The California Office of Tax Appeals (OTA) recently ruled that a married couple were residents of California, and not Nevada, when they sold their business for $16.7 million, and thus owed tax on the sale to California.
On May 3, 2021, the OTA released its (3-0 unanimous) decision in Appeal of J. Bracamonte and J. Bracamonte, OTA Case No. 18010932, 2021-OTA-156P (March 22, 2021). It was issued by the OTA under its rules as a “precedential,” citable decision, which, in itself, is a significant event in view of the fact the overwhelming number of OTA opinions issued are designated as non-precedential.
This is certainly not the first precedential decision issued by OTA on the residency issue, e.g., Appeal of Mazer was issued as a precedential decision back in July 2020. However, what makes Bracamonte different from prior OTA residency decisions is that it was very well briefed by both parties, both parties were represented by skilled counsel, an oral hearing was held before the OTA that lasted a full day, and the case involved significant dollars.
The basic facts of the case are as follows: Taxpayers husband and wife lived in and were residents of California through 2007. Individually, and through a family trust, they owned all the outstanding shares of Jimsair Aviation Services, Inc. a corporation. Taxpayers testified that in May 2008, they first learned of an opportunity to sell Jimsair. The sale closed on July 18, 2008, and the taxpayers received $16.7 million in 2008 (and a small amount in 2009 under the installment sale). There is no suggestion in the case that the California Franchise Tax Board (FTB) took the position this 2008 income had a California “source” such that it would be taxable by the FTB even if the taxpayers were nonresidents of California.
Pointedly, the OTA framed the issue before it as “whether appellants were California residents on July 18, 2008, such that the proceeds from the sale of Jimsair Aviation Services, Inc. (Jimsair) are subject to California taxation.” Put differently, the issue was not residency as of Jan. 1, 2008, or as of Dec. 31, 2008, or for tax year 2008—it was all about residency for purposes of taxing the July 18, 2008, gain. (The FTB conceded the taxpayers changed their domicile from California to Nevada as of Sept. 29, 2008.)
If this was not clear enough, OTA recites in its opinion that “[i]n this appeal, the dispute over appellants’ residency is focused on a single transaction—the sale of Jimsair on July 18, 2008.” (Emphasis added.) The FTB had assessed the taxpayers $1.59 million of additional tax (plus interest) for 2008 (and a small assessment for 2009 for the installment sale payment they received in 2009).
The OTA legal framework for its analysis was straightforward and largely tracks its prior approach in Mazer. Under California Revenue and Taxation Code Section 17041(a)(1), the FTB can tax the “entire taxable income” of a California resident (who is not a part-year resident). Under Section 17041(b), “resident” for this purpose means (1) every individual who is in California for other than a temporary or transitory purpose; and (2) every individual domiciled in California who is outside California for a temporary or transitory purpose.
As the OTA pointed out early in its opinion, foreshadowing its forthcoming analysis, “Thus, an individual domiciled in California remains a resident until he or she leaves for other than a temporary or transitory purpose.” (Emphasis added.) Under this two-part “residency” and “domicile” approach, the OTA stated “the first question we turn to is whether appellants were domiciled in California.”
A person can only have one domicile at any given time. Once acquired, a domicile is presumed to continue unless it is shown to have changed, and the burden of proof of a change of domicile is upon the party asserting the change. In order to change domicile, one must (1) actually move to a new residence; and (2) intend to remain there “permanently or indefinitely.” “Intent” here is not determined merely from “unsubstantiated statements,” and the individual’s “acts and declarations” also will be considered.
Against this legal background, the OTA found the taxpayers had not carried their burden to show a change of domicile from California to Nevada. The FTB’s regulation states that domicile is the place in which individuals have voluntarily fixed the habitation of themselves and their families, not for a mere special or limited purpose, “but with the present intention of making a permanent home, until some unexpected event shall occur to induce [the individuals] to adopt some other permanent home.” (California Code of Regulations, Title 18, Section 17014(c).)
