New Tax Tribunal Ruling on Change-of-Residency Challenges

SALT Alert: Alabama Edition

Client Alert

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There seems to be an increased number of so-called “residency audits” being conducted by the Alabama Department of Revenue (ALDOR), as well as by other state tax authorities. These audits often result from the taxpayer filing a federal income tax return listing an Alabama address, while not having filed an Alabama return, or receiving a W-2 listing an Alabama address. The ALDOR receives notice of this discrepancy through its exchange of information agreement with the IRS. The Alabama Tax Tribunal (ATT) has issued a number of rulings on this issue in the past few years, including a recent (and very instructive) ruling by Judge Leslie Pitman.

At the outset, for Alabama tax purposes “domicile” is defined as “an individual’s true, fixed home to which he intends to return when absent.” Nonetheless, as the ATT judges and their predecessor, Chief ALJ Bill Thompson, have noted on numerous occasions: “[t]here are [no] hard rules for determining if a person is domiciled in Alabama.” Thus, it’s a highly fact-sensitive determination, mixed with some relatively consistent return filing tips outlined below. There is no “one size fits all.”

In general, Alabama residents include those individuals who (1) have domicile in Alabama, (2) maintain a place of abode in Alabama, or (3) spend more than seven months during the tax year in Alabama (Ala. Code § 40-18-2(b)). In order for a taxpayer to change his domicile from Alabama to another state or country, the “taxpayer must abandon Alabama, and also establish a new domicile elsewhere with the intent to remain permanently, or at least indefinitely” (Canady v. State Dep’t of Rev., Admin. Law Div., Dkt. No. INC. 14-445 (Aug. 15, 2014)). And “[a] person’s intent will be ascertained by examining his actions” (ALDOR Rule 810-3-2-.01(1)(b)(1)(i)). 

The latest domicile ruling is Steward v. State Dep’t of Rev. (ATT Dkt. No. INC. 21-769-LP (Sept. 23, 2022) (not appealed)). Surprisingly, the taxpayer appeared at the hearing on his own behalf, without counsel, but his testimony swayed the judge in his favor. He testified that he left Alabama and moved to Jacksonville, Florida, at the end of 2015 to live with his child and the child’s mother in a leased apartment to “create some stability for his child and to build a family there.” He also testified that he worked from the apartment frequently, attended a local church, used a nearby dentist, and even obtained a Florida fishing license. He registered to vote in Florida in October 2016, the year at issue.

On the other hand, he never obtained a Florida driver’s license or car tag, and worse yet, renewed his Alabama driver’s license early that year. He offered a reasonable explanation for his actions, according to the judge. Despite having lost his job due to COVID-19 and apparently not establishing a new residence, the Tribunal found his testimony “credible” and that he had the intent to remain in Florida “at least indefinitely” when he moved there. Thus, he was not an Alabama resident in 2016.

To sum up the critical factors gleaned from this case, other recent cases, and a number of ALDOR and other state DOR audits/administrative appeals we’ve handled over the years, taxpayers and their tax advisers should focus on: 

  • Purchasing a residence or signing a long-term lease on an apartment in the new city/state;
  • Selling the Alabama residence or at least listing it for sale;
  • Notifying the county tax assessor to remove the Alabama homestead exemption from the Alabama residence if the client intends to keep the [former] residence;
  • Filing state or local tax returns with the new state or locality (if required), and as a corollary, filing an Alabama income tax return for the year prior to moving, labeled “Final Return” and attaching a statement of intent to abandon Alabama domicile as suggested by ALDOR Rule 810-3-2-.01(4);
  • Listing the new state address on the federal income tax return (and other documents);
  • Obtaining a driver’s license in the new state;
  • Purchasing a new car tag;
  • Registering to vote in the new state and cancelling their Alabama voter registration;
  • Opening a bank account in the new city and having paychecks deposited into that account;
  • If applicable, obtaining professional licenses and joining professional groups in the new state;
  • Joining a local country club, health club, church/synagogue or other civic organization (e.g., the local Kiwanis or Rotary Club); and
  • Enrolling children (if applicable) in school in the new city.

We have handled appeals in which it was helpful to show that the taxpayers changed their estate planning documents to be governed by the new state’s probate laws. Conversely, frequent return trips to Alabama to visit loved ones (e.g., the spouse or other family members) tend to show an intent not to permanently abandon the state, especially if the spouse remained behind indefinitely. Spouses are presumed to have the same domicile.

The suggestions in this article are by no means an exhaustive checklist, and we also realize that few if any taxpayers can check every one of these boxes. But it’s important for individuals to take proactive measures once they decide to move away from Alabama. Remember, taxpayers bear the burden of proof if the ALDOR or another state initiates a residency challenge, and many states (think New York) take a very aggressive position on the domicile issue. So, before your clients move, talk to them about the importance of taking – and documenting – as many of these steps as possible.