District of Columbia Office of Tax and Revenue Announces an Important Change to its Long-Standing Interpretation of “Statutory Resident”

For the 2020 income tax filing season, taxpayers claiming part-year residency may now be required to file as a “Statutory Resident,” recently announced the District Office of Tax and Revenue (OTR)1.

Prior to this change, which is a change in administrative policy rather than a statutory change, OTR required all individuals that resided in the District of Columbia (District) for only a part of a tax year to file an income tax return as a part-year resident. The instructions had provided that “A DC taxpayer present in DC for 183 days or more and not domiciled in DC during the tax year is a part-year resident for the period not domiciled in DC.2” In keeping with the former OTR published guidance, an individual who was considered a Statutory Resident was taxable as a partyear resident, which permitted the allocation of income received in the District and excluded by means of a subtraction any income received when that individual was not a resident of the District3.

The District Code however defines a “resident” as, in relevant part, “an individual domiciled in the District at any time during the taxable year (Domiciliary Resident), and every other individual who maintains a place of abode within the District for an aggregate of 183 days or more during the taxable year, whether or not the individual is domiciled in the District (Statutory Resident), ... In determining whether an individual is a resident, an individual’s absence from the District for temporary or transitory purposes shall not be regarded as changing his domicile or place of abode.” (Emphasis added4.) Both a Domiciliary Resident and a Statutory Resident are subject to the income tax for the entire tax year and all income is taxable wherever earned5.

Implications

The implications of this change are far reaching. As a result of this recent change, many individuals likely will be surprised to learn that when completing their 2019 D-40 Individual Income Tax Returns that they are not permitted to claim the subtraction for income received during period of non-residence and, as a Statutory Resident, must pay District tax imposed on their entire net income. Since this guidance was not issued until very recently, individual taxpayers have not received advanced notice of this change. OTR has not indicated whether relief will be provided from interest charges for underpayment of estimated income taxes and penalties which could be up to 25 percent of any tax due6.

The change also may result in some Statutory Residents being subject to income tax on the same items of income in two separate taxing jurisdictions (i.e. in the District as a Statutory Resident and in their state of domiciliary residence). A credit for income taxes paid to other states may alleviate this issue7.

There is uncertainty as to how the Statutory Resident provision will be interpreted based on little or no published departmental guidance. For example, what is the effect of “temporary absences” on the 183-day requirement8? Or, for purposes of the 183-day count, whether “day” will be interpreted as meaning any part of a day or a continuous 24-hour period? Also, how broadly will OTR construe the “place of abode” language?

Finally, it should be pointed out that if an individual does not meet the requirements to be a Statutory Resident, then a part-year resident return is not required. OTR instructions provide that “an individual is a part-year resident if he/she moves into or out of DC during the year with the intent to establish or abandon domicile9.” A nonresident income tax return is not required to be filed10. Nonresident individuals (those not considered Domiciliary Residents or Statutory Residents) are not subject to any tax on the whole or any portion of their personal income in the District under Federal legislation, known as the District of Columbia Home Rule Act of 197311. Albeit, an important exception is carved out for nonresidents conducting a trade or business within the District as unincorporated businesses12.

Sources

  1. https://otr.cfo.dc.gov/release/learn-about-tax-year-2020-filing-season-changes. See also, 2019 District of Columbia Individual Income Tax Forms and Instructions, D-40, page 3, “New for 2019 Income Tax Returns” and page 21, “Who is a Resident?”
  2. 2018 District of Columbia Individual Income Tax Forms and Instructions, D-40, page 27, Part-Year Residents. See also e.g. 2017, 2016, 2015, 2014, 2013, 2012, and 2011, District of Columbia Income Tax Forms and Instructions, D-40.
  3. D.C. Code § 47-1803(a)(2)(F). Note that part-year residents also allocate certain deductions and prorate standard deductions and credits.
  4. D.C. Code § 47-1801.04(42), subject to certain exceptions not relevant to this Alert.
  5. See D.C. Code §§ 47-1806.03, 47-1806.01, 47-1803.01, 47-1803.02; 47-1803.03(b).
  6. See D.C. Code §§ 47-4203, 47-4213.
  7. D.C. Code § 47-1806.04(a). See 2019 District of Columbia Individual Income Tax Forms and Instructions, D-40, page 21.
  8. See 9 DCMR § 9-105.6.
  9. 2019 District of Columbia Individual Income Tax Forms and Instructions, D-40, page 21, “Who is a Resident?”
  10. See D.C. Code § 47-1806.03. See also D-40B Nonresident Request for Refund.
  11. District of Columbia Home Rule Act Dec. 24, 1973 , 87 Stat. 777, Pub. L. 93-198, title I, § 101; Aug. 5, 1997 , 111 Stat. 251, Pub. L. 105-33 , title XI, § 11717(a). See D.C. Code § 1-206.02(a)(5).
  12. See Subchapter VIII, Tax on Unincorporated Businesses of Section 47 of the District Code.