Ask The Edd Lawyer ‐ Why Are The Issues Of Domicile And Residency So Important For California Tax Payers? Part 3

By Robert S. Schriebman

This is Part 3 of a 3-part article that explains the importance of the issues of domicile and residence for California income tax purposes. This has always been a hotly contested area of California’s income tax laws under the Revenue & Taxation Code.

In Part 2, we reviewed the definitions of “domicile” and “residency.” We discussed why domicile is important, and we discussed how someone is taxed who is deemed domiciled in California but who receives taxable income while residing outside of California temporarily. In this final part of this series we will discuss and set forth the many factors used by the FTB and the BOE to prove domicile and residency, or the lack thereof. We will start by taking a brief overview of the Mason Harrison case. This is the model case used by the BOE to discuss the factors that we will investigate in this article. We will then set forth the factors used by the BOE in the cases that come up before the BOE for resolution.

A Brief Review of the Harrison Case

Mason Harrison filed an assessment appeal with the BOE challenging an FTB assessment on his 2008 personal income tax return. He was working for the McCain presidential campaign in California during the first half of 2008. His boss offered him the position of running the McCain campaign in Oregon. Mason took the job and moved all of his possessions to Oregon. He signed a lease for the second half of 2008. He activated utilities and changed his credit card account to his new address. However, he continued to register his car in California, and he did not obtain an Oregon driver’s license. When the McCain campaign was over Mason tried to find work in Oregon during 2009, but could not find gainful employment. His former boss offered him a job in California. Mason took the job and moved all of his possessions back to California.

The Arguments

The primary issue in Mason’s appeal is whether he changed his domicile from California to Oregon in mid 2008. To change domicile Mason had to move to a new residence and intend to remain at his new home permanently or indefinitely. The key case relied upon by the BOE in setting forth the factors for and against Mason were set forth in the Appeal of Stephen D. Bragg, 2003-SBE-002, May 18, 2003 (the Bragg decision). The issue of domicile is usually a separate legal issue from the issue of residency and must be determined prior to any decision determining residency. The key is Revenue & Taxation Code § 17014(a). Mason argued that he was neither a California domiciliary nor a resident once he left our Golden State for Oregon. On the other hand, FTB attorneys argued that Mason remained domiciled in California as well as a California resident while in Oregon during the second half of 2008.

Mason asserted that his absence from California was not for a transitory or temporary purpose and that his closer connections during the second half of 2008 were with Oregon only. FTB attorneys, on the other hand, pressed forth that the argument that Mason was in Oregon for temporary employment only.

The Impact of the Bragg Decision

In the Bragg decision the BOE listed non exclusive factors to aid it in determining which state an individual has the closest connection. The BOE cautioned that the factors used in Bragg were non exclusive and merely guidelines. The BOE stated, “ . . . the weight given to any particular factor depends upon the totality of the circumstances.” This language is all good and well, but it is deliberately vague. Factors can be a tricky thing, let me explain what I mean.

The “Bragg Factors” that we will discuss shortly are, in principle, similar to the factors I have written about in the many articles in this web site discussing the factors used by the EDD to determine whether a worker is an employee or an independent contractor. The EDD has a total of twenty-three factors set forth in its Manual to determine worker’s status; the IRS has twenty such factors. People make the mistake of thinking that if they have more factors on their side they are guaranteed a victory over the dark side forces of the government. Accumulating favorable factors, in any kind of fact-driven battle with a taxing authority is not like playing a game of marbles. The one with the most marbles (factors) may not be the winner. You see, the government will argue that while it has fewer factors in its favor, the government factors are much more important than yours. The FTB or the EDD try to convince the hearing officer that despite the fact that it has fewer factors in its favor the FTB or EDD factors are much more important than yours.

What is interesting about the Harrison case is that the BOE never reached a decision for or against either side. The BOE sent both parties home to gather up their respective factors and to come back for a second hearing. As far as I can tell there is no record of a second and decisive Harrison hearing.

The All-Important Bragg Factors

The Bragg factors can be organized into three categories. Many of the factors overlap each other. The three categories are as follows:

• Registration and Filings
• Personal and Professional Associations
• Physical Presence and Property

Registrations and Filings

This group of factors includes items which the taxpayer has filed with the state or other agency. These factors represent how the taxpayer portrays himself or herself to government, and generally includes factors which the taxpayer can change merely by filing or cancelling a registration or license with a government agency. The factors in this category include:

• The state wherein the taxpayer claims the homeowner’s property tax exemption on a residence;
• The address the taxpayer uses on his tax returns, both federal and state, and the state of residence claimed by the taxpayer on such returns;
• The state wherein the taxpayer registers his automobiles;
• The state wherein the taxpayer maintains a driver’s license; and
• The state wherein the taxpayer maintains voter registration and the taxpayer’s voting participation history.

Personal and Professional Associations

The factors in this group help show where the taxpayer had his or her day-to-day contacts in both his or her occupational life as well as his or her personal life. More specifically, these factors show where the taxpayer reaped the benefits of occupational endeavors as well as personal relationships and community involvement. These factors include:

• The state wherein the taxpayer’s children attend school;
• The location of the taxpayer’s bank and savings accounts;
• The state wherein the taxpayer maintains memberships in social, religious, and professional organizations;
• The state wherein the taxpayer obtains professional services, such as doctors, dentists, accountants, and attorneys;
• The state wherein the taxpayer is employed;
• The state wherein the taxpayer maintains or owns business interests;
• The state wherein the taxpayer holds a professional license or licenses; and
• The state wherein the taxpayer owns investment real property.

Physical Presence and Property

This group includes the factors showing where the taxpayer was physically located during the time in question, and where his or her tangible and real property were located. Many of the factors in this group attempt to pinpoint the taxpayer’s location, and therefore may be redundant or used to corroborate location statistics. These factors include:

• The location of all of the taxpayer’s residential real property, and the approximate sizes and values of each of the residences (i.e., indicating the nature of the use of the property) including whether the taxpayer sold or rented any residential property around the time of the alleged residency change;
• The state wherein the taxpayer’s spouse and children reside;
• The taxpayer’s telephone records (i.e., the origination point of taxpayer’s telephone calls);
• The number of days the taxpayer spends in California versus the number of days the taxpayer spends in other states, and the general purpose of such days (i.e., vacation, business, etc.); and
• The origination point of the taxpayer’s checking account transactions and credit card transactions.

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An EDD lawyer, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.

As a trusted EDD attorney, Robert S. Schriebman has successfully dedicated more than 30 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.

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 and 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.