Church Attendance Held Against Under Armour Exec In Tax Domicile Case

This post was originally published on Forbes Aug 13, 2015

It doesn't seem like going to church should count against a taxpayer , but that is what happened last month in a decision of the Maryland Court of Special Appeals.  Here is the story.

An Overseas Assignment

William McDermond had been the Director of Operations for Baltimore-based Under Armour.   When the company went public in 2005, it decided to open an office in the Netherlands and offered Mr. McDermond the position of  Director of European Operations.  It was anticipated in the assignment agreement that he would be in the Netherlands about two years.

Mr. McDermond hoped that he would be able to skip paying Maryland income taxes for a couple of years. Instead he got a lesson in what I call the stickiness of domicile.  Last month the Court of Special Appeals of Maryland confirmed the decision of the Maryland Tax Court that Mr. McDermond was liable for just over $125,000 in Maryland state income tax for the year 2007.  The facts of the case made it look pretty hopeless to me, but there are some points of interest.

The Stickiness Of Domicile

There is an impression among some that if you are not going to be present in the state where you are now living for a fairly extended period, that avoiding state income can be accomplished with a flourish of paperwork.  That is generally not true.  There is this concept called domicile, which borders on the mystical.  Everybody is considered to have a domicile and it remains their domicile until they have both abandoned it and established a new one.

One of the best illustrations of domicile is one of our most ancient written stories - the Odyssey.  Odyssey has taken on the meaning of an exciting journey that one embarks on, but a more accurate title to get the essence of the story across would be "Schlepping Back From Troy".  Odysseus never wanted to leave Ithaca and spent ten years trying to get back after ten years of fighting.  Ithaca remained his domicile for those two decades.  Being the king and all, he didn't have a tax problem from that, but that is neither here nor there.

Trying To Fix The Paperwork

When Mr. McDermond learned of this new assignment he consulted with Joseph O'Neill of Parente Randolph LLC (I note in passing that Parente Randolph merged with another regional firm and was gobbled up by Baker Tilly, which is number 12 in the country by one ranking.  Mr. O'Neill is stilling hanging in there, which indicates that he either has more on the ball than I do or that going from regional to not quite Big Ten is easier than going from regional to not quite Big Four).

Mr. O'Neill noted a flaw in the paperwork.  The correspondence from Under Armour clearly indicated that the assignment was meant to last two years.  Mr. McDermond got the company to change it to indefinite.

On June 16, 2006, one day after the purported meeting between McDermond and O'Neill, Under Armour and McDermond amended the Assignment Letter such that McDermond's “[e]xpected [l]ength of [a]ssignment” was changed to “[i]ndefinite.” O'Neill's June 28, 2006 email to McDermond further referenced the fact that McDermond “had the assignment contract amended to be open-ended, rather than for the current two-year period[.]”

As Lois Lerner and the rest of us have learned you should really be careful about what you put in e-mails.  Mr. McDermond probably presented his e-mail to Mr. O'Neill to back up his penalty defense, but it was probably unfortunate.

The Maryland Tax Court gave little weight to the amendment of the Assignment Letter on June 16, 2006 that purported to alter the expected length of McDermond's assignment in the Netherlands from two years to “[i]ndefinite.” The Maryland Tax Court found that, “[a]s a result of this change, Under Armour ...didn't make any changes to [McDermond's] employment contract ...[and] didn't make any changes to any agreements with the Netherlands for work permits or other purposes.

Note the word "purported". Whenever you see the word "pruport" in any of its forms in a tax decision, you can pretty well count on things not going well for the taxpayer.  "Purport" is judgespeak for "Sez you".

Other Issues

Mr. McDermond did not sell his Baltimore house due to the poor market at the time, but he rented it to his brother and did not stay there when he was back in Maryland.  That probably did not hurt him.

What did hurt him was that his residence permit in the Netherlands was only good for a couple of years.  Then he thought he would need a Maryland drivers license and when he applied for it he signed a statement that he was a Maryland resident. He spent some time trying to learn Dutch on his own, but gave up when he realized he could get all the business done in English..

I think that was probably enough to demonstrate that he had not established the Netherlands as his permanent home, but then they threw in something that I think is just wrong.

Church?

Before moving to the Netherlands, McDermond occasionally attended religious services at a Baltimore church. After relocating to the Netherlands in February 2006, McDermond occasionally attended religious services at a church in Amsterdam, to which he made some charitable contributions. When McDermond would travel back to the United States on business during his assignment in the Netherlands, he would occasionally attend services at the Baltimore church he attended before his move. McDermond further continued to make charitable contributions to his Baltimore church while living in the Netherlands.

First off, some state revenue departments, quite wisely, will not consider continued donations to local charities as an indication of continued domicile out of concern for local charities.  That is not what I see as the problem.

They are holding it against him that when he happened to be in Maryland, he went to church - the same church he had gone to while he was living in Baltimore full time.  Thankfully it does not indicate Mr. McDermoond's religion, but let's just hypothesize that he is Catholic.  Back in parochial school, they told us we had to go to Mass every Sunday, no matter where in the world we were.  It takes a lot to change your domicile, but changing your religion is not a requirement, so Mr. McDermond's church attendance should not have been held against him.

I hypothesized Catholic, because I would think that in Maryland, that thought might have crossed somebody's mind.  Maryland was the only colony founded for Catholics originally.  The only Catholic to sign the Declaration of Independence was from Maryland.  The catechism we had in parochial school was the Baltimore Catechism.  All that and these judges don't get that somebody might go to church, wherever he happened to be.

Appeal?

The case actually looks pretty hopeless, but I would love to see it appealed on just the church issue.  I'm guessing it would be sent down to be reconsidered without considering church attendance and McDermond would still lose, but it would be a really interesting opinion.