A recent decision from the Minnesota Supreme Court illustrates a few important aspects of tax law. First, the statutes can be ambiguous. Second, the Department of Revenue’s attempts to clarify a statute may not reflect legislative intent. Third, sometimes, a court can just confuse things even further.

Unfortunately for the taxpayers involved in this case, that confusion could cost them more than $650,000 in taxes, penalties and interest. The question now is whether other residents in their position will suffer a similar fate. 

The issue is residency. For the Revenue Department, everyone falls into one of three categories: resident, part-time resident or nonresident. Nonresidents, of course, are not obligated to pay income tax to the state. Part-time residents and residents are. The problem is that the statute, according to this decision, is not clear about the definition of “resident.”

The couple found themselves in this predicament in 2010 as the result of a state tax audit. They had moved from Minnesota to Florida but held on to and occasionally visited their home in Minnetonka. They decided to move back to Minnesota in 2007 and re-established full-time residency that August. Were they full-time residents, part-time residents or nonresidents?

The DOR uses a three-pronged test to determine if a taxpayer is a resident under these circumstances. If a taxpayer is domiciled outside of the state but maintains an abode in the state and was physically present in the state for more than half of the year (183 days), he must pay taxes for the full year. The department has a long laundry list of what makes an address a domicile, but, generally, a person’s domicile is his permanent residence, where he gets his mail, maintains a driver’s license — the place he generally holds out to be “home.” An abode is a dwelling that is not a domicile.

They lived here full-time for part of the year, so they were not nonresidents. They were domiciled both in Florida and in Minnesota in 2007, but they owned a house here the whole time. So, they are either part-time or full-time residents.

The couple said one thing, the department said another. We’ll explain more in our next post.

Source: Minnesota Public Radio, “MN Supreme Court deals financial blow to part-year residents,” Bob Collins, Feb. 17, 2016