ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – CAN THE FTB LEGALLY TAX OUT-OF-STATE INCOME EARNED BY A NON-RESIDENT SPOUSE? – THE CAMPBELL CASE
By Robert S. Schriebman
Is the FTB allowed to tax marital income from a spouse residing in another state? In a recent case the Office of Tax Appeals (OTA) held it was perfectly proper for the FTB to reach out and grab out-of-state marital income.
The Campbell Case
In the Matter of the Appeal of D. Campbell and E. Campbell, 2023-OTA-340
Mrs. Campbell resided in California. Mr. Campbell resided in Nevada. The FTB properly taxed the earned income from Mrs. Campbell. All of Mr. Campbell’s income was earned in Nevada. The FTB taxed one half of Mr. Campbell’s income as community property. The Campbells appealed to the OTA and lost.
The basic rule is that California residents are taxed on their entire taxable income regardless of the source, while non-residents are only taxed on income from California sources. (R&TC § 17041)
Mrs. Campbell was taxed on all of her California income because she was a resident and domiciled in California. Mr. Campbell argued that none of his income should be subject to the FTB because he was a resident and domiciled in Nevada.
The primary issue in the case is whether Mrs. Campbell has a marital property interest in her husband’s Nevada wages. Both states are community property states. There is no dispute in the fact that Mr. Campbell’s Nevada income is community property.
Where the income in question is community property, one half of the income is attributable to each spouse, and each spouse must report and pay tax on his or her respective one-half community property interest in the income.
Mr. Campbell contended that he should not be subject to California tax on any portion of his Nevada-based wage income. Under California law, all of Mrs. Campbell income is taxable by California because she is a California resident. Additionally, because Mrs. Campbell has a community property interest in one half of Mr. Campbell’s Nevada wage income, that portion is also subject to tax in California. California law does allow a credit, called the Other State Tax Credit, against the tax in certain cases to prevent double taxation, but that credit is unavailable to the Campbells because Nevada does not have an income tax.
Married couples who are separated and living apart may not have community property income. Rather, the income from each separated spouse may very well be their respective separate property. It was interesting that the OTA judge did not discuss any matters relating to separate property. The judge did not bother to inquire as to the Campbell’s true marital status.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD, and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Web Site Article 773