For California income tax purposes, a person has their domicile in California if, at any point: (a) California has become their true, fixed and permanent home where they have their most settled and permanent connections; and (b) they have not effectively changed their place of domicile to a new location thereafter. To change one’s domicile from California to a new place of residence, a person must (i) effectively abandon their California domicile, with no intent to return; and (ii) establish a new domicile in a new place of residence where they are physically present and intend to stay permanently or indefinitely.
But at what point does a change of domicile to a new place occur? Notwithstanding that the Franchise Tax Board requires taxpayers to identify a specific date on which a domicile change occurs, they have provided little or no guidance as to how that day is determined. Indeed, changing domicile usually involves a process of transition, rather than an act occurring on a single day. Indeed, in advising clients who are planning to change their domicile, we identify and recommend changes with respect to as many as 50 lifestyle factors used by courts and the Franchise Tax Board to determine whether someone’s domicile has changed. To implement that many changes to one’s lifestyle takes time. It does not happen in a day.
Is the domicile change considered to occur when the last relevant factor has been accomplished? What about the point at which the majority of the factors favor the new location as the new domicile? Are there “super” factors that must all be addressed before a change in domicile will be considered effective, without regard to those involving mere “formalities” of a taxpayer’s lifestyle?
What happens if a significant income realization event is expected during the transition process? Will it fall into the period of tax residence or nonresidence?
All of these questions were raised in Appeal of Bracamonte, OTA, Case No. 18010932 (May 2021). In this case, the taxpayers, a married couple, owned a large home in California, another in Arizona and a valuable business in San Diego, the latter of which they “just happened to sell” in the middle of their effort to change their domicile to Nevada.
Following the unsuccessful conclusion of their California residency audit (for more information about California residency tax audits, click here), the taxpayers testified before the Office of Tax Appeals that they decided to move to Nevada and rented an apartment there in furtherance of that plan in late February 2008. While there, they obtained a post office box, registered to vote, obtained driver’s licenses, procured a cell phone with a Nevada area code and opened bank accounts. They took possession of the apartment in early March 2008 on a six-month lease. They also updated their mailing address for a life insurance policy, had their vehicle serviced and Mr. Bracamonte had an eye exam.
In March and April, they attended a Nevada real estate auction, changed their family trust to a Nevada trust from California and purchased and registered a trailer in Nevada. In May, they hired a real estate broker to help them find a house to purchase. That summer they made three offers on different houses, but none of those offers were accepted. In all, they made numerous trips between California, Arizona and Nevada. However, between the time of their purported domicile change (i.e., February 28) and the date their business sold (i.e., July 18) they spent only a total of 28 days in Nevada, compared to 90 days in California and 19 days in Arizona.
They further testified that they first learned of an opportunity to sell their San Diego business in May 2008 (i.e., after the date they claimed to have moved to Nevada). An agreement for the sale of that business was executed on June 2nd and, on June 11, 2008, they executed various closing documents. The sale closed on July 18thand the proceeds were deposited into their Nevada bank account. Subsequently, on September 22, 2008, they closed on the purchase of a home in Nevada. After the sale of the business closed in July and thru the end of 2008, they spent a total 72 days in Nevada, 24 days in California and 25 days in Arizona.
The issue for decision was whether their domicile had effectively changed prior to or after the sale of the business on July 18, 2008. The parties stipulated that if their domicile had changed prior to the sale of the business, the gain on sale would not be taxable by California. On the other hand, if their domicile had not effectively changed as of the date the business was sold, the gain on sale would be taxable.
In finding that the Bracamontes were still domiciled in California on the date that the sale of the business closed, the Appeals panel made several important observations:
- The Board of Tax Appeals panel of judges were underwhelmed by the “impermanence” of the rental apartment and the cosmetic changes to the formalities of their lives the Bracamontes made while they looked for a residence to purchase. Those facts, it held, were insufficient to adopt Nevada as a new permanent home. (It did not help that, at the oral hearing, the taxpayers referred repeatedly to needing a “temporary” place to live – the rental apartment – while they looked for a home to purchase.)
- Retaining their large California home and most of their personal property in California, as well as significant ongoing contacts with California, exhibited an intention to return to California to live.
The Appeals Panel’s remaining observations, the clear messages they contain for future domicile changes and the issue of when a domicile change occurs will be covered in Part II of this blog (click here).
Lance Cross-Border Law and Tax is the premier cross-border tax law firm in California advising clients concerning residency tax problems. In addition to California residency tax planning, we also assist our clients to resolve residency tax audits and appeals of residency tax assessments. Learn more about our complete range of services concerning cross-border residency issues by visiting: www.lancecrossborder.com.