Revenue and Tax Code Section 17014(d)

The Cases

Two recent court decisions have reemphasized how difficult it can be for a nonresident with a California spouse to avoid California income tax. Difficult, but not impossible.

Why The Cases Are Important

The opinions were issued by California’s Office of Tax Appeals, the state’s new administrative tribunal for determining tax appeals. Though nonprecedential (meaning they cannot be cited in future cases), the decisions are important because they are the first cases involving the issue of married couples with separate residency heard by the OTA since it took over appellate responsibility from the State Board of Equalization in 2018. As such, the cases offer some insight into how to plan for separate residency situations.

The first case, In the Matter of the Appeal of Hyginus Offor, OTA Case No. 18011264, affirms the longstanding and often misunderstood rule that while married couples can have separate residency, their income remains reportable community income unless the nonresident spouse also changes domicile from California or maintains out-of-state domicile. The decision starkly illustrates how domicile and residency are related, if legally distinct concepts; and sometimes both have to be managed to avoid California income taxes for spouses planning to have separate residency status. Continue reading

The Issue: Even Casablanca Isn’t Far Enough Away to Avoid A California Residency Audit

The global economy has enabled growing numbers of California residents to find employment overseas, often in Pacific Rim or European countries. Many of these jobs are in financial services or high-tech industries and can be very lucrative. The temptation is to pack up and leave without thinking about the California tax consequences. But that can be a costly mistake. California has special rules for changing residency to another country. If they aren’t scrupulously followed, expatriates can find themselves facing a large California tax bill along with the cheerful balloons at their welcome home party.

Changing Residency To Another State vs. Another Country

Changing legal residency from California to another state has fairly straightforward rules, if you’re willing to seriously pull up stakes. If you keep a vacation home, or a business, or work remotely, then it gets more complicated. But the concept is clear enough: to change your legal residency from California to another state you have to (a) intend to change your residency (that is, intend to leave for other than temporary or transitory purposes) and (b) physically move to the new state (you can’t just think about moving).

How the Franchise Tax Board, California’s tax enforcement agency, determines intent and what constitutes “moving” is another matter. The FTB doesn’t ask taxpayers what they intended; rather, it derives intent from their conduct. For that, the FTB uses the “facts and circumstances/closest connection” test, which compares all of the taxpayer’s California contacts with all of the taxpayer’s contacts in their new home state, and weighs them, in totality. But not every contact weighs the same, and since there are few bright-line rules, an audit can sometimes seem like a Kafka novel in its excruciating focus on seemingly casual details used to punish the unwary. A more detailed discussion of the closest connection test is here. That said, if you follow the regulations and case law, avoid common mistakes, and endure the cost and inconvenience built into establishing and maintaining nonresidency status for taxpayers with significant California contacts, you can have some degree of certainty about establishing yourself as a nonresident in another state.

Articles Posted in Revenue and Tax Code Section 17014(d)

Even Central Asia Isn’t Far Enough Away to Avoid California Residency Rules: Two Recent Cases on Married Couples with Separate Residency

Moving Overseas from California: A Residency Minefield for Expats