Illinois Appellate Tax Court Upholds Taxpayer’s Nonresidency

On July 16, 2012, the Illinois Appellate Court issued its decision in Cain v. Hamer, Dir. Ill. Dept. of Revenue, __ N.E.2d __ ,Ill. App. (1st), 2012 WL 2898163 (Ill. App. 1st Dist.). This is a taxpayer favorable decision for those taxpayers that contemplate changing their state of tax residence from Illinois to some other state.

At issue in this decision were Illinois individual income tax assessments issued by the Illinois Department of Revenue for the tax years 1996 through 2004 against the taxpayers. The assessments were based on the Department’s assertion that the taxpayers remained residents of Illinois for income tax purposes. Under Illinois income tax law, residents are taxed by Illinois on their entire taxable incomes, whereas nonresidents are only taxed on income sourced to Illinois. In this decision the taxpayer, Tyler Cain was a longtime Illinois resident who had worked as a self-employed trader at the Chicago Board of Trade until 1990. However, he and his wife in 1995 executed and filed a declaration of domicile in Florida asserting that they had changed their place of domicile from Illinois to Florida.

The taxpayers retained their longtime Illinois residence, but had constructed an even larger residence in Florida. The taxpayers divided their time between Illinois and Florida. For example, in 1996 they spent 159 days in Florida, 161 days in Illinois and 45 elsewhere. In total, from 1996 through 2005, the taxpayers spent 1,700 days in Florida, 1,666 in Illinois and 284 elsewhere. The taxpayers had developed relationships with medical professionals in Florida, but continued their relationships with Illinois doctors. They maintained private club memberships in both states, but incurred significantly more expenditures at the Florida clubs. Furthermore, credit card statements reflected that the taxpayers made 73% of their expenditures outside Illinois. The focus of their charitable donations had shifted from Illinois to Florida. The taxpayers had also purchased burial plots in Florida, and had other commonly accepted indicia of Florida residency such as Florida voter registration and Florida drivers’ licenses.

The court noted that Illinois law defines a resident as an individual who was present in Illinois for other than a temporary or transitory purpose during the taxable year or who is domiciled in Illinois but is absent from the State for temporary or transitory purposes during the year. The court examined the factual evidence for and against finding that the taxpayers remained Illinois residents. The court found that the most challenging aspect of this case was that the taxpayers roughly split their time between Illinois and Florida; however, it went on to hold that the remaining evidence demonstrated that taxpayers had a much stronger connection with Florida, including: the focus of their charitable giving was in Florida; overall they spent more money in Florida; and they had purchased burial plots in Florida. The court ruled that the balance of the evidence required it to conclude that the taxpayers had become Florida residents and were no longer Illinois residents for Illinois income tax purposes.

In this decision, the court ruled, in a close factual call that, the taxpayers had successfully changed their state of residence from Illinois to Florida. It is likely that this decision will serve as guidance for years to come to taxpayers in how to best marshal facts necessary to document that Illinois is no longer their state of tax residence.

Settlement of Illinois Whistleblower Sales Tax Cases

Finally, as previously reported numerous whistleblower suits have been filed over the last year and a half in Cook County Circuit Court alleging that online retailers have attempted to defraud the State of Illinois by failing to collect and remit sales taxes on delivery charges. The Illinois Attorney General has chosen not to intervene in this litigation. In these lawsuits, a third party, termed a “relator,” that has brought these lawsuits may be entitled to an award of up to 30% of the proceeds recovered, plus attorneys fees, if successful. Defendants in turn can be subject to treble damages and penalties ranging from $5,500 to $11,000 for each violation of the Illinois whistleblower act. Defendants have filed motions to dismiss these whistleblower suits on procedural grounds, which have been unsuccessful. A number of online retailers have settled these cases. However, the attorneys fees requested by the relator have caused some on-line retailers to balk at settlement. These retailers have instead chosen to settle the substantive tax liability and contest just attorneys fees. These cases have been consolidated in front of Cook County Circuit Court Judge Thomas Mulroy. A status conference in the remaining cases has been scheduled in front of Judge Mulroy for August 29th.