Come What May: The Power of Testimony in Domicile Cases

One of the more interesting aspects I’ve seen in residency cases in my practice is the importance and understanding of a taxpayer’s intent in the overall analysis. That’s part of what makes residency cases so unique. There are likely very few situations in federal or state tax law where what is kicking around in somebody’s mind is critical to the determination of the tax issue. But the domicile test—which looks to discover where a taxpayer has his permanent or primary home—turns on the notion that the taxpayer’s intent can be a deciding factor. This can make the audit process really difficult. How do you prove to an auditor what your client was thinking? You can point to objective facts; you can point to case law; but how do you get into someone’s head? And more importantly, how do you convince an auditor to do the same?

Though this makes residency audits sometimes so difficult, it also presents itself in a much different way when you get to actual litigation. This was on full display in the recent ALJ determination in Matter of Irenee D. May, issued by Division of Tax Appeals Judge Herbert Friedman a few months ago. This was a case where the taxpayer prevailed on a domicile issue—proving he changed his domicile to the UK for a short-term period—in what to me looks like one of the worst cases on paper you will see! Consider everything the taxpayer had going against him:

• First, he was claiming a change of domicile to a foreign country. As the tax department has tried to tell us on numerous occasions, including in its recent Nonresident Audit Guidelines (see pages 45-50), it’s really hard to change your domicile to a foreign country. The tax department’s position is that basically there is a higher standard of proof applicable to foreign domicile changes. So there’s that. 
• The taxpayer maintained his historical home in New York during the time he was overseas. 
• His family stayed back, and for most of the period his kids continued to go to school in New York. 
• He had temporary immigration status. 
• He didn’t file his taxes as a UK resident and domiciliary. 
• And he came back! He was only in the UK for a couple of years.

So how does a taxpayer like that win this case? The answer, actually, is easy: testimony. The ALJ was convinced by the taxpayer’s sincere testimony that he and his family really did intend to move permanently to the UK. It also helped that his wife, whom he separated from during the audit years (a fact which admittedly helped his cause greatly), also credibly testified about the breakdown in their relationship and the different states of mind each spouse had about their living situation. Just look at the types of adjectives the judge used to describe their testimony: “Petitioner credibly and unequivocally testified about his intent…”; “He convincingly explained…”; “He described in detail…”; “He compellingly testified about…”; “He emotionally testified about…”; and, the kicker, “Undoubtedly, petitioner’s testimony persuasively demonstrated his absolute and fixed intention in 2005, and through the years at issue, to abandon one domicile and acquire another.”

This case should be exhibit A for the notion that testimony can make all the difference in a domicile case. I've written in the past about the importance testimony can take on in statutory residency cases surrounding day count. But in the May case, you see how powerful testimony can be used to overcome a parade of terrible domicile facts that ordinarily would sink a taxpayer. It’s really quite amazing and should be somewhat of a caution signal for residency auditors who often push too hard in these cases. Remember, these domicile cases are all about intent. That’s the key fact. If a taxpayer gets up on the stand and credibly testifies about what he or she was thinking, more often than not the taxpayer will win. We’ve seen this in other cases, too, including Knight, Handal, Bostwick, Kaltenbacher-Ross, and Cooke. I find the May case particularly interesting, however, because it comes up in the context of a really tough foreign-domicile change case, where the department historically has taken the position that it’s even harder to win such cases. But the judge rejected the idea that the standard of proof was any different when someone was changing their domicile to a foreign country.

So there you have it. If you’re mired in a difficult domicile case, there could be a light at the end of the tunnel!

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