Picture the sun-kissed beaches of Santa Monica, the vistas of Yosemite National Park, the glitz of Hollywood’s Walk of Fame. California’s allure is undeniable, drawing dreamers and seekers from every corner of the globe. But while the Golden State may offer a golden ticket to some, it also extends a hand—albeit with a tax bill in it—to those who stay for more than a vacation.
Distinct Concepts of Residency and Domicile
In California, residents are subjected to income tax on their entire taxable income, regardless of its source, while nonresidents are only taxed on income derived from within California (Revenue and Taxation Code (“R&TC”), §§ 17041(a), (b), & (i), 17951). California law determines that a “resident” is: “(1) every individual who is in the State for other than a temporary or transitory purpose; and (2) every individual domiciled in the State who is outside the State for a temporary or transitory purpose” (Cal. Code Regs., tit. 18, § 17014, see also R&TC, § 17014(a)(1)-(2).
Residency and domicile are two related but distinct concepts.
A domicile is an individual’s permanent home or the place which they consider their true, fixed and permanent residence. This is the place where a person has the most settled and permanent connections, the place where they intend to remain, and the place they intend to return to when absent (Whittell v. Franchise Tax Board (1964) 231 Cal.App.2d 278, 284).
Domicile is chosen voluntarily, representing a permanent home until an event prompts a change (Appeal of Bragg (2003-SBE-002) 2003 WL 21403264). For those domiciled in California, an outbound test applies, examining whether or not the individual was absent for other than temporary and transitory purposes. If an individual is domiciled outside California, an inbound test applies, evaluating whether the individual was in California for other than temporary and transitory purposes.
If the individual is domiciled outside California, the test turns to residency, meaning whether he or she is in California for other than temporary or transitory purposes.
Residency examinations aim to identify individuals who maintain a substantial physical presence within California or derive significant benefits and protections from its laws and government (California Franchise Tax Bd., Chief Counsel Ruling 2014-01). The determination of residency involves an extremely personal and factual analysis conducted by trained examiners based on the individual’s physical presence and intentions.
California courts have established a set of 19 factors, commonly known as the “Bragg Factors,” which are considered when determining residency (Appeal of Bragg (2003-SBE-002) 2003 WL 21403264). These factors ask for the physical presence, location of family members or personal belongings, in-state activity, holding of a California driver’s license or vehicle registration, professional or social affiliation, etc. No single factor is determinative, and the weight given to each factor varies depending on the individual circumstances of the case (Appeal of Bragg (2003-SBE-002) 2003 WL 21403264).
The Office of Tax Appeals recently
decided three residency cases, which each highlight the complexities of residency determinations, the subjective standard, and the fact-heavy analysis.
1. Appeal of Panda
In the Appeal of Panda, the OTA addressed whether a wife’s community property share of her husband’s out-of-state earnings was taxable by California (Appeal of Panda (2022-OTA-237)).
The wife maintained significant ties to California, including employment, her apartment, vehicles and family members in the state. She spent a majority of her time there and while she sought employment outside of the state, she never secured a job outside of the state. Based on the objective factors, the OTA found she failed to meet her burden to rebut the presumption that California remained her domicile. As a domiciliary absent only temporarily, she was deemed a resident.
The OTA then determined that Nevada community property law gave the wife a 50 percent interest in her husband’s wages earned while he was domiciled there, and as a California resident taxed on worldwide income under section 17041(a), her global income included this community property share.
This case underscores both the factual nature of residency determinations and their flow-through to taxation of spousal income, especially regarding the few remaining community property states.
2. Appeal of Housman and Pena
In the Appeal of Housman and Pena, the OTA addressed individual residency issues as well as check-the-box elections (Appeal of Housman and Pena, 2022-OTA-375P). The taxpayers—citizens of Australia—claimed to be California nonresidents at the time of a multi-million-dollar capital gain, seeking to avoid state taxation.
After analyzing the objective facts under the Bragg framework, the OTA found that the taxpayers’ ties to California, including their business interests and employment, demonstrated presence for other than a temporary or transitory purpose, despite their assertions of an intent to eventually return to Australia.
This strict interpretation of the residency statute affirmed FTB’s resident determination.
Besides its residency component, the case cautions tax practitioners that California strictly construes the rules for avoiding residency status and valid entity classification elections, even for foreign individuals and business entities. In particular, the OTA also analyzed whether the taxpayers were entitled to a stepped-up basis for their gain through a late check-the-box election for their Australian holding company. Upholding FTB’s invalidation, the OTA applied the regulations regarding the election.
3. Appeal of Beckwith
In the Appeal of Beckwith, the OTA evaluated the taxpayer’s connections to California and Tennessee using “objective factors” that “provide ‘a measure of the benefits and protection that a taxpayer has received’ from a state.” (Appeal of Beckwith, 2022-OTA-332P (quoting Appeal of Bragg (2003-SBE-002) 2003 WL 21403264) The court’s review of the taxpayer’s contacts spanned registration documents, personal relationships, timing of transferring real estate and physical presence.
Mr. Beckwith purchased California property early in the tax year in question, sold his Tennessee property in the fall and sold his company later in the same year. While Mr. Beckwith contended that he looked for another residence in Tennessee and has not decided to move to California before the following year, he was not able to provide documents supporting this contention.
Together, these objective factors were used to determine the individual’s subjective intent at a certain point in time. “The contacts that a taxpayer maintains in California and other states are important objective indications” of intent (Appeal of Beckwith, 2022-OTA-332P (quoting Appeal of Bracamonte, 2021-OTA-156P).
The OTA performed a fact-intensive review of Mr. Beckwith’s specific activities, giving weight to his property purchase and sale, and his fiancée’s location. It discounted unsupported claims about intended property uses. This demonstrates the factual scrutiny required when taxpayers’ claims implicate substantial tax liability and the taxpayer’s need to document several steps throughout the process.
Determining residency and domicile in California for tax purposes involves a comprehensive analysis of various factors. The FTB auditor will require the taxpayer to re-live and substantiate their lives for the year at issue, including relationships. Residency examinations aim to identify individuals with a substantial physical presence or significant benefits in California. Understanding the Bragg factors and their relevance in residency determination is crucial for tax professionals assisting their clients. By carefully considering these factors and providing appropriate documentation, individuals can navigate California’s complex residency rules and ensure accurate tax reporting.
Cory Stigle, CPA, Esq. is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C.
Philipp Behrendt is an associate attorney with Hochman, Salkin, Rettig, Toscher & Perez, P.C.