IN SUPREME COURT
Took no part, Gildea, J.
Carol Dreyling, et al.,
Filed: March 30, 2006
Office of Appellate Courts
Commissioner of Revenue,
S Y L L A B U S
1. Tax court’s finding that taxpayer was a Minnesota resident in 1998 and 1999 was justified by the evidence.
2. Tax court’s finding that taxpayer failed to prove that fraud penalties were improper was not justified by the evidence.
Affirmed in part, reversed in part.
Considered and decided by the court en banc without oral argument.
O P I N I O N
ANDERSON, Russell A., Chief Justice.
Relators Roger and Carol Dreyling appeal a tax court judgment affirming an order of the Commissioner of the Minnesota Department of Revenue (the commissioner) assessing additional income taxes, penalties, and interest for tax years 1998, 1999, and 2000. We affirm the judgment of the tax court as to the additional income taxes, interest, and penalties assessed for substantial underpayment under Minn. Stat. § 289A.60, subd. 4 (2004), but reverse as to the assessment of penalties for fraud under Minn. Stat. § 289A.60, subd. 6 (2004).
Roger Dreyling (Dreyling)
was born and raised in
After he retired
from the full-time practice of medicine in 1997, Dreyling entered into
temporary employment agreements with two tribal organizations in
For 1998, 1999,
and 2000, Dreyling and Carol filed joint income tax returns indicating that
Carol was a resident of
allocate any portion of their income to another jurisdiction, the commissioner assessed additional income taxes, underpayment and fraud penalties, and interest totaling $30,905.19. Dreyling appealed to the tax court from the commissioner’s order of October 10, 2003. Dreyling v. Comm’r of Revenue, No. 7622-R, 2005 WL 473893, at *1 (
from the tax court’s judgment, contending that he is entitled to nonresident
taxpayer status and reversal of the fraud penalties. We conclude that the tax court’s finding that Dreyling was a
The taxpayer bears
the burden of demonstrating that the commissioner’s assessment is incorrect or
All net income of
resident taxpayers is subject to
below that he was not a resident of
bodily presence in a place coupled with an intent to make that place one’s
home. Miller’s Estate v. Comm’r of Taxation, 240
does not dispute that he was bodily present in
In Manthey, we affirmed the tax court’s finding that a pipeline worker did not change his domicile from Minnesota to Alaska even though he spent most of his time in Alaska, purchased real estate in Alaska, engaged in everyday commerce in Alaska, received hiring preferences as a certified Alaska resident, received dividends from the Alaska Permanent Fund, obtained an Alaska driver’s license, registered and licensed his car and trailer in Alaska, purchased resident hunting and fishing licenses in Alaska, registered to vote and voted in Alaska elections, performed jury duty in Alaska, joined a fraternal organization in Alaska, and only traveled to Minnesota to visit his wife and children for 4 to 6 weeks of the year in 8 out of the 9 years he lived in Alaska. 468 N.W.2d at 549.
Dreyling worked in Alaska on a strictly temporary basis, used a rented mailbox
from Mail Boxes Etc. as his Alaska address, obtained an Alaska driver’s license
(using his address at Mail Boxes Etc.), obtained Alaska resident fishing and
hunting licenses, never voted in Alaska, and registered one motor vehicle in
Alaska in 1999 (which he sold in Minnesota in that same year). Dreyling,
2005 WL 473893, at *1-2. Dreyling
concedes that he was not eligible to receive dividends from the Alaska
Permanent Fund and that he never purchased real property in
The tax court
found that Dreyling was domiciled in
Dreyling argues that,
of the factors listed in Minn. R. 8001.0300, subp. 3, the sheer quantity of
factors favoring nondomiciliary status outweighs the factors favoring domicile
argues on appeal that he has met his burden of proving that he was not
domiciled in Minnesota because the quality of factors he claims favor
outweigh the factors he concedes favor domicile in Minnesota. We reject any attempt to elevate the
importance of one factor over another.
As Rule 8001.0300, subp. 3, specifically provides, “Any one of the items
listed above will not, by itself, determine domicile.” Taking the factors under Rule 8001.0300,
subp. 3, as a whole, we conclude that the tax court’s finding that Dreyling
failed to meet his burden of proving that he was not a resident of
argues that even if we hold that he was a resident of
According to the evidence introduced at trial, Dreyling was audited as part of the “CRV project,” the nature of which was not disclosed at trial. According to the commissioner’s audit log and time summary, the commissioner assessed fraud penalties against Dreyling for five reasons:
Taxpayer made false statements, evasive response and attempts
to mislead. The return is incorrect to
such an extent and in respect to items of such character and magnitude as to
compel one to conclude that the underreporting was known and deliberate. There is a pattern of consistent failure to
conceded at trial the only false statement Dreyling made was filing as a
nonresident. As to the second and third
reasons, the department does not contend that Dreyling deliberately omitted or
attempted to conceal items of his gross income.
