Discussion:Resident of California?

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Discussion Forum Index --> Tax Questions --> Resident of California?

Tax123456 (talk|edits) said:

13 May 2008
Hey Guys,
 I have a client with the following information:

Dave moved to Reno, Nevada on January 1st of last year with the intent to make Reno his domicile. Dave immediately obtained a Nevada driver’s license, registered to vote in Nevada, purchased a home in Nevada, registered his personal vehicle in Nevada, and maintained his nonbusiness bank accounts at a bank in Reno. Dave, however, maintained a one-bedroom apartment in San Francisco because he regularly traveled there for REC’s business.

Do you think he is a resident of California?

Thanks

Riley2 (talk|edits) said:

13 May 2008
How many days will he spend in California in 2008?

Tax123456 (talk|edits) said:

13 May 2008
Client didnt say but he does stay there to have enough time to accrual 1MM in salary, and he goes back there on weekend for vacation

Marcilio (talk|edits) said:

13 May 2008
I wonder if he's trying to avoid paying CA taxes?

Tax123456 (talk|edits) said:

13 May 2008
Yup, my client is trying to claim residency in Neveda, but I believe he is still a resident of CA because of the extensive amount of business he does there. What do you guys think?

Marcilio (talk|edits) said:

13 May 2008
You pay tax in the state where you earn the money. If he is selling intellectual property he may have a case, but residency in Nevada will not negate CA tax on personal services performed in that state.

KatieJ (talk|edits) said:

13 May 2008
As Marcilio says, even if the client is a nonresident of California, his earnings from personal services performed in California are subject to California tax. I presume this client has significant income from intangibles (interest, dividends, capital gains from intangibles) to make the effort of "moving" to Nevada worthwhile.

California will look askance at this situation. In order to change his domicile to Nevada, the client would have to move away from his California home (which he evidently has not done), move to and reside in Nevada, and intend to remain in Nevada permanently or indefinitely. Is the client married? Where does the spouse live? Children? Where do they go to school? Social ties -- club memberships, etc? Church membership/attendance? Where does he obtain professional services -- doctor, dentist, accountant, attorney? Most importantly, where does the client spend his time? California does not have a half-year or 183-day rule, as some states do, but if he spends more days in California than in Nevada during the year, that will weigh heavily towards California residence. It is imperative that he keep precise documentary records of his presence in California, Nevada, and other places during the year. Spending non-working time in California is a really dumb thing to do in this situation. He should stay out of California unless he really needs to be here for business.

All of the facts and circumstances must be taken into account to determine residence. We do not have enough facts here to come to a conclusion, but from the facts given the change of residence is certainly questionable.

I'd suggest reading the California law (Cal. Rev. & Tax. Code Sec. 17014) and the associated regulations, and also Sec. 2000 of the FTB's Residency and Sourcing Audit Manual (http://ftb.ca.gov/aboutFTB/manuals/audit/rstm/2000.pdf). The regulations state that an individual's residence is the state where he has the closest connections during the taxable year. It's like putting weights on a scale. My guess so far is that the FTB would probably assert that he remained a California resident, but if his time in California is limited, he spends most of his time in Reno, and his family is in Reno, he may have a good argument. On the other hand, if he has no ties to Reno other than those you've listed (mostly formalities), and spends significant amounts of time in California, he's probably a dead duck.

TaxRocks (talk|edits) said:

13 May 2008
Assuming the taxpayer is desperately single with no family, what if he has dividend income and income from the sale of stock?

Tax123456 (talk|edits) said:

13 May 2008
But would his business visit to california warrant it to be a temporary or transitory visit, because he did tell me he was going to sell his business 15 months, ago.

KatieJ (talk|edits) said:

13 May 2008
I did once win a case at protest where the hearing officer agreed that the taxpayer's presence in California to work for his employer was a "temporary or transitory purpose." Of course, in order to get to that point, first you have to establish a change of domicile. In that case, the taxpayer-husband was one of the founders of a high-tech business in Orange County. The founders had sold some of their stock to a venture capital company, so he was a minority stockholder. He and his second wife had two young daughters, and he had an adult son from a previous marriage. For various reasons he and his wife decided they did not want to raise the girls in southern California, and they moved to Incline Village, NV. (You need to understand that the "post office box in Incline Village" is a derisive expression among FTB residency auditors, or at least was in my day.)

