The taxpayers in Cain v. Hamer1 were classic snowbirds. Residents of Illinois since 1964, they built a second home in Florida in 1990. Within several years, they began spending a portion of each year in Florida. Every October through May, they enjoyed Florida’s warmer climes. They returned to Illinois once during the holidays, before again fleeing the Midwest winters.

This pattern raises an important question: how can an Illinois resident who maintains contacts with Illinois qualify as a nonresident who is no longer subject to Illinois income tax? In a surprisingly taxpayer-friendly decision, Cain v. Hamer provides a judicial road map for an Illinois snowbird.

The background

From 1964 until 1995, the taxpayers lived and worked in Illinois. They were admittedly Illinois residents and filed resident income tax returns for those years. In 1995 they began to take steps to change their domicile to their second home in Florida, while continuing their snowbird pattern of spending more than five months a year in Illinois. In 1996 they discontinued filing Illinois income tax returns, asserting they were nonresidents.

Apparently and not surprisingly, their tax advisors became concerned that failing to file Illinois tax returns for the years 1996 through 2004 resulted in indefinite exposure to a notice of deficiency. To bring certainty to their potential Illinois tax exposure of $1.8 million (tax and penalties) for those years, the taxpayers paid under protest and filed suit for declaratory judgment. The suit sought a judicial determination that they were not residents for purposes of the Illinois income tax for the years 1996 through 2004. When the trial court granted the taxpayers’ motion for summary judgment, the State appealed, presumably anticipating a favorable result under the least deferential de novo standard of review.

Facts favorable to the taxpayers

As a first step to freeing themselves of the Illinois income tax, in November 1995 the taxpayers filed a written declaration of domicile in Florida. They renounced their Illinois residency, asserting they had changed domicile to the Florida home constructed in 1990. This action was taken in accordance with a Florida statute providing for such a declaration.2

The taxpayers also took a number of other steps to establish their Florida domicile. They:

• Obtained Florida permanent resident identification cards in 1995 and 1996,

• Held Florida drivers’ licenses,

• Voted in Florida,

• Received Florida jury duty summonses during the relevant time period,

• Had newspapers delivered to their Florida residence,

• Purchased burial plots in Florida,

• Developed relationships with several medical professionals in Florida (while continuing relationships with their Illinois doctors),

• Retained legal advisors in both Florida and Illinois,

• Kept some records to prove their physical presence in Florida, Illinois, and other locations during the years in question.

The husband also used a cellular telephone with a Florida area code and maintained a Florida firearm license. The couple’s credit card statements for 2001 through 2004 showed that 73% of their expenditures were made outside of Illinois and that they were making those expenditures outside of Illinois 61% of the time.

Facts detrimental to the taxpayers

In August 1995, the year taxpayers claimed their Illinois residency ended, they began construction of an addition to their Illinois house. They continued to own their Illinois home and occupied it for more than five months a year. The opinion provides incomplete facts on their precise physical presence during the nine years at issue, 1996-2004. However, the facts discernible from the opinion are summarized in the following table:

Calendar Year	Florida days	Illinois days	Other location days
1996	159	161	45
2004	170	171	24
1996-2005	1700	1666	284

 

The table discloses that in calendar years 1996 and 2004 the taxpayers actually spent more days in Illinois (161 and 171) than Florida (159 and 170). During the ten years from 1996 to 2005, the days spent in Florida (1700) only narrowly exceeded the time spent in Illinois (1666).3 No mention is made in the opinion of their physical presence in Illinois for the other seven tax years in question.

The couple continued to own Illinois businesses, although the opinion said the taxpayers had “distanced” themselves from their businesses. What that means is unclear, other than to suggest the taxpayers were no longer working in the businesses. The wife renewed her Illinois interior design license without showing a change of address, despite doing no business in either Illinois or Florida.

The couple used Illinois income tax preparers to help them file their federal tax returns. They made political contributions to Illinois and national candidates and some other state candidates, but no Florida candidates. They continued memberships in various expensive clubs in Illinois, spending $236,000 from 2003 to 2006. (They did, however, spend even more on clubs in Florida during those same years: $422,500.)

The law on Illinois income tax: when does the privilege end?

The Illinois Income Act imposes income tax “on the privilege of earning or receiving income in or as a resident of the state.”4 Since the taxpayers in this case were not earning or receiving income in Illinois, the issue was of residency.

