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Kansas court rules for taxpayer in high-profile residency dispute

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Tim Hartley
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Bob Gershon
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Jamie C. Yesnowitz
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On March 5, 2019, a Kansas District Court reversed a Board of Tax Appeals summary decision and found that an individual who owned, and later sold portions of a large business based in Kansas lacked a Kansas domicile.1 Therefore, the individual was determined to be a nonresident of the state during his 2005 and 2006 tax years. In a lengthy analysis, the Court rejected the Kansas Department of Revenue’s original determination due to a lack of evidentiary support and ordered a refund for the taxpayer of over $46 million.

Background The individual taxpayer, O. Gene Bicknell, owned significant portions of several businesses, the most notable of which was Kansas-headquartered NPC International, Inc. (NPC), the single largest Pizza Hut franchisee in the world. Mr. Bicknell was undisputedly a Kansas resident for many years until 1999, when he purchased a home in Florida with the intent to make it his permanent residence.2 Soon thereafter, as a means to continue managing NPC, Mr. Bicknell temporarily moved back to Kansas. Beginning in 2003, however, amidst changing personal circumstances, Florida became his chosen domicile again, and he filed personal income tax returns as a Kansas nonresident. For the 2005 and 2006 tax years at issue in this litigation, he likewise filed as a resident in Florida, and a nonresident in Kansas.

In late 2005, Mr. Bicknell was approached by a third party about the potential sale of his ownership in NPC. Despite no previous intent to sell the business, negotiations concluded with a sale resulting in a large gain in May 2006.

In September 2007, the Department notified Mr. Bicknell that it was reviewing his residency status. In October 2010, the Department issued a written determination against Mr. Bicknell for more than $42 million assessing tax, penalties and interest for the 2005 and 2006 tax years. The taxpayer filed an appeal with the Kansas Court of Tax Appeals (COTA), with the sole issue being whether he was a Kansas or Florida resident.3

While the case was pending, the Kansas legislature made significant changes to the state’s tax appeals process.4 Specifically, it reconfigured the statutory framework for appeals of Department determinations and replaced the COTA with the Board of Tax Appeals (BOTA), which is generally directed to hear matters de novo.5 The new structure allows taxpayers an option to appeal disputes with the Department to the District Court, rather than the Court of Appeals.6

The dispute between the taxpayer and the Department continued through several rounds of appeal through different venues. Ultimately, the COTA determined that Mr. Bicknell was a Kansas resident in 2005 and 2006 for Kansas personal income tax purposes and upheld the Department’s determination. The taxpayer appealed to the Court of Appeals, which directed the District Court to conduct a de novo review of the COTA decision.7

Ruling The District Court’s de novo review required significant analysis with respect to whether Mr. Bicknell was a Kansas domiciliary and hence, considered a Kansas resident for purposes of personal income tax for the 2005-2006 tax years.

Kansas statutes define the term “resident individual” as a natural person who is domiciled in the state. A person who spends more than six months of a taxable year in Kansas is presumed to be a resident.8 Before March 24, 2006, the related regulation defined “domicile” as that place where a person resides, where the person has an intention to remain, and to which a person intends to return following any absence.9 On March 24, 2006, that regulation was revoked and replaced by more detailed language. Specifically, Kan. Admin. Regs. 92-12-4a defines domicile as “that place in which a person’s habitation is fixed, without any present intention of removal, and to which, whenever absent, that person intends to return.” The regulation provides very specific guidance to determine a person’s domicile and lists several factors as evidence to be considered.10 Despite the applicability of the two different versions of the regulations to the tax years at issue, the Court found no need to separately evaluate the factors relative to the effective time periods. The significant factors to the determination in the earlier version of the regulations overlapped with the lengthy list included in the later version, and the regulations were consistent with each other, as well as with Kansas statutes and common law.

In determining residency for personal income tax purposes, the Court stated, “the most operative element of establishing residence is intent.” An abundance of evidence was available, so while the Court weighed all of the taxpayer’s facts and circumstances, the Court focused on the evidence which it found most relevant based on the credibility of its sources. In particular, the taxpayer’s character and normal business practices, which often included a lack of attention to detail and willingness or necessity to delegate authority to others, had bearing on the Court’s consideration.

The Court focused on the following factors contained in the newer regulation: (i) the percentage of time that the person is physically present in Kansas and the percentage of time that the person is physically present in each jurisdiction other than Kansas; (ii) the location of the person’s domicile for prior years; (iii) the location at which the person votes or is registered to vote; (iv) the location of services performed by the person in the course of employment; (v) change in the person’s living quarters; (vi) the person’s ownership of other real property; (vii) the jurisdiction in which the person has been issued a valid driver’s license; (viii) the jurisdiction from which any motor vehicle was registered to the person and the actual physical location of the person’s vehicle or vehicles; (ix) the filing by the person of a Kansas tax return, report or application as a Kansas resident or a nonresident individual; (x) the address where personal mail is received by that person and not subsequently forwarded; and (xi) the representations made to any insurance company concerning the person’s residence and on which any insurance policies are issued.11 Further, the Court considered as “other evidence” the taxpayer’s: (i) choice of law on estate planning documents; (ii) various corporate filings and other business-related statements; (iii) family holidays; (iv) church attendance; and (v) other representations.

