Articles Tagged with nine-month presumption

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moving to california tax consequencesThe Case

A recent case from California’s Office of Tax Appeals brings some clarity to how strictly  California dates a change of residency for income tax purposes when a nonresident claims to have moved to California shortly after a liquidity event. The case, Appeal of Housman, OTA Case No. 18010200 (November 2022), in some ways is the flipside of Appeal of J. Bracamonte, a case involving a resident who claimed to move to another state shortly after a stock sale. Bracamonte is discussed in detail in this article. Both cases went badly for the taxpayers, and for many of the same reasons: failure to plan, failure to keep residency related records, establishing or retaining superior living accommodations in California, spending more time in the state than in their home jurisdiction during the year at issue.

Overview: The Importance of Timing

As discussed in the Bracamonte article, changing residency from California is binary: it happens on a specific date. Indeed, the date has to be reported on Schedule CA of the 540NR “part-year” return, which exiting taxpayers, with few exceptions, have to file for the year they move. The converse is also true for nonresidents moving to California. Schedule CA of the part-year return requires those taxpayers to disclose the date they become California residents. Continue reading

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California criminal tax fraud in residency cases

What’s Happening?

There’s a noteworthy residency-related Easter egg in the criminal tax fraud indictment against the Trump Organization and its CFO, Allen Weisselberg. The complaint includes the charge that Weisselberg fraudulently failed to file tax returns as a New York City resident, thus evading the municipality’s income tax on the city’s inhabitants. Monetarily, it’s one of the lesser offenses. It isn’t even mentioned in much of the media coverage. But it shines a spotlight on a question that sometimes arises in California residency tax planning: are there criminal tax fraud risks in asserting nonresidency while retaining or establishing significant contacts with California?

The Short Answer

The short answer is no. You would have to blatantly abuse California’s unique system for determining residency status, or commit outright perjury, to incur criminal tax fraud charges for claiming nonresidency. However, the long answer is, while California residency rules aren’t the same as New York’s, the two systems are enough alike that the Weisselberg case may embolden the FTB to think otherwise.

Background

First, the obvious point: the Weisselberg indictment was brought by the State of New York. Accordingly, no matter how the case is resolved, it can’t have a direct precedential impact on the enforcement of California’s residency rules. California draws on its own robust jurisprudence to adjudicate residency tax issues. It rarely needs to look to the outcomes and opinions from out-of-state courts in that regard. Continue reading

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CA residency and coronavirus

The Issue

Can COVID-19 orders make you a resident? Since the COVID-19 emergency struck, tens of thousands of nonresidents have found themselves marooned in California due to coronavirus travel restrictions. The typical situation involves a seasonal visitor forced to remain in a vacation home longer than intended. But it runs the gamut, involving temporary visits to California prolonged by stay-at-home orders, or by the increased risk of contracting the coronavirus posed by traveling back home, particularly where the only feasible method of transportation is via commercial airline. Some nonresidents have even been formally quarantined due to a family member becoming infected. Unable to return home as planned, many nonresidents find they have already spent the majority of the year in state.

In those scenarios, it’s reasonable for out-of-state visitors to ask (as many contacting my office have) whether they will be deemed California residents due to the extra time spent in coronavirus lockdown. And the corollary question to that is, will the Franchise Tax Board, California’s tax enforcement agency, find out about the extended sojourn, and if it does, how will that affect the likelihood of being audited?

The Short Answer

The short answer is, remaining in California longer than planned for reasons not within your control is, in most cases, a temporary or transitory purpose. Therefore, unexpected delays in leaving California, beyond the power of the nonresident to mitigate, don’t usually confer residency status. The coronavirus pandemic is just such as case.

However, as usual with residency rules, it’s never that simple. Context may determine whether getting locked down in California jeopardizes nonresidency status. The good news is, the year is only half over, and that means even the worst-case scenarios can be managed in the remaining months of 2020. For nonresidents still stranded in California by the coronavirus emergency, what they do next may make all the difference.

And now the long answer. Continue reading

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Manes Law graphic six-month presumption

The Six-Month Mythos

You don’t have to be a tax lawyer to know that the way to avoid becoming a resident of California is to spend less than six months in the state during any calendar year. Right? Well, not exactly. The “six-month presumption,” as it’s called, which is mentioned in one form or another in almost every Google search result of California residency rules, isn’t all that it’s cracked up to be. That’s not to say the amount of time spent in California doesn’t play an important role in determining legal residency. Just the opposite. It’s critical. But the real rule is more complex and has to be understood in the context of how California determines residency. It isn’t by counting days. In fact, relying on the six-month figure as a magical way to avoid California residency can get a taxpayer into serious tax trouble.

What Is The Six-Month Presumption?

The six-month presumption is established by regulation. You would think it would say something simple like: if you spend no more than six months in California during any calendar year, you’re not a resident. That’s the popular online version. And frankly it’s the version many auditors for the Franchise Tax Board (California’s tax enforcement agency) seem to have in the back of their minds. But that’s not the legal rule.

Rather, the rule has various qualifiers: if a taxpayer spends an aggregate of six months or less in California during the tax year, and is domiciled in another state, and has a permanent abode in the domicile state, and does nothing while in California other than what a tourist, visitor, or guest would do, then there is a rebuttable presumption of nonresidency. What would a tourist, visitor or guest do? According to the regulation, nothing much more than owning a vacation home (or presumably renting one), having a local bank account for local personal expenses, and belonging to a “social club” (read “a country club”).

