Hartford Business Journal

16 Hartford Business Journal • November 25, 2019 • www.HartfordBusiness.com portant collections, is also significant, as are social ties, like church, country- club or gym memberships. It can also become an issue if one spouse spends more time in Connecticut than the other, which is common for individuals with grandchildren or other family members who remain in the state. Business ties, including whether an individual still owns and is ac- tive in a Connecticut company, are also looked at. West Hartford lawyer Mark Ship- man represents clients caught up in domicile audits. In addition to indi- viduals, he said he's seeing an uptick in calls from business owners trying to figure out how to relocate their companies' domicile before they sell their business and have to pay Con- necticut taxes on that transaction. For example, he said he's repre- senting a $3-million company that is projecting to grow to $20 million in annual revenue in five years, when the owners plan to sell. They're looking for advice on how to begin the relocation process. "I've seen more calls from people who want to leave the state either because they are going to sell a business, or are retiring and want to go to a tax-free state and they still have a large income that's not generated in Connecticut but taxed in Connecticut," he said. Shipman said he has created a checklist for individuals looking to break their Connecticut ties. Among the things he advises: Do most or all of your entertaining at your new state residence; register to vote and (actually vote) and reg- ister cars, boats and other vehicles in your new state, while surrender- ing all Connecticut ties. Long legal process It's not clear exactly how many domicile audits DRS performs annually. In fiscal 2019, the num- ber was a small subset (less than 1 percent) of the 33,132 compliance activities conducted by the agen- cy's income-tax division, DRS said. Anecdotally, lawyers and ac- countants say they are seeing more domicile audits among high-net- worth individuals, and when they do arise the amount of time and money on the line is significant. Hartford tax attorney Louis B. Schatz, chair of Shipman & Good- win's tax practice group, said anyone who changes their tax-residency sta- tus and gets audited should expect a process that takes anywhere from six months to two or three years — or even longer — with tens of thou- sands, or even hundreds of thousands of dollars or more on the line. "It's common- ly understood that if you are a high-net-worth individual and you leave Connecticut, you should anticipate that there is a good chance you will get audited," said Schatz, who typically has 10 to 15 residency cases pending at any one time. Interestingly, even people who believed they changed their do- micile prior to their death can be audited, as significant estate-tax revenue could be at stake, accord- ing to Lisa Staron, a trusts and es- tates attorney with Murtha Cullina. Those cases are particularly hard to defend, Staron said, because the evidentiary burden always falls on the taxpayer, even when they are no longer around. Settling the case The audit process begins when an individual is notified by DRS. That may not occur until two or three years after the taxpayer claimed to have moved their primary residency because DRS likes to review several years of living patterns, Schatz said. Taxpayers must submit detailed paperwork to prove their domicile status, including filling out the personal-life questionnaire. Once an auditor makes a final decision, an appeal can be made to DRS' ap- pellate division. Schatz said most cases get settled at the audit or appellate levels, with taxpayers often agree- ing to some form of cash settle- ment to avoid prolonged litigation in tax court. Notably, there are only a couple well-known Connecticut court cases on the domicile issue. Some lawyers and accountants say that's on purpose — DRS wants to avoid the court setting signifi- cant legal precedent that would establish clear parameters on what it takes to switch a domicile. Schatz said he doesn't necessarily buy that argument but he does agree there isn't much clarity on the issue. "What's unfortunate and what makes this such a difficult area is that there is no bright-line test," he said. "If you sell your house and move to Florida and never enter Connecticut again, you have clearly met the standard of moving out of the state. On the other hand, if you keep your Connecticut home and you come back here for 180 days a year and have not done any of the things that are required to show that the Florida home is intended to be the place that you view as your permanent home, then you clearly have not left Connecticut. It's the gray area between those two extremes that creates the problem and that is where most of the difficult cases reside." Sullivan, the former DRS com- missioner, said tax officials do make judgement calls, but the state also has an obligation to verify if in fact people have permanently disconnected from Connecticut. "It's only fair to the rest of the taxpayers here who are picking up the burden for those folks who are leaving," Sullivan said. Schatz said it would be helpful if lawmakers brought more clarity to the issue, but they should also fo- cus on what's causing more people to leave in the first place. "I've been practicing tax law for close to 40 years and I am old enough to remember when Con- necticut was a tax-haven state in the 1980s and early 1990s, and people would move from New York to Con- necticut to avoid the state income tax," he said. "Things have come full circle now, where because of the high taxes and business climate people are moving out of Con- necticut. You hope that our political leaders understand the issues and address them and are able to turn the situation around." Department of Revenue Services Commissioner Scott Jackson (left) said the state keeps close tabs on the top 100 taxpayers, whose tax status and income have a major impact on Connecticut's budget. Former DRS Commissioner Kevin Sullivan said he put a greater focus on high earners who claimed to move their permanent address to another state. PHOTOS | HBJ FILE Lisa Staron, Trusts and Estates Attorney, Murtha Cullina >> Domicile Effect continued

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