Reed Smith Client Alert

This week, the Appellate Court of Illinois, Second District, issued its decision in Grede v. Hamer, holding that an individual was not an Illinois resident, notwithstanding the fact that the individual had not abandoned his Illinois domicile for the tax years at issue.1 Reed Smith’s state tax attorneys represented the taxpayers in Grede.

Under the Illinois Income Tax Act ("IITA"),2 an individual is an Illinois resident if the individual is present in Illinois for other than a "temporary or transitory purpose" during the tax year, or if the individual is "domiciled" in Illinois but is absent from the state for a temporary or transitory purpose. If an individual leaves Illinois for other than a temporary or transitory purpose, or if an individual establishes domicile elsewhere, then he or she ceases to be an Illinois resident. Reed Smith successfully litigated the question of abandonment of domicile in Cain, another Appellate Court case, which was decided last year.3 Grede addresses the other basis for residency under the IITA, the "other than a temporary or transitory purpose" test.

Grede involved Mr. Grede, a married individual, with a son and daughter, who lived and worked in Illinois until 2000. In 2000, Mr. Grede accepted a job offer with the Hong Kong Exchange ("HKEX"), and moved to Hong Kong. His initial employment contract was for a three-year period. However, HKEX’s common practice was to renew employment with employees at Mr. Grede’s level. Mr. Grede applied for and received an employment visa to work in Hong Kong, rented an apartment, opened a bank account, and obtained a Hong Kong identity card. He also terminated the lease on his car in Illinois, changed his status at social clubs to non-resident, and joined social clubs in Hong Kong.

As part of his incentive package with HKEX, Mr. Grede was entitled to receive stock options once HKEX went public. These options were subject to a vesting period of 10 years, culminating in May 2010. During his employment, Mr. Grede was offered and accepted another position within HKEX and intended to continue to negotiate for contract extensions.

Mr. Grede’s contract was not renewed after March 2003, and Mr. Grede returned to the United States in June 2003. Mr. Grede’s wife and their two children remained in Illinois for most of the time that Mr. Grede was working and living in Hong Kong.

Mr. Grede filed his 2001 Illinois income tax return as a non-resident married individual, filing separately. He did not file an Illinois return for 2002, nor for the portion of 2003 prior to his return from Hong Kong. Mrs. Grede filed her 2001 and 2002 returns as married, filing separately, and for property tax purposes, she claimed a homestead tax exemption for the Illinois house that she co-owned with Mr. Grede. The Gredes filed a joint 2003 return, with Mr. Grede as a part-year resident for the period after he returned from Hong Kong.

The Department challenged Mr. Grede’s claim of non-resident status for the period 2001 through June 2003 and ruled against him in an administrative hearing. It concluded that his intentions were reflected by the three-year term of his original employment contract with HKEX. For 2003, the year of his return, the Department ruled that his filing of a joint return with his wife precluded claiming a non-resident status for any portion of the year.

The Trial Court reversed the Department’s decision as "against the manifest weight of the evidence," finding that Mr. Grede’s intent while he was living in Hong Kong was to remain there on a permanent basis.

The Appellate Court reversed the decision of the Trial Court. It concluded that Mr. Grede did not change his domicile from Illinois to Hong Kong because he had significant connections to Illinois, including immediate family, a home, a driver’s license, and voting. However, it also concluded that "domicile is not dispositive of an individual’s residency." In particular, the Appellate Court found persuasive the evidence that showed that Mr. Grede moved to Hong Kong because of the long-term incentives offered by HKEX, including the stock options. While the Department argued that the three-year employment contract was evidence that the employment would not last indefinitely or permanently, the court held that "[i]t was not the language of the contract that controlled, but rather [Mr. Grede’s] intent."

The Appellate Court also addressed the Department’s argument that the Gredes could not claim Mr. Grede was a non-resident because Mrs. Grede claimed the homestead exemption for the Illinois house. The court pointed out that Mrs. Grede co-owned the house and her name was listed on the tax bills. The house was Mrs. Grede’s primary residence during the years in question, making her eligible to claim the homestead exemption.

Finally, the Appellate Court addressed the question of whether the joint return filed for the latter part of 2003 precluded Mr. Grede from being classified as a non-resident for the earlier portion of the year. The court concluded that for 2003, Mr, Grede was a part-year resident, a status recognized by the IITA and, thus, his part-year filing for 2003 was proper.

The Department has 35 days to request that the Illinois Supreme Court review the Grede decision. Reed Smith will provide further updates if the court exercises its discretion and allows an appeal.

If you have questions about the Grede decision or other Illinois residency issues, please contact the authors of this article, or the Reed Smith lawyer with whom you usually work. For more information on Reed Smith's Illinois tax practice, visit

1. 2013 Ill. App. (2d) 120731-U. The decision in Grede is a Rule 23 Order, meaning it will not be published and may not be cited as precedent.
2. 35 ILCS 5/101 et seq.
3. Cain v. Hamer, 2012 Ill. App. (1st) 112833.



Client Alert 2013-114