California Domicile Change: On What Day Does it Occur? (Appeal of Bracamonte) Part II
In Part I of this Blog entry (click here), we discussed the facts of the Bracamonte Case and some of the observations about them made by the Office of Tax Appeals. In Part II of this Blog entry, we discuss the panels’ remaining observations, what they mean for future domicile changes and the date that a change of domicile occurs:
- The panel was most influenced by the extent of the Bracamontes’ continuing physical presence in California – beginning with the date they claim they moved out of California through the date of the business sale. Their presence in California during this period “far outweighed their presence in any other state,” including Nevada, their “purported state of residence” where they “did not spend much time.” The appeals panel found the “sheer amount of time spent in California, the breadth of [the taxpayer’s] activities here and the average length of their stays in their respective homes significant.” In this regard, they observed that “physical presence is a factor of greater significance than mental intent and the formalities that tie one to a particular state.”
- In the end, the Tax Appeals panel agreed with the conclusions reached by the Franchise Tax Board in the residence audit (for more information about California residence tax audits, click here). In particular, they found that the Bracamontes “availed themselves of the benefits and protections of California the most” during the period leading up the business sale. Consequently, the taxpayers were California residents on the date of the business sale.
Unfortunately, the OTA did not state a clear-cut rule defining the point in a domicile change transition process at which the change is considered to become effective. Nevertheless, several messages in the observations chronicled above are instructive in that regard:
- A mere change in the formalities of one’s lifestyle, such as re-registering cars in the new claimed state of domicile, obtaining a new driver’s license, opening bank accounts, establishing new cellphone service, registering to vote, renting a post office box and re-writing one’s estate planning documents under the law of the new location, may not be sufficient, of themselves, to work a change of domicile.
- Likewise, the mere rental of an apartment on a short-term basis does not evidence a sufficient intention to remain in the new location permanently or indefinitely to effect a domicile change.
- A change of domicile will probably not be found if the taxpayers retain a California residence of which they continue to make significant use after the claimed change of domicile. If there are any “super” factors that must change ahead of an effective domicile change, this is certainly one. Nothing says “I have not left California permanently or indefinitely with no intention to return to live” like retaining and continuing to use the family home for residential purposes. (There are, nevertheless, planning options that can facilitate retention of a vacation home in California after a domicile change.)
- Another possible “super” factor is indicated in the weight given to the taxpayers’ continued significant presence in California after the alleged date of domicile change. To state this as a “rule of thumb,” a change of domicile will not occur until the taxpayers spend more (probably, significantly more) time in the alleged new domicile location than in California after the date of the alleged domicile change, whatever the taxpayers’ reasons for the time spent in California.
- Continuing to avail themselves of the benefits and protections of California’s laws and government, such as making use of California courts to resolve disputes or retaining relationships with California healthcare professionals, may justify a finding that the taxpayers should continue to contribute to the support of that government.
- Retaining ongoing significant connections with California of other kinds can also delay the effective date of a domicile change.
- Finally, if you have a significant income realization event on the horizon, properly planning for the date that event will be considered to have occurred can take the pressure off of the date your domicile changes.
To summarize, one’s domicile does not change simply because a majority of the factors that bear on the issue favor the new location over California as the taxpayer’s domicile. That is especially so where the factors in favor of the taxpayer’s position may correctly be characterized as “formalities” of the taxpayer’s lifestyle that do not go to the substance of where a taxpayer actually resides. Under the rule that a taxpayer’s domicile is presumed to continue until he or she has clearly proven otherwise, taxpayers are likely to lose a domicile case if weighing the factors on both sides results in a close case or only a slight majority of factors weigh in the taxpayer’s favor.
This case also arguably demonstrates what the few cases in this area have already told us (admittedly, with little clarity) i.e., that there are a half-dozen or more identifiable factors that are more important than other factors (dubbed “super factors” in this analysis) which must support the taxpayer’s claim in order to prevail. Focusing on changing the way these “super” factors line up is arguably the key to effectively changing domicile.
For the foregoing reasons, I continue to stress the importance to my clients of: (i) aiming to complete the domicile transition process in its entirety (especially addressing what are arguably “super” factors), before declaring a change of domicile; and (ii) engaging in planning prior to declaring a domicile change to address the timing of an expected income realization event and/or the desire to retain a vacation home in California.
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.