Domicile is a legal construct that describes the relationship the law creates between an individual and a particular locality or country.
Income tax rules do not apply for estate, gift, or generation-skipping tax purposes. Whether the transfer is subject to taxation generally depends on the domicile of the donor, or decedent, at the time of the gift or death. Reg. Section 20.0-1(b)(1), Reg. Section 25.2501-1(b).
Domicile is defined as the combination of physical presence in a place and the intent to remain there indefinitely.
Domicile is a function of a person’s intent to remain in a particular residence indefinitely and even an illegal alien can establish a U.S. domicile. Estate of Jack v. United States, 54 Fed. Cl. 590 (Fed. Cl. 2002).
An individual can be both a non-resident alien and a resident alien during the same year. This generally occurs in the year the individual arrives in or departs from the United States.
The IRS will not rule on whether an alien individual is a non-resident of the United States, including whether the individual has met the requirements of the substantial presence test or exceptions to it. However, the IRS may rule regarding the legal interpretation of the definition of resident. Rev. Proc. 2007-7, 2007-1 I.R.B. 227, Section 3.01(7).
Domicile is the place where a person has his/her permanent principal home to which, whenever he/she is absent, he/she returns or intends to return. Domicile is important because it is used in determining in what state a probate of a dead person’s estate is filed, what state can assess income or inheritance taxes, where a party can begin divorce proceedings, or whether there is “diversity of citizenship” between two parties which may give federal courts jurisdiction over a lawsuit. Where a person has several “residences” evidence may need to be examined to determine which is the state of domicile. A person may have only one domicile at a single point in time. A business has its domicile in the state where its headquarters is located. For tax purposes, a business’ domicile is often a principal place of business.
Each State of the United States is considered a separate sovereign within the U.S. federal system, and each therefore has its own laws on questions of marriage, inheritance, and liability for tort and contract actions. Persons who reside in the U.S. must have a state domicile for various purposes. For example, an individual can always be sued in their state of domicile. Furthermore, in order for parties to invoke the diversity jurisdiction of a United States Federal Court, the plaintiffs may not have the same domicile as any defendant.