The taxpayers here “secured” on Feb. 25, 2008, and “took possession” on March 6, 2008, of an apartment in Henderson, Nevada, which in many situations, is perfectly adequate evidence of making a “permanent home” in another state. However, the OTA stated they testified at the hearing they had rented that apartment because they “needed a temporary place to live” while they looked for a permanent home. Again, leasing an apartment, while looking for a long-term home, in many situations is a perfectly adequate “permanent home.” The law does not require one to own a house in another state (as opposed to having an apartment, condo, etc.) in order to change domicile.
The FTB regulation refers to “permanent home,’ not “permanent house.” Indeed, the taxpayers then purchased a home in Nevada in September 2008. (It is not a coincidence that the FTB conceded the taxpayers changed their domicile to Nevada as of Sept. 29, 2008.) However, while renting that (“temporary place to live”) apartment in Henderson, the OTA pointed out, the taxpayers continued to maintain significant ties to California.
Until the time of the purchase of the Nevada house, “appellants retained their large California home, and left much of their personal property at their California home and spent a majority of their time there from Feb. 25, through July 18, 2008;” and they “only took essentials to their Nevada apartment;” and they “left their precious mementos and other valuable items in California until they acquired a ‘permanent home’ in Nevada.” Accordingly, the OTA concluded “the impermanence of the apartment evidences their intention of returning to their California home until they found a suitable Nevada replacement.”
Upon concluding the taxpayers were (still) domiciled in California, the issue under Section 17014(a) became whether they were outside of California for a temporary or transitory purpose. This determination, noted the OTA, is based by examining “all the circumstances of each particular case” and “must be based on objective facts” rather than “solely on the individual’s subjective intent.” When there are significant contacts with more than one state, the issue is identifying the state “with the closest connections,” and the OTA looks in this process to a long list of (nonexclusive) factors set forth in Appeal of Bragg.
Although the OTA did not undertake a factor-by-factor, systematic review of the Bragg factors, it concluded as a general matter that while contacts with Nevada did increase, their contacts with California “remained significant.” The OTA noted that numerous vehicles and vessels were registered in California; they maintained a California post office box address, numerous banks accounts, and established care with healthcare professionals in California. They also “conducted business” in California, including in connection with ongoing litigation and the sale of Jimsair.
“Most significantly,” said the OTA, the taxpayers’ physical presence in California between Feb. 26 and their claimed move date of July 18 “far outweighed their presence in any other state.” The OTA found “the sheer amount of time spent in California, and the average length of stay in the respective homes significant” and found “their physical presence in California most persuasive.” (Emphasis added.) In response, the taxpayers argued their time spent in California after Feb. 25 was “temporary and transitory” because it was to care for family members and manage occasional business needs.
The OTA’s rejection of this position was two-fold. First, the OTA noted, again, the “amount” of time spent in California and “the breadth of their activities” there and the “little time” actually in Nevada. Second, and more important, the OTA stated that having found to be domiciliaries of California, the question is not whether the taxpayers were in California for temporary/transitory purposes, but whether they were in Nevada for temporary/transitory purposes.
Accordingly, the OTA concluded, “[s]ince appellants were California domiciliaries and were physically in California for a majority of the time in leading up to and on July 18, 2008, we find the appellants’ strongest connections were with California.” That conclusion led to the OTA holding that the taxpayers were California residents for tax purposes on the (July 18, 2008) date of the sale of the Jimsair stock.
What are the lessons to be learned from Bracamonte for those California residents wishing to become nonresidents? There are several.
There is a classic legal adage to the effect, “bad facts make bad law.” Here, bad facts did not causally lead to bad law because the law cited in Bracamonte is well established and not in dispute. But bad facts definitely lead to bad results, as happened in this decision. Thus, the first lesson is that the specific facts of a specific case are absolutely critical to the residency/domicile determination in California.
There certainly are metrics to be considered, such as the (nonexclusive) factors in Bragg, but the devil is truly in the details as to those factors, as well as any other relevant factors under the circumstances of the case. Taxpayers as part of the planning process, and the FTB as part of an audit process, should and will look critically at the details of the particular case.
