Lights Out for Ohio’s Bright-Line Tax Residency Test
May 31, 2016 Deadline for Filing Ohio Form IT-DA Pending
Ohio tax law contains what many practitioners refer to as the “Bright-Line” Residency Test, which is a law designed to simplify the residency determination for Ohio tax purposes and mitigate the economic impact of individuals leaving Ohio for lower income tax states, such as Florida, Texas and Nevada. An Ohio Supreme Court decision from last year, Cunningham v. Testa, Slip Opinion No. 2015-Ohio-2744 (2015), eliminates these benefits of the Bright-Line Test and effectively reinstates the common-law domicile test for determining tax residency. As a result, individuals seeking to change, or that have already changed, their residence from Ohio to a no-tax state should truly abandon Ohio. The Affidavit of Non-Ohio Residency/Domicile (Ohio Form IT DA), which is due not later than May 31 of the year following the taxable year to which it relates (even if the individual’s Ohio tax return is on extension until October), is nonetheless still relevant in certain fact patterns.
Before 1993, many taxpayers were leaving Ohio for warmer climates and lower taxes. In order to successfully change their tax domicile away from Ohio, these individuals were advised by their attorneys and CPAs to cut off all ties with Ohio--i.e., to no longer use Ohio attorneys, accountants, doctors; no longer contribute or participate in Ohio charities, churches or boards; avoid visiting Ohio; and limit their involvement with their Ohio-based businesses. This was necessary in order to illustrate the individual's goal of changing domicile under traditional common-law tests. At the same time, the Ohio Department of Taxation spent significant time and resources auditing the day to day lives of these individuals in an effort to assert that the individuals were still residents of Ohio.
Ohio originally enacted the Bright-Line Test in 1993 in order to make the residency determination simpler and to ensure that these former Ohioans did not completely and economically abandon Ohio. The common law domicile test was replaced by a contact-period test (often referred to as a "days-in and days-out" test). As a result, individuals could still use Ohio service providers, actively participate in Ohio charities, maintain and regularly visit their Ohio abode, and continue in a hands-on management role of their Ohio-based business.
Over the years, the number of contact periods that were permitted in Ohio continued to be expanded by the General Assembly. In 2007, the bright-line residency law was amended to add additional opportunities for being presumed a nonresident, but also added additional conditions to the residency determination. One such condition was the requirement that an affidavit be signed under penalties of perjury stating the taxpayer was not domiciled in Ohio during the entire taxable year.
Practitioners and taxpayers widely understood that the statement about not being domiciled in Ohio meant averring that the individual did not exceed the contact period threshold in Ohio. The Supreme Court decision in Cunningham has now held that this understanding is wrong and has reestablished the relevance of common law principles to determine Ohio domicile. As a result, the Bright-Line Test is no longer a bright-line and former Ohio residents should re-evaluate their situations to ensure they will not be considered Ohio residents for Ohio income tax purposes following the Cunningham decision.
How the Bright-Line Test Worked in certain Tax Years Prior to Cunningham
Before the Cunningham case, Ohio's Bright-Line Test provided that an individual is irrebuttably presumed to be a non-Ohio resident for individual income tax purposes if the following three tests are met:
During the entire taxable year, the individual did not have more than one hundred and eighty-two contact periods with Ohio (1) ;
During the entire taxable year, the individual had at least one abode outside of Ohio;
The individual timely filed a form with the Ohio Department of Taxation ("ODT") verifying that the individual was not domiciled in Ohio during the taxable year.
The Form referenced is the Affidavit of Non-Ohio Residency/Domicile (Ohio Form IT DA) that is due not later than May 31 of the year following the Ohio taxable year to which it relates. Based on an individual’s facts and circumstances, the filing of this Affidavit is still relevant for purposes of meeting the statutory tests.
The presumption of non-domicile is not triggered if the individual fails to timely file the statement or makes a false statement. The meaning of “false statement” in this context is a tricky concept, as discussed in the discussion below regarding the Cunningham case.
The determination of whether an individual made a “false statement” contains a circular analysis, because the intent of the bright-line statute was to remove the relevance of common law notions of domicile. However, the law’s requirement that the individual “verify” that he was “not domiciled” in Ohio was considered by the Court to implicate the common law notion of domicile (as opposed to merely verifying that the individual met the contact periods and abode tests). In effect, the Supreme Court has revived the common law principles of domicile for Ohio taxation purposes.
