Burke, Warren, MacKay, Serritella, P.C.A recent Illinois Appellate Court case made life a lot easier for those who love to spend their summers in Chicago but can no longer tolerate the long, cold winters and the Illinois income and inheritance tax systems.

Old Man Winter Isn’t For Everyone

Tyler and Talbot Cain lived and worked in Illinois for nearly 31 years before Old Man Winter got the best of them. Shortly after Tyler Cain’s retirement in 1990, the Cains, like many snowbirds, purchased a home in Florida. Until 1995, the Cains remained Illinois residents while spending part of each year in Florida. In 1995, the Cains decided to enjoy all of the benefits of the Sunshine State and establish legal residency.

To establish their Florida residency, the Cains did more than simply live in their Florida residence. The Cains filed a written declaration of domicile with the local authorities in Florida, obtained Florida drivers’ licenses and registered to vote in their local jurisdiction. Mr. Cain went so far as to register his hand gun in Florida and purchased burial plots in Florida.

While in Florida the Cains developed relationships with several medical professionals, but also maintained their preexisting relationships with their Illinois-based medical professionals. In addition, the Cains utilized tax and legal advisors located in both Florida and Illinois.

Between 1996 and 2005, the Cains divided their time between their Florida residence and their Illinois residence spending nearly 1,700 days in Florida and 1,666 days in Illinois. (For those of you keeping score at home, during that period the Cains also did quite a bit of travelling outside of Florida and Illinois.)

In keeping with their active lifestyle, the Cains maintained private club memberships in both states and were members, board members and/or committee members of several organizations in both states.

Nothing Spoils Fun in the Sun Like a Visit From the Tax Man

In August 2006 the Illinois Department of Revenue sent the Cains a notice of tax deficiency claiming that the Cains owed $1.842 million in unpaid income taxes and penalties. The Illinois Department of Revenue argued that the Cains were Illinois residents despite the fact that they owned a residence in Florida. In short, even though the Cains took many steps to establish their residency in the State of Florida, it was not enough to remove them from the jurisdiction of the Illinois taxing authorities. Presumably well-rested and tanned, the Cains were not about to be pushed around. The Cains took their case to court.

In the lower court decision, the court reviewed the specific steps taken by the Cains to establish themselves as Florida residents and determined that the Cains were “mere seasonal visitors” to Illinois and were not residents of Illinois. Not to be denied, the Illinois Department of Revenue appealed the lower court’s decision. In reaching its decision, the Appellate Court was guided by the Illinois Department of Revenue’s very own regulations and ruled in favor of the Cains. After reviewing all of the facts, the Appellate Court concluded that the Cains’ “intended to live in Florida for half the year and visit Illinois, not the other way around.”

If You Plan to Play in the Sun, Make Sure You Are Protected

Many taxpayers like the Cains visit Florida for the sun, beaches and golf; however, most stay because Florida has no separate state level income tax or inheritance tax. In Illinois, the top marginal income tax rate is 5% and the top marginal inheritance tax rate is 16%.

Establishing residency outside of Illinois can be a challenge, particularly if a taxpayer wishes to maintain some connection with Illinois. Even though the Cains took many common sense steps to make it clear that they intended to establish themselves as Florida residents, the Illinois Department of Revenue was not deterred. In fact, the Illinois Department of Revenue forced the Cains to incur the expense of litigating the matter all the way through the Illinois Appellate Court
despite the fact that the regulations published by the Illinois Department of Revenue supported the Cains’ position.

Because no two taxpayers are alike, the courts (and the local taxing authorities) are inclined to carefully review the facts of each situation. Unfortunately, in the current economic environment it has become clear that Federal, state and local taxing authorities will aggressively pursue tax revenues despite common sense actions undertaken by a taxpayer and despite the taxpayer taking legal steps prescribed by the state in which they are seeking to establish residency, such as filing a written declaration of domicile. Without proper planning, a taxpayer may face an unexpected tax bill just like the Cains.

For individuals considering a change of residency, we strongly encourage that they plan ahead. Oftentimes this requires paying close attention to the details of their lives, such as obtaining a new drivers’ license and/or a new voter registration card, and complying with the nuances of the laws of the state in which they intend to become a resident, as the facts are often more important than the law itself.

Immediately following its loss in the Appellate Court, the Illinois Department of Revenue proposed new regulations, which were intended to change the result reached by the Appellate Court. These proposed new regulations adopt two new presumptions of residency. First, an individual will be presumed to be a Illinois resident if the individual is receiving a homestead exemption for Illinois property. Second, an individual who is an Illinois resident in one year will be presumed to be a resident in the following year if the individual is present in Illinois more days than the individual is present in any other state. Although both of these presumptions may be rebutted by clear and convincing evidence, it is the taxpayer’s burden to do so by producing to evidence to overcome the presumption.

In light of the position adopted by the Illinois Department of Revenue in its litigation with the Cains and its proposed new regulations, we strongly encourage individuals to consult their attorney or tax preparer for guidance in establishing their residency outside of the State of Illinois and maintaining good records in the event of an audit.

As we await warmer weather, keep in mind that a well-prepared taxpayer can avoid Old Man Winter and the Tax Man.

* * * * *

To discuss the issues related to establishing residency in a more favorable tax jurisdiction, including Florida, Arizona or Texas, please feel free to contact Jonathan W. Michael.  Jonathan is licensed to practice law in the State of Florida and has successfully assisted many clients in establishing residency outside of the State of Illinois.

Jonathan W. Michael, Esq.
Burke, Warren, MacKay & Serritella, P.C.
330 N. Wabash Ave.
Chicago, Illinois 60611-3607
Direct:  312-840-7049
E-Mail:  jmichael@burkelaw.com

Jeffrey D. Warren, Esq.
Burke, Warren, MacKay & Serritella, P.C.
330 N. Wabash Ave.
Chicago, Illinois 60611-3607
Direct:  312-840-7020
E-Mail:  jwarren@burkelaw.com




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