ASK THE EDD ATTORNEY – WHY ARE THE ISSUES OF DOMICILE AND RESIDENCE SO IMPORTANT FOR CALIFORNIA INCOME TAX PURPOSES? PART 1
By Robert S. Schriebman
This is Part 1 of a three-part series that will discuss the importance of the issues of domicile and residence for California income tax purposes. Perhaps more has been written by the Board of Equalization (BOE) and the courts over these issues than any other issue of California taxation.
In Part 1 we will discuss the recent BOE Harrison decision issued on April 30, 2014. We will also review two key statutes of the California Revenue and Taxation Code (R&T Code) 17014 and 17041. We will also review relevant California BOE cases dealing with domicile and residence.
THE CASE OF MASON JARED HARRISON
Mason Moves from California to Oregon
Mason Jared Harrison (Mason) filed an assessment appeal with the BOE for his 2008 personal income taxes. Mason initially had a job with the McCain presidential campaign in California in 2008. In mid 2008 he was offered an opportunity to head the McCain campaign in the State of Oregon. He accepted the assignment and moved to Oregon in mid 2008. As a young single man of 22 he did not have a huge moving job. He liked Oregon very much and decided that this was to become his new home. He signed a rental agreement, applied for utilities, and intended to stay in Oregon indefinitely. However, he kept his California driver’s license and had registered his car with the California DMV a couple of months before he moved.
After the McCain campaign was over Mason was out of work, but he decided to stay in Oregon. He stayed in Oregon until mid 2009 when he was offered a job in California with his old boss. He decided to take the job and move back to California. However, this decision was not made until mid 2009.
Mason’s Income and Taxes
Mason filed his 2008 California Income Tax return reporting only the income that he earned while residing in California (about two-thirds of his yearly income). The income that he earned in Oregon was not reported to the FTB. The FTB learned from the IRS the total amount of Mason’s 2008 income and taxed him on the remaining unreported one-third. Mason appealed the assessment, and his case came before the BOE.
The BOE’s Decision on Mason’s Oregon Income
The Harrison case is unusual in that the BOE did not issue any decision in favor of Mason or the FTB. Rather, the BOE instructed both sides to furnish additional evidence and arguments relating to whether or not Mason should pay California taxes on his Oregon income. The BOE set forth very instructive criteria that should be furnished to them in order for the BOE to render a final decision. What we have in the Harrison case are perhaps the best guidelines in years that we can all use to build a case for out-of-state domicile and residency. These guidelines will be discussed in Parts 2 and 3.
TWO KEY CALIFORNIA STATUTES
When I was in law school I was fortunate enough to have as one of my professors the late William E. Burby (author of “Burby on Real Property”). Professor Burby was in his early 80s at that time, but he was all there mentally and physically. He was a demanding teacher, but he told our class one very important lesson in the practice of law, “There is no substitute for knowing what the law states regarding your specific case.” In other words, if there is a statute that governs your matter know what that statute has to say. Most tax law involves statutes, and in the issue of residency and domicile this is no exception. The Revenue and Taxation Code (R&T Code) has two key statutes that must be reviewed. The first is R&T Code § 17014 relating to the definition of “resident.” The second is § 17041 relating to tax rates.
R&T Code § 17014(a) defines “resident” to include the following:
(1) Every individual who is in this state for other than a temporary or transitory purpose.
(2) Every individual domiciled in this state who is outside the state for a temporary or transitory purpose.
As you can see, this statute is not very helpful because it does not define key terms. Residency usually means a place where a person resides; where the person is living at a particular time. Domicile means a place where a person is residing and intends to reside at that location permanently or indefinitely. This can get confusing because this depends upon a person’s state of mind. In the Internal Revenue Code a person away from his residence and on business temporarily may deduct all living expenses that he would not otherwise be able to deduct while living at his permanent residence. Let me give you an example: Several years ago I represented a man who worked for a major aircraft assembly company. He had his home in my community, but he would often take on assignments that would take him away from home for several months at a time. The IRS refused to allow deductions for his hotel, travel, and meals. The IRS argued that several months at one location establishes a new permanent residency. I took the IRS to task and won the case.
The determination of whether a taxpayer is out of the state for more than a temporary or transitory purpose is a residency issue to be determined after a taxpayer has been found to be a California domiciliary but may not be a California resident based on the facts surrounding his absence from the state. In other words, the issue of domicile must first be established before the issue of residency. Things can get very confusing quickly. You see, “domicile” includes residence, but residence, by itself, does not include domicile.
In Mason’s case, if the BOE found that he was domiciled in California during the entire year of 2008, he would have to include his Oregon income and pay California taxes even though he was temporarily residing in Oregon.
CALIFORNIA CASE LAW
The first thing you must understand when trying to fight a California tax assessment is that the position initially taken by the FTB is presumed to be correct, and the taxpayer has the burden of proof to show that the FTB is wrong. (Appeal of George H. and Sky Williams, et al, 82-SBE-018, Jan 5, 1982). This presumption is a rebuttable one and will support a finding only in the absence of sufficient evidence to the contrary. The FTB’s determinations cannot, however, be successfully rebutted when the taxpayer fails to present credible, competent, and relevant evidence as to the issues in dispute. Furthermore, the FTB’s determinations of residency are presumed to be correct, and the party challenging the FTB and asserting a change in domicile bears the burden of proof (V and Beverly Zupanovich, 76-SBE-002, Jan. 6, 1976). If there is doubt on the question of domicile after the facts and circumstances have been presented, the domicile must be found to have not changed (Whitmore v Commissioner (1955) 25 T.C. 293).
The term “domicile” refers to one’s permanent home, the place to which he has, whenever absent, the intent of returning. An individual can have only one domicile at any one time. To change a domicile a taxpayer must move to a new residence and intend to remain there permanently or indefinitely (Appeal of Stephen D. Bragg, 2003-SBR-002, May 18, 2003).
In Part 2 we will discuss how California residence are taxed pursuant to R&T Code § 17041. We shall also explore how tax rates are determined and discuss the FTB’s usual arguments in cases involving domicile and residence.
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.