Changing Residency: Keeping a Minnesota Bank Account and Financial Adviser No Longer Matters!
Should keeping a bank account or financial adviser in Minnesota be considered when determining where a person is a resident? Since at least the 1980s, the Minnesota Department of Revenue has been answering that question in the affirmative. Recently, however, the Minnesota business community has been urging the Minnesota legislature to reevaluate whether the location of a person’s advisers (attorneys, accountants, and financial advisers) and bank accounts is still relevant. On May 30, 2017, the Governor and the legislature finally agreed—the location of an individual’s attorney, CPA, financial adviser or bank account may no longer be considered by the Minnesota Department of Revenue or any court in determining where an individual is domiciled.
The initiative to remove from consideration the location of a person’s advisers and bank accounts arose following references to Minnesota bank accounts and advisers in a few court opinions about residency. Those passing comments captured the attention of the media and caused individuals who wanted to move to another state or country to question whether they should fire their Minnesota advisers and close their Minnesota bank accounts before moving. These individuals were acting out of fear that in an audit by the Minnesota Department of Revenue, the Department would deem them Minnesota residents because they still had advisers and bank accounts in the state.
The following scenario offers an example of such an audit: John, who had lived in Minnesota his whole life, retired from a long and successful career. After retirement, John moved from Minnesota to Florida. John kept his Minnesota house for his use when he would visit the state, which typically happened during the summer months. John also kept a few other Minnesota connections, including his long-term advisers—his accountant, lawyer, and financial adviser. Additionally, because John had a bank account at a national bank that had branches and ATMs in both Minnesota and Florida, John did not close the bank account that he had opened long ago in Minnesota. A few years after moving to Florida, John was audited by the Minnesota Department of Revenue to determine whether John really moved to Florida or if John remained a resident of Minnesota. If John remained a Minnesota resident, then all of his income would be subject to Minnesota income tax.
Minnesota law provides that John is a resident of Minnesota if he is either: (1) domiciled outside Minnesota, but “maintain[s] a place of abode in the state and spend[s] in the aggregate more than one-half of the tax year in Minnesota” (“physical presence resident”) or (2) “domiciled” in Minnesota because his subjective intent is to remain a Minnesota resident (“domiciled resident”).
An auditor at the Minnesota Department of Revenue, therefore, first asks John about his presence in Minnesota. John provides sufficient documentation to show that he was not in Minnesota for greater than one-half of the tax year. Next, the Department of Revenue turns to evaluating John’s “domicile.” Upon learning that John still uses the services of a financial adviser in Minnesota and that he never closed his Minnesota bank account, the auditor informs John that these factors (among several other factors) weigh in favor of John still being a Minnesota domiciliary resident.
John tells the auditor that he only communicates with his financial adviser by email and phone—his financial adviser could be anywhere! John also responds that he is able to bank online, by phone, and at the local branch and ATM in Florida and so he did not see a need to close his bank account. Yet, the Minnesota Department of Revenue auditor argues that a rule that it promulgated, Minnesota Rule 8001.0300, provides that both factors are to be considered in evaluating where John is a resident.
Minnesota Rule 8001.0300 provides that the Department of Revenue evaluates a person’s subjective intent using the infamous 26 factors (the “domicile test”). The 26 factors include where a person spends his or her time, maintains a home, works, is involved in the community, has a driver’s license, and is registered to vote. Also among the factors are the “location of any bank accounts, especially the location of the most active checking account,” “business relationships,” and the “location of other transactions with financial institutions.”
The factors in Minnesota Rule 8001.0300 were adopted in 1981, before either interstate banking or internet banking became common. To individuals like John, and to the rest of the business community in Minnesota, the factors appear outdated. Thus, the business community has been asking that the legislature change the law to preclude consideration of bank accounts and advisers in residency audits.
In response to the business community’s push for legislative changes, the Minnesota Department of Revenue initiated listening sessions with several interested organizations, including members of the Minnesota CPA Society, the Minnesota Chamber of Commerce, the Minnesota State Bar Association, the Association of Public Accountants, and the Minnesota Bankers Association. The listening sessions culminated in a residency report issued in March 2015. The residency report promised that the Department of Revenue would issue a Revenue Notice that would clearly state that the Department “will not look at the location of bank accounts when determining residency.” The Department’s report clarified that “[d]ue to modernization of the banking industry, the mere location of a person’s bank does not indicate where a person lives.” The Department’s report made no similar promises regarding financial advisers, noting only that the location of an adviser is not the only factor in a residency determination.
Almost a year later, the Department of Revenue issued Revenue Notice 16-01, dated February 1, 2016. In the Revenue Notice, the Department of Revenue did not address financial advisers. As to bank accounts, the Revenue Notice provided that “having one or more bank accounts located in Minnesota, does not, by itself, demonstrate an intent to establish or retain domicile in Minnesota.” Arguably, the Revenue Notice was a shift from the March 2015 report, which indicated that the Revenue Notice would provide that the Department would not look at the location of bank accounts at all. The Revenue Notice, therefore, stated nothing new. There is no question that the location of a person’s bank account is not the only factor in determining domicile. Nor is it one of the most important factors.
Yet, because these items remain factors in Minnesota Rule 8001.0300, the business community continued expressing its preference for legislative change. Thus, in 2016, the omnibus tax bill (which passed, but was not signed by the Governor) included an amendment which provided that in determining where an individual is domiciled, neither the Department of Revenue nor any court shall consider “the location of the individual’s attorney, certified public accountant, or financial adviser, or the place of business of a financial institution at which the individual applies for any new type of credit or at which the individual opens or maintains any type of account.”
The same amendment was before the legislature in 2017. It was included in the omnibus tax bill, which was passed by the legislature during a special session and signed into law by the Governor on May 30, 2017. The change in the law is effective for tax years beginning after December 31, 2016. Thus, individuals seeking to move from Minnesota to another state or country no longer have to ask whether they should fire their Minnesota advisers and close their Minnesota bank accounts.