by Bradley R. Marsh and Dina B. Segal *
People have long flocked to California for beautiful weather, rich agriculture, and immense business opportunities in a myriad of industries. In Nov. 2012, however, the state passed Prop. 30, which increased already high income tax rates. The rates, topping out at 13.3% on those earning more than $1 million a year, have prompted many high earners to leave the state...
As a general rule, California imposes a tax on the entire taxable income of all California residents. [Cal. Rev. & Tax Code § 17041(a)]. Section 17014(a) of the California Revenue and Taxation Code defines a "resident" as either "every individual domiciled in this state who is outside the state for a temporary or transitory purpose" or "every individual who is in this state for other than a temporary or transitory purpose." ...
 A Taxpayer Domiciled in a State Is a Resident of That State Even If That Person Has Left for Temporary or Transitory Purposes
... California courts have defined domicile as "the concurrence of physical presence in a particular place with the intention to make that place one's home." [Estate of Glassford, 114 Cal. App. 2d 181, 186 (Cal. App. 1952).]...
In order to change one's domicile, a person must actually move to a new state and intend to remain there permanently or indefinitely. [In re Marriage of Leff, 25 Cal. App. 3d 630, 642 (Cal. App. 2d Dist. 1972).]...
 A Taxpayer Is a Resident of a State if He or She Is in That State for Other than Temporary or Transitory Purposes
... The determination of whether a person is in California for a temporary or transitory purpose cannot be based on the individual's subjective intent, but must instead be based on objective facts. A "temporary or transitory purpose" must be considered in the context of the facts and circumstances of each particular case. [18 CCR § 17014(b).]...
There is a statutory presumption that a person who spends nine months or more in California is a California resident, but this presumption is rebuttable. [See Cal. Rev. & Tax Code § 17016.]...
 Burden of Proof for Domicile and Residency Determination
If there is a dispute regarding whether there has been a change in domiciliary location, the party asserting the change bears the burden of proving such change...
For a residency determination, the tax authority's finding of residency is presumptively correct, and the burden lies with the taxpayer to prove it to be erroneous.
 California Courts Have Considered the Issue of Residency for Tax Purposes
[a] Only One Published California Case Addresses the Issue of Whether a Taxpayer Coming from Out of State Has Become a Resident of California
Klemp v. Franchise Tax Board, 45 Cal. App. 3d 870 (Cal. App. 2d Dist. 1975) is the only published California case which considers the issue of whether a person from another State has acquired residency in California. In Klemp v. Franchise Tax Bd., the Court of Appeal considered whether a husband and wife from Illinois were residents of California during a six-year period when they owned a home, maintained a bank account, belonged to a country club in California, and spent more time in California than Illinois...
The court concluded that "the record unequivocally shows that the Klemps did not, during the period in question, engage in any activity in California other than that of a seasonal visitor or tourist." The court reached this conclusion despite the fact that the Klemps spent more physical time in California than in Illinois during the years in question, owned a house in California, and were members of the Thunderbird Country Club in California, where Mrs. Klemp served as chairman of the Women's Golf Association for a two-year term. 24 The court reasoned that "time spent in California is only a factor to be considered as an indication of the purpose of the visit" and "the ownership of an abode, a bank account and a club membership do not subject a seasonal visitor to California income tax."
[b] California Courts Have Addressed the Issue of Whether a Taxpayer Has Given Up His or Her California Residency When the Taxpayer Moves to Another State
California courts have considered whether a taxpayer has given up his or her California residency when the taxpayer leaves the State. In 1965, the First District Court in Whittell v. Franchise Tax Bd., 231 Cal. App. 2d 278 (Cal. App. 1st Dist. 1964) considered whether a California husband and wife had given up their California residency when they moved to Nevada.
The court, considering the Whittells' connections to Nevada and California, concluded that the Whittells failed to rebut the presumption of residency because their "domestic and business activities in California [were] extensive indeed and [made] it abundantly clear that presence here was neither temporary nor transitory." The court reasoned that the extensive connections the Whittells had established in Nevada "did not render their activities in [California] any less indicative of their residence in [California]."
 The State Board of Equalization Has Considered the Issue of Residency for Tax Purposes[a] The State Board of Equalization Applies a Closest Connections Test to Determine a Taxpayer's State of Residency
To determine a taxpayer's state of residency, the State Board of Equalization ("Board") considers where a taxpayer has his or her closest connections during the period at issue. Namely, the Board, in Appeal of Stephen D. Bragg, 2003-SBE-002, May 28, 2003, articulated a non-exhaustive list of 19 factors to consider when ascertaining where a taxpayer has his or her closest connections during the audit period.
This closest connections test has never been recognized by any California statute or published California opinion as a method of determining residency. In fact, this method of determining residency is flawed in that it is based on the erroneous presumes that every taxpayer must have a state of residency. The Board has found that a taxpayer does not have to establish that he or she is a resident of another state to show that he or she is not a California resident.
Thus, although a taxpayer's connections to California may be used to aid in finding whether that taxpayer's purpose in this state was temporary or transitory, a closest connections test comprised of a list of factors is arguably an improper approach for determining residency. Nevertheless, because the closest connections test is utilized by the Board to determine residency, it is important to consider what connections to California have been found to trigger a residency audit.
[b] The State Board of Equalization Has Rendered Varying Decisions on the Issue of Residency
 A Spouse or Domestic Partner May Owe California Income Tax on Income Earned by a Non-Resident Spouse or Partner
Each spouse in a marriage or partner in a domestic partnership can have a different state of residency. If spouses are residents of two different states, then the issue arises whether they must pay taxes on the income of the other spouse located out of state. This depends on whether the domicile of the earning spouse is in a community or separate property state. "It is well settled that marital property interests in personal property are determined under the laws of the acquiring spouse's domicile." [Appeal of Idella I. Browne, 1975 Cal. Tax LEXIS 65 (Cal. Tax 1975) (citing Schecter v. Superior Court of Los Angeles County, 49 Cal. 2d 3, 10 (Cal. 1957)).]
As a result of California's expansive residency laws, many taxpayers have been surprised to find they owe California income taxes when they did not consider themselves California residents. Individuals considering moving to or from California, those coming to California or leaving California temporarily for work or leisure, as well as those simply obtaining California source income, should seek advice regarding California's expansive laws and regulations on residency determination.
* Bradley R. Marsh is a state and local tax attorney in the San Francisco office of Winston & Strawn LLP. Dina B. Segal is a corporate attorney in the Del Mar office of Sheppard Mullin Richtor & Hampton LLP with an expertise in state and local tax.
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RELATED LINKS: For more information on residency for California personal income taxes, see:
2013-01 Lexis Federal Tax Journal Quarterly § 3.01 - California Residency for Income Tax Purposes - "You Can Check Out Any Time You Like, But You Can Never Leave"
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