Mom and girls moved out of the OC house, which was put on the market. Dad was still working for the company he helped found. They moved everything out of the house other than what Dad and adult son needed in order to stay there until the house sold. Every Friday night Dad flew to Reno, Mom picked him up and drove him home to Incline Village. Every Monday morning she dropped the girls at school and took Dad to the Reno airport to fly back to John Wayne. Mom was a great record keeper and had ALL of the plane tickets. The house was not a permanent abode because it was listed for sale and if it had sold, he and sonny would have had to move out. He didn't keep a personal vehicle in California, but used a company car during the week. And of course they had moved their driver's licenses, voter registration, bank accounts, vehicle registrations, etc., etc to Nevada.

The auditor said Mom was a nonresident of California, but that Dad had not changed his domicile (partly because he was out of town when Mom and girls physically moved out of the house), and his presence in Nevada was for temporary purposes, so he was still a resident. I argued that his domicile had changed (in fact, when he went home from that out-of-town trip, he went home to Nevada to help unpack, not to California; he said otherwise his wife would have killed him) along with the rest of the family, and that his presence in California after that was for the temporary purpose of performing services for his employer. We were able to document that he did not spend a single day in California after the move other than working days.

I should also mention that after the move to Nevada, Dad sold another big chunk of his stock to the VCs at a substantial gain. The major adjustment was taxing his community 1/2 of the gain on the stock sale (Mom's 1/2 was excluded because the auditor agreed she was a nonresident). The hearing officer agreed with me that the taxpayer was a nonresident. But if he had been single, I doubt that I could have convinced her, particularly if he had spent vacation time in California as well as working time. In that case he would have been a resident, and his share of the gain on the stock sale would have been subject to California tax.

Tax123.., has the client made serious efforts to sell the business, and can you document that? Just telling you he planned to sell the business isn't the same as seriously trying to sell it. That could be a helpful fact, but again, the most important element is time in California vs. time in Nevada.

TaxRocks (talk|edits) said:

13 May 2008
Also, where in the CA code does it mention its right to tax worldwide income? I just know this, but have no authoritative source.

Tax123456 (talk|edits) said:

13 May 2008
Thanks a lot Katie J, well in my case he is single and did sell his business a year after he changed his domicile to Nevada. We've established his domicile is in Nevada. After moving to Nevada, he went back for business trips regularly and occasionally stayed on the weekends with no business purpose. However he did fail to keep a record of the number of days of these visits.

TaxRocks (talk|edits) said:

13 May 2008
Your client doesn't sound so smart. Who doesn't keep a record? Does he have an idea of how long he stayed?

KatieJ (talk|edits) said:

13 May 2008
Try CRTC Sec. 17071.

States have the power to tax residents on all income, from all sources. Shaffer v. Carter, 252 U.S. 37, 40 S. Ct. 221 (1920); Travis v. Yale & Towne Mfg. Co., 252 U.S. 650 (1920).

KatieJ (talk|edits) said:

13 May 2008
How have you established that his domicile is in Nevada? I don't get that from the facts you've given. Maybe so, maybe not. He hasn't given up his ties to California. He maintains a California home (how substantial in comparison to the Nevada home?) and it sounds as though all of his business interests are in California. Those are significant ties, especially for a single individual.

Does he have other family -- parents, siblings? Where do they live?

Tax123456 (talk|edits) said:

13 May 2008
We based his domicile on the facts that he bought a house, changed his voter registration to Neveda, got a Neveda Driver's License, maintained non business bank account in Neveda, and registered his personal vehicle for Neveda. Based off of that I concluded he met the intent and physical presence test.

KatieJ (talk|edits) said:

13 May 2008
Not necessarily enough. You've missed the first requirement: severance of ties to the old domicile.

Mind, I'm not saying you don't have an argument. But I don't think it's conclusive; at least, I don't have enough information to come to that conclusion.