Individuals are considered Illinois residents if they are present in the state for other than a “temporary or transitory purpose” or are “domiciled” in Illinois but leave for a temporary or transitory purpose.5 If individuals leave the state for other than a temporary or transitory purpose or establish domicile elsewhere, they cease to be Illinois residents.6 Stated differently, an individual loses his Illinois domicile:

1) by locating elsewhere with the intention of establishing the new location as his domicile, and

2) by abandoning any intention of returning to Illinois.7

The taxpayers were admittedly Illinois residents prior to their move to Florida in 1995. The question to be decided was whether their move to Florida constituted a change in domicile or a departure from Illinois for “other than a temporary or transitory purpose” so that they lost their Illinois residency, or, conversely, whether their periodic returns to Illinois were for “other than a temporary or transitory purpose” so that they should be classified as Illinois residents.

The court reviewed the four common law elements required for a change of domicile: (i) physical abandonment of the first domicile; (ii) an intent not to return to the first domicile; (iii) physical presence in the new domicile; and, (iv) an intent to make that one’s domicile.8 The first three tests are easily met in this case: the taxpayers physically left their Illinois home, renounced their Illinois residency, moved to Florida, and declared Florida their domicile. According to the court, the “difficulty comes in determining whether the taxpayers “abandon[ed] any intention of returning” to their Illinois home.”

After their move, the taxpayers split their time roughly equally between the two states. The court found the taxpayers maintained an intent to return to both Illinois and Florida for approximately half of their time during 1996 through 2004. The income tax regulations make clear that individuals may have only one domicile, and the Illinois Department of Revenue was not arguing that the taxpayers’ domicile alternated between Florida and Illinois. So the court held that a concept of “intent to return” cannot be the basis to decide residency. Instead, the court adopted the concept of domicile as an intended permanent home (and of “return” as a permanent, indefinite, or lengthy return). Here, the taxpayers chose Florida as their domicile. The court found the contacts, memberships and real property holdings maintained in Illinois after their 1995 move were outweighed by “changing their voter registrations to Florida, paying Florida income taxes,9 obtaining residency cards and drivers’ licenses in Florida, and filing a declaration of their Florida residency.” Thus, the court concluded the taxpayers’ intent was quite clear: they wished to establish Florida as their permanent residence in 1995, even though they planned to keep ties in Illinois and have regular seasonal visits. The court said the taxpayers intended to live in Florida for half the year and to visit Illinois, not the other way around.

Looking for further support, the court reviewed examples contained in the income tax regulations. The regulations state that whether an individual in Illinois is there temporarily or transitorily will depend on the facts and circumstances.10 Again, in this case the taxpayers split their time roughly equally between Florida and Illinois. The court recited verbatim and analyzed three examples contained in the income tax regulations. According to the court, the examples make clear that the degree of time splitting does not render individuals’ presence in Illinois other than “temporary or transitory.” In two of the examples, the hypothetical individuals’ three- to four-month-long yearly trips to another state did not affect their residency because other factors regarding their intent are considered controlling. In the third example, the individuals spent over four months in Illinois and actually owned a home in Illinois, but were nonetheless considered Minnesota residents because the connection of the individuals to Minnesota was closer than it was to Illinois. The court found this third example to be applicable to the Cains. Although the taxpayers maintained some Illinois ties, including social club memberships and the continued ownership of their longtime home, the court found the facts showed a much stronger connection to Florida. The court then reviewed those connections: spending more money on Florida social clubs, holding drivers’ licenses and residency cards in Florida, voting in Florida, using a Florida telephone number, spending more money in Florida than in Illinois, and purchasing burial plots in Florida. The court said that while the ties between Illinois and their companies continue, the taxpayers have distanced themselves from their companies. Likewise, although the taxpayers’ charitable foundation is still involved in Illinois causes, the taxpayers had “begun to shift its focus to Florida.” In the court’s opinion, these facts established the taxpayers had a much stronger connection to Florida than to Illinois. Based on the examples given in the regulations’ definition of “temporary and transitory purpose,” the court found the “regularity and duration of the taxpayers’ visits to Illinois do not affect their residency status in the face of this disparity in connections.”