These qualifiers call for some parsing. Continue reading

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CalresidencymythsThe Issue

While not quite as prevalent as Bigfoot videos, myths about California’s residency tax rules abound on the internet. Of course, believing in Bigfoot won’t increase your chances of a residency audit, or cost you tens or hundreds of thousands of dollars if the audit goes against you. In contrast, misinformation about California’s rules for determining residency can have just that result. This article discusses the top five California residency tax fictions out firm often encounters at websites offering residency advice. They’re in no particular order, but my comments should provide some indication about how misguided they are and why.

The Basics

First, the basics. You can’t understand what’s misleading about many of the residency myths without first grasping the legal framework for California residency for tax purposes. The key concept is this: No one thing makes you a resident of California, and no one thing makes you a nonresident. Rather, California follows a “facts and circumstances” test. This means the Franchise Tax Board, California’s tax enforcement agency, weighs all the contacts a taxpayer has with California and every other jurisdiction. To determine residency status, the FTB scrutinizes the contacts under legal precedent, regulations, chief counsel rulings, and audit practices. Since this is what California tax authorities do, effective residency planning must do the same. Therefore, whenever someone says that this in-state contact results in California residency, or that out-of-state contact means you’re safely a nonresident, a fundamental misconception is at work.

Why It Matters

The reason residency status matters for tax purposes is also often misconstrued. California taxes residents on all their taxable income, from whatever source. That’s obvious to almost everyone who would broach the topic. But online discussions of California residency often miss the equally important corollary: California taxes nonresidents on all their taxable California-source income. Ignoring this second element of California’s tax law can lead to residency plans that go horribly astray.

For a more detailed discussion of how California determines residency status, see this article on residency guidelines.

And now to the myths. Continue reading

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California Tax Traps for Nonresidents

Sunny Taxxy California

Most of the world knows the Palm Springs area for its picturesque golf courses, celebrity homes and halcyon weather. Among the taxing authorities in Sacramento, however, the words “Palm Springs” conjure up less carefree images. Spurred by the state’s appetite for tax revenues, the Franchise Tax Board, California’s main tax enforcement agency, has tapped into a new revenue source: taxing seasonal visitors to popular vacation spots in California, where residents often have second home. Palm Springs is one such area. But so is Santa Barbara, Sonoma County, San Diego.

Seasonal Visitors As Tax Targets

This is how it works. California taxes residents based on their worldwide income, from whatever source, no matter how far-flung. In contrast, California taxes nonresidents only on their income derived from California sources. For instance, these might include a limited partnership operating in California or rent from an investment property. Since California has the highest income tax rate in the country, visitors who suddenly find themselves defined as “residents” may face a large and unexpected tax liability.

Obviously, the FTB  would like to claim everybody who sets foot on California soil as a resident and subject their income to California tax. That’s their job, after all. As many seasonal visitors have discovered, the FTB’s policies sometimes seem not to fall too far short of that mark.

A special division of the FTB has for years systematically targeted seasonal “part-time” residents for audit (I use the term “part-time” loosely, since we are talking about nonresidents who spend part of the year here, not part-time legal residents per se; but the term has stuck). Though other vacation spots experience their share of audits, historically the most common casualties are affluent “snowbirds” who own vacation homes in the Palm Springs area as an escape from the winter blasts of the Midwest or northern states. In fact, many of the major cases in residency taxation are eerily similar: they usually involve Midwesterners who own winter vacation homes in Palm Springs and environs. If the FTB finds significant taxable income coupled with meaningful contacts with California (such as a vacation home, business interests or long visits to the state), it can lead to the launch of a full-blown residency audit. Continue reading

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3e3cc7a8-6972-4e93-b914-51a711755f0cManes Law has over two decades of experience in advising clients on California residency law, handling residency audits, assisting businesses relocate out of California, and appealing residency determinations. Based on this experience, we have assembled this list of frequently asked questions and provided brief answers.

1.Q. How does California tax residents versus nonresidents?

A. California taxes residents on all their income, from any source, no matter where it is generated. In contrast, nonresidents are only subject to California income taxes with respect to “California-source” income (that is, income generated in California). If a nonresident has no California-source income, then the nonresident should owe no taxes to California.

2.Q. I am a nonresident who owns a California vacation home. If I spend more than six months in California, am I automatically a resident?

A. No. There is a lot of mythology on the internet about the “six-month presumption.” While it’s always better from a residency perspective to spend less time in California, spending more than six months in California does not automatically make you a resident. In fact, no one thing will ever make you a resident, and no one thing makes you a nonresident. The test for legal residency is complex and involves many factors (discussed here). You can spend more than six months in California without becoming a resident, but you should plan carefully to make sure an extended stay plus other contacts don’t result in an audit or unfavorable residency determination. Nor is it a good idea to spend more than six months year in and year out. Doing so suggest a closer connection to California than your home state. In addition, beware of the nine-month presumption, discussed in the next question. See our article, “The Six-Month Presumption In California Residency Law: Not All It’s Cracked Up To Be“.

3.Q. I’ve heard that if I spend more than nine months in California, I am definitely a California resident. Is that true?

A. California law applies a “nine-month presumption” to visitors. That is, if you spend more than nine months in California in any tax year, you are presumed to be a resident. But the presumption is rebuttable. Other factors may apply that result in you not being a legal resident, despite the extended stay. Prudence, however, suggests you shouldn’t tempt fate with a stay of such length. As a practical matter, there is only one old case in which a taxpayer spent more than nine months in California and was able to rebut the nine-month presumption. So, be forewarned. Continue reading

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