Second, while no single fact is determinative, it is clear from not only how the FTB approaches residency cases at audit, but also under the law, that some factors are more important than others. For instance, obtaining a driver’s license and registering to vote in the new state are definitely relevant facts, but they are not as significant as others. As a general proposition—and there are few general propositions to be found in California residency cases—two items which will quickly rise to the top of any analysis are: (1) day counts; and (2) residential property. Note how both were prominently addressed in Bracamonte.
What this means in practical terms is that the amount of time one spends in various locations, and especially in California as compared to the new claimed state of residency, is very important in the overall analysis. The FTB in its briefing to the OTA pointed out the taxpayers’ longest stay in Nevada was four days, and the average stay was just over two days. It also means that one’s living accommodations are very important, e.g., what type of housing did one acquire or afford themselves of in the new state, and what kind of housing did one give up (or keep) in California.
The FTB’s briefing to the OTA included a discussion of “the location, size and value of all the taxpayer’s residential real property,” and highlighted they continued to own their California home after renting “a rather pedestrian apartment in Nevada.” The high California day counts and the low Nevada day counts, and the apartment in Nevada and the longstanding home in California, were very detrimental facts to the taxpayers’ position in Bracamonte.
Third, precise dates are important. Bracamonte mentions all the steps and actions the taxpayers took in California and Nevada after July 18, 2008. The OTA commented that all those steps and actions were “unpersuasive” on the issue before it of the residence/domicile status of the taxpayers as of July 18, 2008. In other words, it is not only very important what you do, but when you do it. As in Bracamonte, a change-of-residency out of California is often followed by a large realization event, and residency status as of the date of that event (barring source income issues) becomes the focus of the case.
Fourth, keep in mind that under the law, “domicile” and “residence” are different concepts and when both are at issue—which is the situation in most cases when one moves from California to another state—domicile is to be decided first. That means the two-part domicile inquiry of (1) actually moving to a new residence; and (2) intending to remain there “permanently or indefinitely” are likely the first two legal issues to be addressed. Thus, Job One is to move one’s prior California domicile to another state. As discussed above, continuing to then maintain significant prior ties to California is not helpful in carrying the burden of proof that one moved out of California with the intention of remaining there “permanently or indefinitely.”
Fifth, does the “motivation” for the move matter? In the author’s opinion it should not, and does not, under the law. As the U.S. Supreme Court famously remarked in 1935, “The legal right of a taxpayer to decrease the amount of what otherwise would be his [or her] taxes, or altogether to avoid them, by means which the law permits, cannot be doubted.” (Gregory v. Helvering.) As long as you take the proper steps, i.e., intend to move “permanently or indefinitely,” why you move should not matter.
However, motivation is certainly of interest to the FTB. In Bracamonte, for example the FTB’s briefing to the OTA included the argument that the appellants “also attempt to make much of the fact that their relocation to Nevada was not tax motivated. And while Appellants have not provided any documentation to support their timeline, one would question their version of the timeline. . .” regarding the move. The FTB argued in its briefing that the taxpayer’s connections with Nevada “were either made in anticipation of life after the sale of Jimsair or were gathered over a relative short-period of time with little or no effort in order to merely check a box to give one the impression that they became California nonresidents.”
Finally, the reality is that the more money at issue, the higher the likelihood the case will be critically examined by the FTB. Common sense and principles of materiality tell us that a California resident moving elsewhere will not draw nearly the attention and audit activity by the FTB if the FTB “keeping” him or her a resident of California generates a potential $16,000 assessment, as opposed to the $1.6 million assessment as in Bracamonte.
This is certainly not to say the applicable law is different in those two situations or that a residency audit will not take place involving a potential $16,000 assessment. It is to say that in the author’s experience, the larger the monetary exposure, the greater the probabilitys that the FTB will be interested in the issue and examine it in detail.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Eric J. Coffill is senior counsel in the Eversheds Sutherland Sacramento office and has nearly 40 years of experience counseling clients on state and local tax controversy and litigation matters at the administrative, trial, and appellate levels, particularly those involving the California Franchise Tax Board (FTB) and the California Department of Tax & Fee Administration.
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