The North Carolina Department of Revenue has struck out for the third time in its historic $10.4 million tax dispute with a wealthy Raleigh couple that dodged the state’s taxman by relocating to Florida.
A unanimous three-judge panel for the North Carolina Court of Appeals affirmed in an Aug. 4 opinion two lower court rulings in favor of Steve and Elizabeth Fowler, multimillionaires who made their fortune with a paving and grading company.
The appellate court, Business Court and an administrative law judge have all found that the Fowlers were domiciled in Florida when they filed their individual income tax returns for 2006 and 2007 as non-residents of North Carolina.
The state’s dispute with the Fowlers is believed to be the largest tax fight of its kind in recent history – and the Department of Revenue’s loss is seen as a major gain for taxpayers.
“It’s a very taxpayer-friendly decision,” said Gregg Polsky, a tax law professor at the University of North Carolina School of Law in Chapel Hill. “What this case stands for is it’s not very hard to change your domicile in North Carolina. You can be pretty sloppy in how you handle it. That’s what’s remarkable about this case.”
But another tax law professor, Lawrence Zelenak, who teaches at Duke, disagreed with the assertion that the decision means that the Court of Appeals is pro-taxpayer. Instead, he argued that the court was merely being lazy because it simply adopted the Business Court’s findings without performing any real analysis of its own.
“Going forward the real meaning of this is that the Court of Appeals doesn’t want to be bothered by dealing with the facts in residency cases and they’ll affirm any lower court ruling,” he said. “I think that borders on dereliction of duty.”
Zelenak added, “I think the result in the case is absolutely outrageous. There’s no way under any reasonable view of the facts that they changed their domicile before the sale of the stock.”
The Fowlers entered into an agreement to sell their company Jan. 19, 2006, and early the next day boarded a chartered plane bound for Naples, Florida, where they had bought a $1.6 million home.
Their timing allowed them to avoid paying Florida’s intangibles tax and North Carolina taxes arising from the $106 million sale of their company. The Sunshine State has no personal income tax.
In Florida, the Fowlers took a series of actions meant to establish residency. They attempted to obtain new drivers’ licenses and a post office box. They also tried to register to vote and to register a vehicle, but were unsuccessful because they failed to bring the necessary paperwork. They completed the tasks on a return trip in March.
“This case is a window into how someone sells a business and moves,” said the Fowlers’ attorney, John Wester of Robinson, Bradshaw & Hinson in Charlotte. “It’s avoiding taxes in a lawful manner. That’s why states like Florida attract people like the Fowlers.”
The Court of Appeals opinion leans heavily on the earlier findings of James Gale, chief judge of the state’s Business Court. He affirmed a ruling from Administrative Law Judge Beecher Gray, who had chided state revenue officials for relying on a murky “facts and circumstances test” to conclude that the Fowlers owed taxes.
Revenue officials can consider a list of 16 “non-exclusive” factors when determining a taxpayer’s domicile. But Gale found that “any attempt to weigh” the factors “does not lead to a necessary finding that the Fowlers failed to abandon their domicile in North Carolina on January 20, 2006.”
After considering Gale’s findings, Court of Appeals Judge Wanda Bryant, who wrote the opinion, concluded that “it is clear that petitioners were acting based on their intent to change their domicile to Florida.”
Bryant affirmed Gale’s determination that the Fowlers had relocated to Florida on Jan. 20, despite the fact that they continued to spend a significant amount of time in North Carolina after that date. Mr. Fowler stayed on as president of the paving and grading business and oversaw the company’s daily operations for three years after the move to Florida to ease the transition to new ownership. The Fowlers also kept their home in Raleigh until 2010.
“I think that explains why the Department of Revenue is so discomfited by this decision,” Polsky said. “They don’t like the precedent this is setting. If they can’t win this one, what cases are they going to win? You would think that these are really good facts for the government but they keep losing.”
A spokeswoman for the state Attorney General’s Office, which argued on behalf of the Department of Revenue, could not be reached for comment. She declined an interview request shortly after Gale’s ruling.
Revenue officials could petition the state Supreme Court to hear the case. But if the appellate decision stands it will clarify the case law on domicile for tax purposes, according to Wester.
“This case makes it clear that it is unrealistic to have a watershed moment or dispositive break when one closes all doors on his or her former state of domicile,” he said. “It seems to me that tax policy should favor this kind of action, especially when the indicia of ‘where you live’ have changed fundamentally.”
Follow Phillip Bantz on Twitter @NCLWBantz