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Design Your Asset Protection Plan

Design Your Asset Protection Plan

You design a lot of things in your life. The layout of your house, the flow of your business, the requirements on your children, and many more scenarios are all elements of conscious design. Asset protection is no different. There is an architecture, a cohesive...

Corporate Opportunities

Corporate Opportunities

Does the Rule Apply to Real Estate? If you invest in and/or syndicate real estate what are the duties to your investors? You owe them a duty of loyalty. But how far does that go? The issue of corporate opportunities is important. I wrote a whole chapter on it (from...

Checkbook IRA

Checkbook IRA

A recent case has shed light on one of the riskiest retirement plan strategies put forth by promoters. In McNulty v. Commissioner (157 T.C. 10) a U.S. Tax Court brought clarity to the scheme of using self-directed IRAs for personal investments.

Are You a California Resident?

california taxes

Are you a California Resident?
You: I am out of your state for six months and a day!
California: Hold my non-alcoholic beer!

Many people believe that as long as they are outside the state of California for six months and a day they are not residents of California. And thus don’t have to pay California’s high income taxes. But the state of California is both broke and arrogant. And they make the rules the way they want.

The short answer is that you must be in your ‘home state’ more days than in your California home to avoid the state’s taxation. And for those who like to travel, tramping to Europe, New Zealand and the Nevada side of Lake Tahoe for just half the year won’t work with California’s wide, casting net.

What follows is a more technical explanation of California’s Franchise Tax Board (“FTB”) position on the issue. Please know that the FTB has more attorneys on the payroll than you do.

THE FTB’S DETERMINATION OF CALIFORNIA RESIDENCY

According to the FTB, a California resident is any individual who meets either of the following:  (1) present in California for other than a temporary or transitory purpose; or (2) domiciled in California, but outside California for a temporary or transitory purpose. As such, a California nonresident is any individual who is not a resident; and a part-year California resident is any individual who is a California resident for part of the year and a nonresident for part of the year. See, FTB Publication 1031, Guidelines for Determining Resident Status (2021), p. 4.

Residency is significant because it determines what income is taxed by California. The underlying theory of residency is that you are a resident of the place where you have the closest connections. These connections include, but are no means limited to, the following:

  1. amount of time you spend in California versus amount of time you spend outside California;
  2. location of your spouse and children
  3. location of your principal residence
  4. state that issued your driver’s license
  5. state where your vehicles are registered
  6. state where you maintain your professional licenses
  7. state where you are registered to vote
  8. location of the banks where you maintain accounts;
  9. the origination point of your financial transactions;
  10. location of your medical professionals and other healthcare providers (doctors, dentists, etc.), accountants, and attorneys;
  11. location of your social ties, such as your place of worship, professional associations, or social and country clubs of which you are a member;
  12. location of your real property and investments;
  13. permanence of your work assignments in California. In using these factors, it is the strength of your ties, not just the number of ties, that determines your residency. See, FTB Publication 1031 (2021), p. 5.

Generally speaking, your state of residence is where you have your closest connections. If you leave your state of residence, it is important to determine if your presence in a different location is for a temporary or transitory purpose. You should consider the purpose and length of your stay when determining your residency.

When you are present in California for temporary or transitory purposes, you are a nonresident of California.

For instance, if you come to California for a vacation, or to complete a transaction, or are simply passing through, your purpose is temporary or transitory. As a nonresident, you are taxed only on your income from California sources.

When you are in California for other than a temporary or transitory purpose, you are a California resident.

For instance, if your employer assigns you to an office in California for a long or indefinite period, if you retire and come to California with no specific plans to leave, or if you are ill and are in California for an indefinite recuperation period, your stay is other than temporary or transitory.

As a resident, you are taxed on income from all sources. You will be presumed to be a California resident for any taxable year in which you spend more than nine months in this state.

Although you may have connections with another state, if your stay in California is for other than a temporary or transitory purpose, you are a California resident. As a resident, your income from all sources is taxable by California. See, FTB Publication 1031 (2021), p. 6.

