Thomas Kennedy, the founder of a number of successful software companies, owes $6.7 million in Massachusetts income tax plus penalties after he failed to convince the state Appellate Tax Board that he had relocated to Florida.
On Oct. 14, 2011, Mr. Kennedy filed a Massachusetts Form 1-Nonresident/Part-Year Resident Income Tax Return (F1) as a resident from Jan. 1, 2010, to June 1, 2010, and as a nonresident from June 2, 2010, to Dec. 31, 2010. On Oct. 9, 2012, Mr. Kennedy filed a 2011 F1, and on Oct. 11, 2013, Mr. Kennedy filed a 2012 F1. Mr. Kennedy’s filing status was “Married filing separate return.”
After an audit, the state Department of Revenue Audit Division advised Mr. Kennedy that he had not met his burden of demonstrating the establishment of a new domicile outside of Massachusetts, and therefore he remained domiciled in Massachusetts during the tax years at issue. The department issued a notice of assessment asking for $8.79 million in taxes, interest, and penalties.
After subsequent discussions, Mr. Kennedy conceded liability for a portion of the assessment with a total $6.7 million remaining in dispute, which Mr. Kennedy appealed to the board (Kennedy v. Comm’r of Revenue, No. C332038 (Mass. App. Tax Bd. 10/31/19)).
Center of Life
Mr. Kennedy was born in Massachusetts and moved to Florida when he was seven years of age. He graduated from the University of South Florida in 1973. In 1982, Mr. Kennedy moved to Virginia. He and his wife were married in June 1988 and subsequently had four sons, all of whom were born in Virginia. In 1993, the Kennedys built their own vacation home in Massachusetts. In 1997, the Kennedys sold their home in Virginia and moved to their vacation home in Massachusetts, making it their full-time home. In 2008, they moved to a 60-acre property with a farmhouse in Brewster, Mass. The Kennedys made substantial renovations to the farmhouse. They also built a pool house and an indoor sports complex. The Kennedys also closed on a Miami Beach house on June 15, 2010.
In 1994, while still in Virginia, Mr. Kennedy founded BackOffice, a global software and consulting-service company. When the Kennedys moved to Massachusetts in 1997, they also moved the BackOffice headquarters. In 2007, Mrs. Kennedy began working at BackOffice, eventually becoming president and CEO. Mr. Kennedy served as the chief technical officer (CTO) and chairman of the board of directors. During the tax years at issue, BackOffice had an office in Boston, as well as offices in several non-Massachusetts locations. BackOffice also had offices outside of the U.S.
In 2008, Goldman Sachs purchased a 15% interest in BackOffice for $30 million. In May 2011, Goldman purchased additional shares of the company for $125 million giving Goldman a 51% ownership in BackOffice. On May 10, 2011, Mrs. Kennedy was dismissed from her duties as president and CEO. On November 15, 2011, Mr. Kennedy resigned as CTO. Mr. Kennedy retained his 30% interest in BackOffice. On Dec. 28, 2012, Mr. Kennedy divested himself of his remaining interest in BackOffice, which Goldman purchased for approximately $85 million.
In 2013, the Kennedys started another business venture, Zudy, a software development company. Zudy was headquartered in Miami Beach with an office in Massachusetts. The Kennedys owned a property management company, K&M Management Inc., and a personal finance company, K&M Investments LLC, to manage their extensive real estate holdings and their personal finances, respectively. Both companies were headquartered in Massachusetts during the tax years at issue.
Mr. Kennedy conceded that Mrs. Kennedy was domiciled in Massachusetts during the tax years at issue and that three of the Kennedy sons were attending high school or college in Massachusetts during that time period. The Kennedys owned properties in Massachusetts, Florida, and other locations during the tax years at issue. The Kennedys celebrated three major holidays together, Thanksgiving, Christmas, and July 4th. During the tax years at issue, the Kennedys celebrated all but one of the holidays in Massachusetts.
After the sale of their interest in BackOffice, Mrs. Kennedy purchased a luxury suite at Gillette Stadium, home of the New England Patriots. Mr. Kennedy owned eight club-level, season ticket seats for the Patriots. The Thomas R. Kennedy Trust, of which Mr. Kennedy was a beneficiary, owned season tickets to the Boston Red Sox. BackOffice owned a suite at TD Garden for Boston Celtics and Boston Bruins games. Neither Mr. Kennedy nor his businesses owned any season tickets for any sports teams in Florida.
In 2010, Mr. Kennedy made a charitable contribution of $3 million to the University of South Florida. Mr. Kennedy’s primary physician was located in Massachusetts. Mr. Kennedy had an accountant, who was located in Massachusetts. Mr. Kennedy obtained his Florida driver’s license on June 29, 2010, and at that time registered to vote in Florida. Mr. Kennedy voted only in the Presidential election in November 2016. During 2010 and 2011, Mr. Kennedy spent more days in Massachusetts than in Florida. In 2012, he spent 153 days in Massachusetts and 157 days in Florida.
The board found that the evidence did not support Mr. Kennedy’s insistence that he lived a very separate life from his wife and that they maintained separate legal domiciles. The board found that Mr. Kennedy and his wife were very much “a united couple” who shared the same domicile. The board found that “the center” of the Kennedy family life was based in Massachusetts. The board found that Mr. Kennedy spent the vast majority of his family time with his wife and his sons in Massachusetts during the tax years at issue.
