ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – WHEN YOU LIVE AND WORK OUTSIDE OF THE U.S.A., BUT ARE STILL CONSIDERED A CALIFORNIA RESIDENT FOR INCOME TAX PURPOSES
By Robert S. Schriebman
The California Legislature recently enacted AB-592, a new law requiring the FTB to revise its individual income tax return to include a space for a taxpayer’s address as his/her principle residence. A person’s principle residence will be a factor in determining whether or not income is taxed. California residents are taxed upon their entire taxable income regardless of its source, while nonresidents are only taxed on income from California sources (R&TC § 17041). Domicile is also a factor in determining residency (R&TC § 17014).
It is important to have a solid understanding of the differences between “residence” and “domicile” for tax purposes. The recent Office of Tax Appeals (OTA) Mazer case is helpful in giving guidance. The difference between residing outside of California as opposed to being domiciled outside of California may mean the difference of whether or not one pays FTB taxes.
Mr. Mazer, in 2013, moved from California to Malaysia for the purpose of employment. Mrs. Mazer, on the other hand, stayed in California and occupied the family residence. Mr. Mazer had a two-year contract, subject to renewal, but ceased employment in March 2014 and returned home to his wife. Mr. Mazer was in Malaysia for a total of 13 months.
While in Malaysia, Mr. Mazer’s living expenses were mostly provided by his employer. The employer provided his residence, utilities, vehicle, cellular phone, and internet services. Mr. Mazer did not apply for a Malaysia driver’s license.
The Mazers timely filed a 2013 California Resident Income Tax Return Form 540 listing the California address. Because California is a community property state, Mrs. Mazer reported one half of Mr. Mazer’s income. It was clear that Mrs. Mazer continued to be both domiciled and a resident of California. Mr. Mazer, on the other hand, did not report his one half of compensation that he earned in Malaysia.
The FTB demanded that Mr. Mazer report all of the family income, an additional $57,000 and issued a proposed assessment. Mr. Mazer disagreed with the FTB’s demand, arguing that he was not a resident of California and that he was domiciled in Malaysia. The OTA ruled against Mr. Mazer and required that he report all of his income and pay about $4,500 in FTB taxes. Let’s look at why the OTA ruled against Mr. Mazer.
The Mazer Case
California residents are taxed upon their entire taxable income while non-residents are only taxed on income from California sources. How does California define “residency?” A resident includes every individual who is in California for other than a temporary or transitory purpose; or every individual domiciled in California who is outside of California for a temporary or transitory purpose. R&TC §§ 17014(a) and 17041(a). The key question under either test is whether the taxpayer’s purpose in leaving California was temporary in character. A person can have only one domicile at any given time. What does domicile mean? It is defined as a physical location where the taxpayer intends to remain indefinitely. So, the key question for the OTA was whether Mr. Mazer was truly domiciled in Malaysia. If he was in fact so domiciled, he would not have to pay California taxes on the $57,000 of earnings. When it comes to the question of domicile, actions speak louder than words. (2020-OTA-263P, July 23, 2020)
At this point in our discussion, we will examine key factors used by taxing authorities to determine domicile or residency.
Establishing a Domicile
As mentioned earlier, a person can have only one domicile at any given time. Domicile is defined as a physical location where a person intends to remain indefinitely. Some will say that it is a person’s true, fixed, permanent home, and the place where he/she intends to return if traveling. In order to change a domicile, a person must actually move to a new residence where he/she intends to remain permanently or indefinitely (Appeal of Bragg 2003-SBE-002). It is clear that Mrs. Mazer’s domicile was the California family residence. Mr. Mazer returned to that residence after only 13 months of employment in Malaysia. Mr. Mazer never intended to make Malaysia his permanent home. Therefore, he was not domiciled there. Mr. Mazer remained domiciled in California and for tax purposes is considered to be a California resident. R&TC §17014(a)
Establishing A Residency
If a taxpayer is domiciled in California, but working elsewhere, he/she will still be considered a California resident if his/her absence was for a temporary or transitory purpose. RT&C § 17014(a). The OTA had to determine if Mr. Mazer was away from California temporarily. Where a person domiciled in California leaves due to employment, taxation will be determined upon whether or not the taxpayer substantially severed all connections to California and then took the steps required to show that he/she is established significant connections with their new place of employment. If a person maintains California connections, the picture is not so clear.
The OTA set forth a 3-part test to determine whether a person severs his/her connections to California. Let’s review those tests.
- Registrations and filings with a state or other agency
- Register to vote
- Obtain a driver’s license
- Vehicle Registration
- Personal and professional associations, including the state of the taxpayer’s
- Open a new bank account
- Real property ownership
- Ownership of a business
- Religious affiliation
- Children’s school
- Physical presence and property
- Where spouse and children reside
- Utility bills
- Mailing address for credit card transactions
- Residential address
Safe Harbor Provisions
This article has centered around §17014 of the Revenue and Taxation Code. The Code Section proports to set forth the definition of a resident. However, in its definition of residency, the Code Section attempts to also define “domicile.” There are no black and white answers that will distinguish one term from another. But, there is a Safe Harbor Provision set forth in subsection (d). A person domiciled in California is deemed to be a nonresident if absent from the State for at least 546 consecutive days. This translates into 18 months. The absence must be due to employment. Most people having contacts in California probably cannot stay away for 18 continuous months. To this end, the statute provides that one may return to California for up to 45 days during the year without running afoul of the 546-day Safe Harbor.
In the Mazer case, Mr. Mazer failed the Safe Harbor test because he was only away for 13 months.
California residents are taxed upon their entire taxable income regardless of the source, while nonresidents are only taxed on income derived from California sources. This is the basic rule of taxation set forth in R&TC § 17041(a). It’s enough to cross your eyes between the laws set forth in R&TC §§17014(a) and 17041(a). Even though Mr. Mazer was working in a foreign country fulltime for 13 months, he was still considered a California resident and required to pay personal income taxes on the total amount he earned overseas.
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 40 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.
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