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.
Does the change 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 their 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, in February 2008, they decided to move to Nevada and rented an apartment there in furtherance of that plan in late February. 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. Those California contacts included several vehicles and vessels still registered in California, a California post office box, numerous bank accounts and established relationships with healthcare professionals in California. Numerous meetings in San Diego about the pending sale of their business and ongoing litigation in California courts were also mentioned as continuing connections with California.
- 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, will be insufficient, of themselves, to work a change of domicile.
- Likewise, the mere rental of an apartment on a short-term basis does not evince a sufficient intention to remain in the new location permanently or indefinitely to effect a domicile change.
- It was suggested, in dicta, that the closing of the taxpayers’ purchase of their residence in Nevada may have been an important factor in the outcome, had it occurred before the income realization event. However, because that statement was unnecessary to the outcome of the case, it has no precedential value and I would not expect the Franchise Tax Board to consider themselves bound by it in a future case where other factors pointed to continuing California residence after an out-of-state residence purchase.
- 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 address the desire to maintain a vacation home in California after a domicile change, which we will be happy to explain to you.)
- 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. Continuing to take advantage of such benefits and protections may also be a “super” factor that may prevent a domicile change.
- 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 your domicile change.
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 lives. 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 to a dozen identifiable factors that are more important than other factors (dubbed “super factors” in this analysis) which must support the taxpayer’s position 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 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.