Taxpayers challenge Minnesota residency rules at their own peril

Most of the residency squabbles that erupt over whether someone must pay Minnesota income taxes here get settled quietly with the state's tax collectors.

When reluctant taxpayers do go to court to challenge the Minnesota Department of Revenue over where they live, they typically lose. But not always.

A wealthy Twin Cities couple has scored an uncommon tax court victory that has Revenue, not accustomed to defeat, mulling an appeal to the Supreme Court. The residency win for Curtis and Stacy Marks comes amid heightened public attention to Minnesota's long-running residency questions, stirred up by two Supreme Court opinions last year in which NBA referee Ken Mauer and businessman William D. Larson lost big.

Some lawyers say Revenue has been more aggressive in scrutinizing residency claims in the last three to four years. The department says its strategies are a private matter.

Either way, the court cases offer a window on the 26 factors that Revenue weighs in determining where a taxpayer really lives. The threat of audits over the issue have certain taxpayers meticulously logging the days spent in Minnesota and what they do here.

In her decision Oct. 23, Minnesota Tax Court Judge Joanne Turner sided with Curtis and Stacy Marks.

She disagreed with how Revenue Commissioner Myron Frans applied the 183-day rule, which lassoes people like this: You may claim residency somewhere else, but if you spend 183 days or more in Minnesota in a given year and keep an abode here, you were a full-year Minnesota resident for tax purposes. (An abode means a residence with a kitchen and a bathroom.)

The Markses weren't packing their bags for some low-tax sunshine, but were actually moving back to high-tax Minnesota from Florida in 2007. They argued that they didn't have to pay full state income taxes for 2007 because they were part-year residents.

Turner agreed, saying that when counting to 183, only the days spent in Minnesota when the Markses were not Minnesota residents should be counted. Before they reached 183, they had decided to change their domicile back to Minnesota.

Still to be hashed out is the exact day the Markses decided to stay put in Minnesota.

"We're still arguing about that," said the Markses' lawyer Barry Gersick.

Gersick, a partner at Maslon Edelman Borman & Brand, said he thinks they may settle on the day the Marks children were accepted into Breck School, a private school in Golden Valley. Gersick wouldn't say how much income tax is at stake, just that the amount is "substantial."

Court records show the Markses own a $3.9 million home on Lake Minnetonka in Woodland.

Curtis Marks, 54, cofounded Verifications Inc., a Twin Cities background checking and drug testing business that was acquired last year. He's now running a local software company called Click Boarding LLC. Through Gersick, he declined to be interviewed. Gersick said Curtis Marks now lives in Excelsior and is focused on having a trial to determine when their residency started.

Tom Dougherty, at Lommen Abdo Law Firm, said Revenue used to piggyback on IRS audits but is now initiating more of its own and focusing more on residency.

"My impression is they are seeking out fertile areas, and they have identified this as a fertile area for audits," Dougherty said.

In an interview, Commissioner Frans said he would not discuss audit criteria, which he said is nonpublic data under state law.

Frans said taxpayers filed 99 residency administrative appeals between mid-2010 and April 2014, but he would not say whether they are trending up or down. Revenue can't break the filings down by year because the appeals are not tracked that way, he said.

Frans said staff are reviewing the Marks decision.

"We have some time to decide whether to appeal that case to the Supreme Court," Frans said. "We haven't made a determination yet."

Joel Germershausen, a tax manager at Baker Tilly Virchow Krause, called the recent decision a "common sense outcome." and said it shows the courts are interested in interpreting the spirit of the law and not just giving a literal reading of it.

"It doesn't happen all the time, because we don't often have people moving back to Minnesota," Germershausen said.

The 26 factors Revenue weighs take into account such things as the location of the most actively used checking account, where children attend school and whether the taxpayer applied for resident or nonresident fishing, hunting or watercraft licenses in Minnesota. Most people get tripped up by the licenses, Germershausen said.

Germershausen said he once considered using the microchip in a client's showdog as evidence that his client's "locus of life" had moved from Minnesota.

Such issues have been top of mind lately following two residency fights the Minnesota Supreme Court decided last year. The taxpayers lost.

NBA referee Ken Mauer Jr. ran afoul of Minnesota's tax laws after claiming residency in Fort Myers, Fla., and not paying Minnesota state income taxes in 2003 and 2004.

Among the strikes against the St. Paul native, according to the Supreme Court decision, was that his efforts to sell his 10,600-square-foot home in Afton during those years were halfhearted.

Another was that he kept at least two of his four cars here: two Lexuses and a Rolls-Royce Corniche were largely garaged in Minnesota during the tax years in question. The 1988 Honda Accord? That was in Florida.

The decision wasn't unanimous. In his dissent, Justice G. Barry Anderson said Mauer had properly established residency in Florida, even continuing to insist on his residency there in the face of a protracted battle with the NBA over it.

The court's interpretation of the domicile rule was "arbitrary," Anderson wrote in his dissent. "Taxpayers in Minnesota enter the domicile swamp at their own peril."

Businessman William D. Larson was luckless too. Larson, of Peterbilt truck dealership fame, moved to Las Vegas in 1998 and shifted belongings to his new home, including his extensive wine collection.

He opened a Nevada bank account, registered cars there, canceled his Minnesota driver's license, among other actions.

But the court decided his connection with Minnesota during the 2002 through 2006 tax years was stronger than his connection with Nevada. It agreed that the "locus" of his life was still in Minnesota. Larson owned more property in Minnesota than in Nevada, spent more time in Minnesota than Nevada, registered more vehicles in Minnesota and kept bank accounts and mail delivery in Minnesota, the Supreme Court noted.

The court also noted that Larson used just one attorney in Nevada but used four law firms in Minnesota, and that it was his personal assistant in Minnesota who managed his bank accounts and bills and received his mail.

Jennifer Bjorhus • 612-673-4683