Last, the court pointed to the income tax regulations that list the types of evidence that help to determine whether an individual is an Illinois resident. Those include evidence of “voter registration, automobile or driver’s license registration, filing an income tax return as a resident of another state, home ownership or rental agreements, club and/or organizational memberships and participation, telephone and/or other utility usage over a duration of time.”11 The court found the evidence the taxpayers introduced of their connections with Florida were consistent with the taxpayers being Florida residents.

Ten planning points for taxpayers with Illinois contacts who seek to avoid Illinois income tax – The lessons of Cain

1. If the taxpayer works in Illinois or earns income from an Illinois source (such as real estate located in Illinois), that income is subject to Illinois income tax regardless of residency.12

2. If the taxpayer has only retirement income, Illinois exempts it by allowing a subtraction of retirement income in computing Illinois taxable income.13

3. An Illinois resident has the right to establish a domicile different from Illinois under the four part test:

a. physical abandonment of the first domicile;

b. an intent not to return to the first domicile;

c. physical presence in the new domicile; and

d. an intent to make that one’s domicile.

4. The taxpayer should pick a state like Florida, which has a statute authorizing the individual to designate it as the state of residency. The taxpayer should fully comply with the statute.

5. Individuals may have only one domicile, and domicile does not alternate between two states during a calendar year.

6. The taxpayer should maintain logs of physical presence during the year.

7. The issue of whether a taxpayer’s presence in Illinois is other than “temporary or transitory” is a fact and circumstances test but the following do not make a person an Illinois resident:

a. being physically present in Illinois for a significant amount of time each year (more than five months but less than six months),

b. retaining ownership of an Illinois house,

c. being a member of social clubs in Illinois

8. The taxpayer should take all action in the new state of residence as if the taxpayer resided solely in that new state: register to vote, obtain all licenses there (driver’s, car, firearms, hunting, and any others), use the new mailing address, have newspaper subscriptions delivered, change telephone cell numbers, do banking, change registrations, buy a burial plot, obtain medical care, retain legal advisors, contribute to political candidates of the new state.

9. Not filing an Illinois tax return results in an indefinite time for Illinois to assert a notice of deficiency.14 Consider having the client receive some Illinois source of income requiring the filing of an Illinois non-resident return so at least some statute of limitations is running.

10. If a dispute with the State of Illinois occurs, argue the taxpayer has closer contacts with the non-Illinois state and hope you draw the same appellate panel that decided Cain.

Conclusion

Advising Illinois snowbirds seeking to avoid Illinois income tax while maintaining a house in Illinois remains a tricky business. There is inherent uncertainty in a fact and circumstances test. This case provides appellate authority to try to avoid the privilege of being subject to Illinois income tax. Still, not filing tax returns results in an indefinite period to assess a notice of deficiency. Taxpayers need to be advised of this risk. ■

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This article was originally published in the February 2013 issue of the ISBA's Trusts & Estates newsletter.

Steven E. Siebers (ssiebers@slpsd.com) is a partner at Scholz, Loos, Palmer, Siebers & Duesterhaus LLP in Quincy, Illinois. He concentrates his practice in estate planning, probate, banking, corporate, real estate, taxation, and civil litigation.

Emily Schuering Jones (ejones@slpsd.com) is an associate at Scholz, Loos, Palmer, Siebers & Duesterhaus LLP in Quincy, Illinois. She her practice areas include civil litigation, insurance defense, probate, banking, and civil appeals.

1. Cain v Hamer 2012 IL App (1st) 112833

2. Fla. Stat. § 222.17(2)

3. Opinion includes facts of physical presence for year 2005 even though relevant years were 1996-2004.

4. 35 ILCS 5/201(a) (West 2010)

5. 35 ILCS 5/1501(a)(20)(A)(West 2010)

6. 35 ILCS 5/1501(a)(17) (West 2010)

7. 86 Ill. Adm. Code § 100.3020(d)

8. Viking Dodge Inc. v. Hoffman, 147 Ill. App. 3d 203, 205, 497 N.E.2d 1346, 101 Ill. Dec. 33 (3rd Dist. 1986)

9. Where this finding came from is unclear since Florida has no personal income tax.

10. 86 Ill. Adm. Code § 100.3020(c)

11. 86 Ill. Adm. Code § 100.3020(g)(1)

12. 35 ILCS 5/201(a)(West 2010)

13. 35 ILCS 5/203(a)(2)(F)(2012)

14. 35 ILCS 5/905(c)(2012)