Where are his business bank accounts, brokerage accounts, etc.? What about professional services? etc., etc.

Tax123456 (talk|edits) said:

13 May 2008
He doesn't have family in either states, his home in California is an apartment that he regularly visits (don't know how often) and occasionally stayed on weekends.

Tax123456 (talk|edits) said:

13 May 2008
His business bank accounts were kept in California. The principle place of activity for business occurred in San Francisco, CA.

Tax123456 (talk|edits) said:

13 May 2008
btw I graduated from SDSU; go aztecs

KatieJ (talk|edits) said:

13 May 2008
Apart from purchasing the house, all of the elements you've cited as demonstrating a change of domicile are formalities. You could do all of those things (including buying a house if you have the means to do it) without spending any significant amount of time in Nevada or intending to make a permanent home there. By themselves, those items are not determinative. It's the taxpayer's actions that will be determinative -- and of course, an auditor will have the benefit of hindsight. Does he behave like a person who intends to make a permanent home in Nevada? Does he participate in the community there? When he travels outside CA and NV, where do his travels usually begin and end -- in CA or in NV?

Tax123456 (talk|edits) said:

13 May 2008
How does California income tax work? From the way I understand it, CA tax is based on the worldwide income taxation so everything would get pulled in? Also where can I find this information? And in the end would it matter where his jurisdiction is because I believe everything would be pulled under California tax anyways? Thanks

TaxRocks (talk|edits) said:

13 May 2008
I think by "would it matter where his jurisdiction is", you mean would it matter where his state of residency is?

BEGooding (talk|edits) said:

May 13, 2008
Tax123456: is your name Dave?

KatieJ (talk|edits) said:

13 May 2008
Hmm, good question, Brad <G>.

Tax123456: California, like most states, taxes residents on all income, from all sources. See Cal. Rev. & Tax. Code Sec. 17071. Nonresidents are taxed only on income from California sources; see CRTC Secs. 17951-55.

Income from personal services has its source at the place where the services are performed (18 Cal. Code of Regs. Sec. 17951-2 and 17951-5). So regardless of his tax residence, Dave's income earned by performing services in California is subject to California tax. If he works for his employer (which I gather is his own company) part of the time in California and part of the time elsewhere, prorate by the days or weeks.

Income from intangible property, such as stocks, bonds, mutual funds, etc., has its source at the residence of the owner unless the intangible has acquired a business situs in California (18 CCR Sec. 17952). Income from real or tangible personal property has its source at the location of the property (18 CCR Sec. 17951-3). Income from a trade or business has its source at the place where the business is carried on; if a unitary business is conducted both within and without California, the net income from that business is apportioned in accordance with the formula provided by CRTC Secs. 25120-25139 (California's version of UDITPA).

So if Dave is a nonresident of California, his non-California source income will not be subject to California tax.

BEGooding (talk|edits) said:

May 13, 2008
I expect this ruse to avoid CA state taxes is a common ploy among CA residents. It really boils down to the definition of "CA resident" and I expect that is really a matter of intent. If Dave doesn't have a record of his time in CA, then I recommend he produce a record. There are many ways he could go through his records to reconstruct his whereabouts. Unless he can prove he wasn't in CA, I expect the franchise tax board could propose the he in fact WAS in CA.

KatieJ (talk|edits) said:

14 May 2008
Yes, that's why the P.O. box in Incline Village is a common joke among auditors. The FTB has a crew of auditors who do nothing but residency and source audits. The template they must complete is 40 pages long BEFORE any data is entered into it.

Where all the business connections are in California, and there are no significant ties to the alleged new state of residence, no doubt the taxpayer will be held to be a resident. Of course, we don't have all of the facts and circumstances of this particular case. However, the idea that owning a home and changing one's driver's license, voter registration, vehicle registraton, bank accounts, etc. is enough to establish a change of domicile or residence is a common misconception. You have to actually move to the new location and stay there, and behave in all respects as if that is your main and permanent home. I doubt that our "Dave" has done that.

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