After considering the voluminous body of evidence, the Court found only two factors potentially representative of Kansas residence, both of which were reliant upon testimony from third parties regarding the taxpayer’s intent. In contrast, the Court found the overwhelming body of evidence with probative value suggestive of the fact that the taxpayer was a resident of Florida, not Kansas, during 2005 and 2006. Therefore, the District Court reversed the Board of Tax Appeals decision.

Commentary Throughout its decision, the District Court openly referenced the Department’s insinuations that the taxpayer sought to intentionally mislead the Department as to his residency. Rather than accepting the Department’s suggestion that the taxpayer had an improper motive to be a nonresident, the Court clarified its preference to rely upon objective evidence to determine the taxpayer’s subjective intent.

It is interesting that the District Court openly chastised the earlier COTA decision for its lack of evidence and analysis. Further, it reiterated the Court of Appeals decision, noting the COTA’s failure to consider the relevant Department regulations in reaching its conclusion. In contrast, the District Court provided a thorough and detailed examination of every available fact. From a procedural perspective, it will be interesting to see whether the administrative changes adopted by Kansas in 2014 and 2016 result in consistently more detailed analyses by Kansas courts, or whether the lengthy opinion here was necessitated by the specific issue at hand.

And while this taxpayer eventually won at the District Court level, the analysis shows that to successfully prove domicile in a high-profile matter, one may lose when looked at through the lens of privacy, as the lifestyle and behavior of the taxpayer (the good, the bad and the ugly) is laid bare for all to see. Taxpayers with potentially significant residency disputes, particularly when transitioning from a high-tax jurisdiction to a low- or no-tax jurisdiction in a year in which a large gain from a business occurs, should carefully evaluate their own facts and circumstances. It is important for taxpayers to document what they are doing during that transition, and evaluate whether the likely fight is worth it from a financial and personal perspective.
 

1 Bicknell v. Kansas Department of Revenue, Crawford County District Court, 11th Judicial District, No. 2017-CV-000131-P, March 5, 2019. This is an appeal of an unpublished Board of Tax Appeals Summary Decision dated Oct. 2, 2017.
2 The Court noted that Mrs. Bicknell’s residency was not the focal point of its decision and made no mention of whether the couple filed joint returns in Kansas.
3 While the COTA appeal was pending, the taxpayer filed a separate suit in the Shawnee County District Court seeking declaratory judgment that the residency regulation adopted by the Department, KAN. ADMIN. REGS. 92-12-4a, is unconstitutional. The District Court granted the Department’s request to dismiss the case due to lack of subject matter jurisdiction over the constitutional challenge to pending matters at the COTA. The Court of Appeals later upheld this determination. Bicknell v. Jordan, Kansas Court of Appeals, No. 109,720, March 28, 2014 (unpublished).
4 Ch. 141 (S.B. 231), Laws 2014.
5 KAN. STAT. ANN. § 74-2438(b), absent a stipulation for and appeal on record.
6 KAN. STAT. ANN. § 74-2426(c), added by Ch. 112 (S.B. 280), Laws 2016. Previously, all decisions from the COTA were appealed to the Kansas Court of Appeals. Further, the BOTA is allowed two optional formats with respect to issuing decisions: summary decisions, and full and complete decisions.
7 In re Bicknell, Kansas Court of Appeals, No. 111,202, Sep. 25, 2015 (unpublished). This decision was on remand from the Court of Appeals of a COTA determination that the taxpayer was a Kansas resident in 2005 and 2006. The Court of Appeals ordered remand for readjudication of domicile applying the Department’s regulations. The taxpayer successfully argued to the Court of Appeals that the COTA had ignored KAN. ADMIN. REGS. 92-12-4 (2006) and almost all of KAN. ADMIN. REGS. 92-12-4a. In its determination, the COTA failed to provide any analysis or explanation for its failure to address evidence concerning the residency regulations.
8 KAN. STAT. ANN. § 79-109(b). A nonresident individual is an individual other than a resident individual.
9 KAN. ADMIN. REGS. 92-12-4. Further, to constitute a change in domicile, there must be an intent to change, actual removal, and the acquisition of a new domicile. Other relevant factors listed as evidence of domicile include a voting residence, where an individual’s driver’s license is issued, and where an individual’s vehicle is registered.
10 KAN. ADMIN. REGS. 92-12-4a(7).
11 Id.



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