Dreyling, 2005 WL 473893, at
*12. Rather, the
department contends that Dreyling intentionally misallocated a portion of his
taxable income for each year to
The tax court found that Dreyling failed to prove that fraud penalties were improper, essentially because (1) Dreyling was a sophisticated taxpayer who reviewed the criteria for nonresident taxpayer status before filing his returns, (2) Dreyling filed as a nonresident despite the lack of substance to his claim that he was domiciled in Alaska, (3) Dreyling’s allocation of income to Alaska resulted in a persistent and substantial understatement of his Minnesota taxable income, and (4) Dreyling’s conduct during the audit, and the records he supplied, were inadequate to disprove the foregoing. See Dreyling, 2005 WL 473893, at *12-13.
We conclude that
Dreyling met his burden to prove that a fraud penalty was improper under the
facts here. Dreyling testified that he
first considered moving to Alaska upon graduation from medical school in 1965,
but that he rejected the idea because at the time he and his wife had four
young children and Alaska lacked educational opportunities for them comparable
to those in Minnesota. Dreyling
testified that, after his retirement from practice in
As Dreyling testified, he reviewed the criteria for nonresident taxpayer status before filing his returns, and concluded he qualified as a nonresident. Dreyling’s tax preparer also testified that, in the preparer’s opinion, Dreyling satisfied at least some of the criteria listed in Minn. R. 8001.0300. Dreyling reported all of his Alaskan income, disagreeing with the commissioner only over his residency. There was no evidence Dreyling had ever been audited, or paid any penalties for understating his income or filing late, until the returns in question here.
While we do not
condone a taxpayer’s failure to cooperate completely with the commissioner, Dreyling
maintained at least some records to document his out-of-state residence, and
produced the bulk of the documents requested by the commissioner. Dreyling testified he did not produce
documentation for 1998 because he believed that year was beyond the statute of
limitations. But Dreyling did produce copies of his credit
card statements showing his purchases in 1999 and 2000. The commissioner never subpoenaed any of
Dreyling’s records, and Dreyling’s refusal to produce all available documentation
supporting his out-of-state travel was appropriately construed against him in
calculating the number of days he was present in the state. See Blumberg
v. Palm, 238
Dreyling testified to these matters under oath and denied that, in claiming nonresidency, he intended to defraud the state. While we ordinarily defer to the trial court on matters of credibility, here the tax court made no finding that Dreyling’s testimony in this respect was not worthy of belief. Dreyling’s denial, while self-serving, is supported by the circumstantial evidence of his intent.
We conclude that
the tax court’s finding that Dreyling failed to prove
that fraud penalties were improper was not justified by the evidence. We therefore reverse the imposition of fraud
penalties. The record reflects that
Dreyling has paid the penalties assessed under Minn. Stat. § 289A.60, subd. 4,
for substantially understating his
Affirmed in part, reversed in part.
GILDEA, J., not having been a member of this court at the time of the argument and submission, took no part in the consideration or decision of this case.
 Carol Dreyling is a named party
because the Dreylings filed joint income tax returns, but she acknowledges that
she was a
 Dreyling testified that he developed symptoms of cardiac problems that culminated in a six-vessel cardiac bypass in 2002. He also testified to a total knee replacement in 2001, aggravated by the Alaskan weather. In addition, at trial he wore a brace on his right foot.
 Before trial in the tax court, Dreyling conceded that he was a resident of Minnesota in 2000. In this action, Dreyling is still contesting the fraud penalty imposed for that year.
 Dreyling claims that, of the 26
factors listed in the rule, ten factors favor non-domicile, two factors clearly
 Dreyling claims the following factors
are among those favoring domicile in
 Dreyling agrees that “location of
social, fraternal or athletic organizations or clubs” and “whether resident or
nonresident hunting and fishing licenses were purchased [in 1999]” favor
 The statute of limitations for
assessment of taxes is three and one-half years from the time a return is
filed, but this limit does not apply to fraudulent returns.