Mr. Kennedy also had stronger business ties to Massachusetts than he did to Miami Beach during the tax years at issue. Rather than establish that his business life centered in Miami Beach, the board found that the evidence established just the opposite—that Miami Beach provided a secluded respite for Mr. Kennedy from his Massachusetts-based work.
The board found that Mr. Kennedy’s social life was primarily centered in Massachusetts during the tax years at issue. Comparing his activities, relationships, and real estate holdings in Massachusetts versus Florida, the board found that Mr. Kennedy’s business, family, and personal lives were centered in Massachusetts. The board found that Mr. Kennedy’s “perfunctory, ministerial steps” were not sufficient to demonstrate that he had “changed the center of his life” from Massachusetts to Florida. Mr. Kennedy, the board found, knew that he would be realizing a large capital gain within five years from Goldman’s initial investment. The board thus found that “tax planning” served as the impetus for Mr. Kennedy to attempt to change his domicile to Florida.
For Massachusetts income tax purposes, “residents” shall be taxed on their taxable income. A Massachusetts taxpayer is subject to tax on all of his or her income, regardless of its source. In contrast, like most states, Massachusetts taxes nonresidents only on income from Massachusetts sources. The term “resident” is defined as: (1) any natural person domiciled in the state, or (2) any natural person not so domiciled, but who maintains a permanent place of abode in the state and spends more than 183 days of the taxable year in the state. Accordingly, if Mr. Kennedy was domiciled in Massachusetts, he is subject to tax on all of his income, regardless of the number of days he spent in the state.
Domicile has been defined as “the place of actual residence with intention to remain permanently or for an indefinite time and without any certain purpose to return to a former place of abode.” The hallmark of domicile is that it is the place where a person dwells and which is the center of his or her domestic, social, and civil life.
A determination of domicile depends upon a comprehensive facts-and-circumstances analysis with the ultimate question being “the location of the center” of Mr. Kennedy’s life. A person is considered to have changed his or her domicile by satisfying two elements: (1) the establishment of physical residence in a different state, and (2) the intent to remain at the new residence permanently or indefinitely. The burden of showing a change of domicile is always upon the party asserting the change.
Here, Mr. Kennedy was “undisputedly very close to his wife and four children; therefore, an analysis of the center” of Mr. Kennedy’s life must focus particularly on Mr. Kennedy’s family and how and where he connected with them, the board said. Mr. Kennedy pointed to cases where a taxpayer was found to have created a domicile in a different state while other close family members remained domiciled in Massachusetts. However, the board noted, ”married taxpayers have been far less successful in proving a domicile apart from a spouse.“ Less common is the situation that Mr. Kennedy here claims—a center of life apart from a spouse with whom he or she shares ”a solid marriage.“
The board considered Mr. Kennedy’s close family ties to have “the greatest weight” in its determination that Mr. Kennedy had not abandoned his Massachusetts domicile in favor of a new one in Florida during the tax years at issue. Moreover, Mr. Kennedy was very active in BackOffice during the tax years at issue through Nov. 15, 2011, when he resigned as an employee of BackOffice. Further, Mr. Kennedy endeavored to establish SportsMoney LLC in Massachusetts during 2012, and his other business ventures—K&M Management and K&M Investments—were each headquartered in Massachusetts, not in Florida.
Accordingly, the center of Mr. Kennedy’s “business life remained in Massachusetts through tax year 2012.“ Mr. Kennedy also enjoyed several social activities in Massachusetts that he did not partake of in Florida. The board thus found that ”the center of Mr. Kennedy’s social life remained in Massachusetts during the tax years at issue.“ In short, the center of Mr. Kennedy’s life remained in Massachusetts during the tax years at issue. Accordingly, Mr. Kennedy failed to meet his considerable burden of proving a change of domicile from Massachusetts to Florida.
The department may impose a 20% penalty when an underpayment is “substantial.” An underpayment is substantial if it exceeds 10% of the tax required to be shown on the return for the period. An understatement will be reduced by any portion for which the taxpayer had “substantial authority” for the position taken on a return.
Here, substantial authority did not exist. Relevant case law, the board found, “does not support Mr. Kennedy’s position that he was domiciled outside of Massachusetts.“ Mr. Kennedy did not indicate to the board any part of his returns that allegedly served as a disclosure of the underlying facts affecting his tax treatment. Further, the board found that Mr. Kennedy’s reliance on his accountant’s advice, consisting merely of ministerial steps ”intended to make a show of domicile for the taxing authorities,“ was not sufficient to establish that he acted in good faith, and that he therefore had ”reasonable cause“ for the position he took on the returns for the tax years at issue.
Accordingly, the underpayment penalty assessed by the department was not waived. Thus, like so many others before him, Mr. Kennedy failed to achieve what might be the most difficult feat a taxpayer can attempt—a change of domicile while maintaining ties to the domicile the taxpayer has purportedly abandoned.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Robert Willens is president of the tax and consulting firm Robert Willens LLC in New York and an adjunct professor of finance at Columbia University Graduate School of Business.