Nontaxable Escape from Taxifornia?
Are you one of the many Californians thinking about moving out of California to escape the high tax burdens of our state? With the rise of remote work and the plethora of opportunities across the country, recently released California Department of Finance figures provide an estimate that California’s population declined by more than 352,000 between April 1, 2020, and January 1, 2022. However, for any taxpayer considering making a move to another state, a recent Office of Tax Appeals (“OTA”) opinion may provide some food for thought.
The OTA was established by the Legislature in 2017 to handle administrative appeals of tax disputes. A precedential opinion from the agency is binding on future panels and becomes controlling law. Consequently, a precedential 2021 OTA opinion, Appeal of J. Bracamonte and J. Bracamonte (2021-OTA-156P) (“Appeal of Bracamonte”), is a must-read for California taxpayers contemplating changing their residence for tax purposes. In the opinion, the OTA walks through the framework used to determine whether a taxpayer has changed or relinquished their California domicile and as with every residency case, is very fact intensive.
In this appeal, the taxpayers were a married couple who were residents of California through 2007 and owners of a California home from 1988 through December 2017. The taxpayers owned all the outstanding shares of Jimsair, a fixed base operator (“FBO”) located in San Diego County.
On February 25, 2008, the taxpayers drove to Henderson, Nevada, and stayed for three days to secure an apartment for rent. During this trip, the taxpayers also obtained a post office box, set up mail forwarding, registered to vote, obtained Nevada driver’s licenses, obtained a cell phone with a Nevada area code, and opened new bank accounts.
On March 6, 2008, the taxpayers took possession of the apartment in Nevada, which had an initial rental period from March 1, 2008, to August 31, 2008, but was extended to September 30, 2008. During this month, the taxpayers also updated their life insurance policy address to Nevada, had an eye exam, had their car serviced, and registered their car in Nevada.
The taxpayers also made several other attempts to solidify their connections outside of California, including changing their family trust from a California trust to a Nevada trust, purchasing a trailer in Nevada, and hiring a Nevada real estate broker to help them purchase a house in Nevada.
However, the OTA’s opinion notes that from February 25, 2008, through July 18, 2008, the taxpayers spent 28 total days in Henderson, Nevada, 90 days at their property in Escondido, California, and 19 days at their property in Lake Havasu City, Arizona.
The taxpayers stated that they first learned of the opportunity to sell Jimsair in May 2008, when the buyer contacted the husband. The buyer agreed to purchase the company and on June 2 and June 11, 2008, the taxpayers executed documents in Henderson, Nevada for the sale. The sale closed on July 18, 2008, and the taxpayers received $16,699,000 in 2008 and $617,522 in 2009.
On July 23, 2008, the taxpayers terminated their post office box in Escondido, California. The taxpayers closed on the purchase of a home in Henderson, Nevada, later that year on September 22, 2008.
From July 18, 2008, through December 31, 2008, the taxpayers continued to spend time at their various properties in California, Arizona, and Nevada. “In total, from July 18, 2008 through December 31, 2008, appellants spent 72 days in Nevada, 24 days at their property in Escondido, California, and 25 days at their property in Lake Havasu City in Arizona.”
The opinion notes that in general, “an individual who is domiciled in California and leaves the state retains his or her California domicile as long as there is a definite intention of returning to California, regardless of the length of time or the reasons for the absence.”
In order for a taxpayer to change their domicile, the OTA concluded that “a taxpayer must: (1) actually move to a new residence; and (2) intend to remain there permanently or indefinitely” citing a prior State Board of Equalization opinion, Appeal of Berner (2001-SBE-006-A) 2002 WL 1884256.)* Furthermore, the burden of proof for a change in domicile is on the party that is asserting the change.
When taxpayers have significant contacts with more than one state, additional analysis is necessary to determine the state of residence for the taxable year. To help guide the OTA’s analysis, it turns to a prior State Board of Equalization opinion, Appeal of Bragg (2003-SBE-002) 2003 WL 21403264, which “provides a list of nonexclusive factors that are helpful in determining which state an individual had the closest connection to the period in question. These factors can be separated into three categories: (1) registrations and filings with a state or other agency; (2) personal and professional associations; and (3) physical presence and property.”
As provided in a prior precedential OTA opinion, Appeal of Mazer (2020-OTA-263P) the Bragg factors include items such as:
Registrations and filings with a state or other agency, including:
• Homeowner’s property tax exemption
• Automobile registration
• Driver’s license
• Voter registration/participation history
• Address used and state of residence claimed on federal/state tax returns
Personal and professional associations, including the state of the taxpayer’s:
• Bank and savings accounts
• Memberships in social, religious, and professional organizations
• Use of professional services, such as doctors, dentists, accountants, and attorneys
• Maintenance/ownership of business interests
• Professional license(s)
• Ownership of investment real property
• Presence/connections/residency as indicated by third-party affidavits/declarations
Physical presence and property, including:
• Location and approximate sizes and values of residential real property
• Where the taxpayer’s spouse and children reside
• Taxpayer’s telephone records (i.e., the origination point of taxpayer’s telephone
• Origination point of the taxpayer’s checking account/credit card transactions
• Number/general purpose (vacation, business, etc.) of days the taxpayer spends in California versus other states
The OTA cautions that “these factors are not exclusive, and serve merely as a guide.” Furthermore, the specific weight for any particular factor “depends upon the totality of the circumstances.”
Although some of these factors would support the taxpayers’ claim that they relinquished their California residency, such as the fact that they changed their driver’s license and voter registration to Nevada, the OTA notes that the taxpayers’ California connections were also significant. For example, the taxpayers still had vehicles and vessels registered in California, and maintained their California post office box address, bank accounts, and healthcare professionals.
However, the crucial part of the opinion in the Appeal of Bracamonte is not the restatement of these factors and subsequent analysis but its discussion of the taxpayers’ “physical presence” within California.
The OTA notes that between February 26, 2008, when the taxpayers claimed they moved out of California, to July 18, 2008, the date the sale of Jimsair closed, their presence in California “far outweighed their presence in any other state.” The OTA even goes so far as to discuss the “average length of their stay in the respective homes” as a significant factor in determining the taxpayers’ residency status. In a footnote, the opinion notes that between March 6, 2008, when they took possession of their apartment in Henderson, Nevada, and July 18, 2008, the date the sale of Jimsair closed, the taxpayers’ stays in California averaged 8.5 days, whereas their stays in Nevada averaged 2.18 days. The OTA proclaims that “physical presence is a factor of greater significance than mental intent and the formalities that tie one to a particular state.”
Therefore, the OTA found that the taxpayers were California residents for tax purposes, and the income received from the sale of Jimsair was subject to California taxation.
While the determination of a taxpayer’s residency status will always be a fact-intensive analysis, the OTA’s precedential opinion in the Appeal of Bracamonte shows that taxpayers thinking about moving out of California for tax purposes should be wary of the impact that their physical presence in this state after their move may have on the determination of their state of domicile. As this opinion demonstrates, planning in advance of the sale of a business is critical.
* The 2002 State Board of Equalization opinion, Appeal of Berner, also involved a dispute over the residency of taxpayers who had moved from California to Nevada. However, the State Board of Equalization in Berner concluded that the taxpayers had successfully changed their primary residence to Nevada and reversed the FTB’s decision to assess additional personal income tax for the years at issue.
Disclosure: The taxpayers in the Appeal of Berner were represented by Bewley, Lassleben & Miller, LLP partners Richard L. Dewberry and Joseph A. Vinatieri.