HOW THE FTB APPLIES THE SO-CALLED “SIX-MONTH PRESUMPTION”

There is widely thought to be a “six-month presumption” in California residency law to the effect that, if you want to avoid becoming a resident of the State of California, then all you need to do is to spend less than six months in California during any calendar year. Although the amount of time you spend in California does play a critical role in determining your legal residency, the real rule is more complex.

There is, indeed, a “six-month presumption,” established by regulation, that if a taxpayer spends an aggregate of six months or less in California during the year, and is domiciled in another state, and has a permanent abode in the domicile state, and does nothing while in California other than what a tourist, visitor, or guest would do, then there is a rebuttable presumption of non-residency.

As such, the real rule, established by regulation, is that the so-called “six-month presumption” consists of an aggregate of 183 days. Thus, if you spend a total of more than 183 days in California during any calendar year, then you are not entitled to the presumption. Furthermore, in order to qualify for the presumption, you have to be a domiciliary of another state and have a permanent home there (owned or rented).

For residency law purposes, “domicile” is defined by case law and the regulations as “where an individual has his true, fixed, permanent home and principal establishment, and to which place he has, whenever he is absent, the intention of returning.” If you are not a domiciliary of another state, and if you do not have an abode there, then you are not entitled to the six-month presumption. Furthermore, in order to qualify for the presumption, you must have only the kinds of limited contacts a tourist or visitor might have.

The FTB regulations envision this as restricted to owning a vacation home, having a local bank account, and joining a country club. Thus, if a taxpayer has any other contacts, there is no presumption. Furthermore, the presumption is rebuttable. As such, even if you meet all the requirements for the establishing the presumption, the FTB still is entitled to offer evidence to prove that you are a California resident. In addition, there is yet another presumption (otherwise known as ‘stacking the deck’) that the FTB’s rulings are correct, which you then must also rebut.

Despite these formal considerations, it should be noted that, as a practical matter, the FTB uses a “ledger analysis” in determining California residency. Under this “ledger analysis,” the FTB literally makes a ledger with three columns. One column itemizes your time spent in California; a second column itemizes your time spent in your home state; and a third “other” column itemizes your time spent elsewhere.

The FTB then compares your “California column” with your “home state column.” If you spent more time in your home state than you spent in California, then you prevail in the time category; and if you spent less time in your home state than you spent in California, then you lose in the time category. The idea is that the place where you spent most of your time (not necessarily the majority of the year) is more likely to be your home than not.

BRIEF DISCUSSION

Applying the California FTB’s so-called “ledger analysis” to the problem at hand, the problem may be restated, as follows: if you spend three months of the year in the State of Nevada (presumably in the “home state” column); you spend three months and a day of the year in Europe (presumably in the “elsewhere” column); and say, for example, you spend four months of the year in California (presumably in the “California” column), then it is easy to see that you spent more time in the State of California than in your “home state” of Nevada (the “elsewhere” column is not really relevant).

Thus, your stay in the State of California is not “temporary or transitory,” because you spent more time in the State of California than in your “home state” of Nevada. The underlying rationale is that the place where you spend most of your time (and not necessarily the majority of the year) is more likely to be your home than not.

CONCLUSION

As a practical matter, the California FTB applies a “ledger analysis” in determining California residency, and what really matters is that you must spend more time in your “home state” than in California.

One sure way to avoid all the FTB’s technical considerations for asserting their taxation is to sell your California home and move to another state.

Design Your Asset Protection Plan

Design Your Asset Protection Plan

You design a lot of things in your life. The layout of your house, the flow of your business, the requirements on your children, and many more scenarios are all elements of conscious design. Asset protection is no different. There is an architecture, a cohesive...

Corporate Opportunities

Corporate Opportunities

Does the Rule Apply to Real Estate? If you invest in and/or syndicate real estate what are the duties to your investors? You owe them a duty of loyalty. But how far does that go? The issue of corporate opportunities is important. I wrote a whole chapter on it (from...