Bright-Line Test Becomes Dimmer - Cunningham v. Testa
Kent and Sue Cunningham were born, raised, and educated in Ohio. The couple had Ohio driver's licenses and voted in Ohio. The couple owned a home in the Cincinnati area and also owned a separate home in Tennessee. During calendar year 2008, Mr. and Mrs. Cunningham filed an Ohio homestead property tax exemption. In order to obtain the homestead tax exemption, the Cunninghams declared that their Ohio home was their principal place of residence for property tax purposes as of January 1, 2008. In March 2009, Mr. Cunningham timely filed the 2008 Affidavit of Non-Ohio Residency/Domicile with the Ohio Department of Taxation and declared that he was not domiciled in Ohio at any time during 2008 for Ohio income tax purposes. On the Affidavit, he did not provide his out-of-state abode but declared that he was domiciled in Tennessee in 2008.
Mr. Cunningham's Affidavit was challenged by the Tax Commissioner because the Tax Commissioner believed that the Affidavit contained a false statement. The Supreme Court of Ohio agreed with the Tax Commissioner and determined that an Affidavit may contain a false statement if the Affidavit is not supported by the common law principles of domicile. The Supreme Court looked to the actions of the Cunninghams. Specifically, the Court noted that the Cunninghams filed for a homestead property tax exemption, voted in Ohio during the year, held Ohio driver's licenses, and did not properly complete the Affidavit. As a result of the Court’s decision, along with filing the Affidavit, an individual must also be domiciled outside of Ohio under common law principles.
Application of the Ohio Administrative Code - The Residency "Rule"
When the Bright-Line Residency statute was originally enacted in 1993, the Department of Taxation also adopted an Ohio administrative code section (the "Rule") related to the Bright-Line Test. The Rule provided that if the taxpayer were presumed to be a resident of Ohio under the Bright-Line Test, certain activities of the taxpayer were not permitted to be considered by Ohio or the taxpayer to meet the burden of showing the taxpayer was not a resident. The purpose of the Rule was to permit individuals claiming a change in domicile to continue to participate in Ohio's economy by using Ohio attorneys and accountants, participating in Ohio charities, etc.
Changing Common Law Domicile
Under common law, a presumption exists that once a person has acquired an Ohio domicile, such domicile continues until the person clearly shows that he has acquired a new non-Ohio domicile. A change of domicile is effected only when an individual chooses a new domicile, establishes actual residence in that place and demonstrates a clear intent that it be the individual’s principal and permanent residence.
Whether an individual intends to make a particular residence his domicile is determined on the facts and circumstances of the individual's situation. The courts look not only to the declarations of the person, but also to the accompanying actions and circumstances. In other words, the individual’s stated intent to change his domicile must be consistent with and supported by his actions and the circumstances of the particular situation. There are many facts that can be considered in determining a person’s domicile, including, but not limited to, the following:
Voter registration and actual voting location
Residence of spouse
Where important personal items are located
Location of charities the individual is active in and to which donations are made
Location of businesses owned or operated by the individual
IRS Service Center where file federal tax return
Location of church or synagogue attended
Address on federal tax return
Automobile license plates
Address used on mail for bills, subscriptions, bank statements, etc.
Clubs in which the individual belongs, including country clubs, health clubs, etc.
Address used for employer's payroll and personnel records
Location of doctors, attorneys, accountants and other professionals
Address on insurance policies
Location of frequented stores and shops
Although the Supreme Court's decision in Cunningham has revived the relevance of common law domicile for Ohio tax purposes, an individual may nonetheless change his or her common law domicile to a different state--it is merely much more complicated following this decision. Individuals should truly abandon Ohio in order to avoid the problems faced by the Cunninghams. Those individuals should, assuming it is accurate, also continue to file the Affidavit of Non-Ohio Residency/Domicile (Ohio Form IT DA) not later than May 31 of the year following the taxable year to which the Affidavit relates. Without legislative changes to the provision, it will be unwise for individuals to rely on the Bright-Line Test in the future.
Zaino Hall & Farrin LLC professionals have advised many individuals regarding changes in state domicile. We would be happy to further discuss your particular facts and circumstances and how the Cunningham decision may impact your Ohio personal income tax situation.
(1) R.C. 5747.24(B)(1) was amended in 2014 to allow for an individual to have two hundred and twelve contact periods with Ohio and still be considered a non-resident for individual income tax purposes.
If you would like to discuss Ohio Domicile issues, please contact any of our professionals.