The California Workplace of Tax Appeals Seems at Residency

The topic of individuals leaving California, many of them for tax reasons, is a timely one. While some such moves are visible, e.g., Elon Musk and Larry Ellison, the vast majority of these departures gather no publicity.

California’s population growth is now the lowest since 1900, and a contributing factor may be the California personal income tax (PIT) climate for high-wealth individuals. California, at 13.3%, has the highest personal income tax rate of any state. The overall California budget is heavily dependent upon personal income tax revenue. As of the end of November 2020, year-to-date revenue was $74 billion, with $53 billion, or 72%, coming from the PIT.

Recent California legislative activity also seems intent on increasing that tax burden. On Dec. 7, the first day of the new California 2021-2022 Regular Legislative Session, Assembly Bill 71 was introduced, which states its intent is to fund programs addressing homelessness through new and ongoing revenues of at least $2.4 billion per year. Possible sources of additional revenue identified in AB 71 are increasing the PIT on incomes over $1 million marking-to-market unrealized capital gains, and repealing the stepped-up basis of inherited assets. The 2019-2020 Regular Legislative Session, which ended in September 2020, saw the failure of two other proposals aimed at high-wealth California taxpayers. AB 2088 would have imposed a new “wealth tax” in California. AB 1253 would have increased California’s top PIT rate to 16.8%, retroactive to Jan. 1, 2020.

Accordingly, residency law for California PIT purposes is a hot topic as more individuals consider leaving the state. The California Office of Tax Appeals (OTA) was created as part of the Taxpayer Transparency and Fairness Act of 2017. (AB 102, Cal. Stats. 2017, Ch. 16. See Coffill and Gustafson, “California’s Altered Tax Landscape: The Decline of the Board of Equalization and the Rise of Two New Tax Agencies Under AB 102 and AB 131,” Journal of Multistate Taxation and Incentives, Volume 27, Number 9, Jan. 2018.) Since the time the OTA opened for business on Jan. 1, 2018—replacing the Board of Equalization (BOE) as the quasi-appellate body for taxpayer appeals from decisions by the Franchise Tax Board (FTB)—the OTA has issued nine opinions on the issue of a California resident changing, or attempting to change, their residence/domicile to another state. While the sample is small (only nine decisions out of 265 OTA decisions so far involving franchise and income tax matters), it is still possible to draw some preliminary conclusions regarding the OTA’s view on the residency issue. This article discusses the California residency issue as it has been addressed, so far, by the OTA.

The first two residency matters involved the now legendary and seemingly never ending Hyatt cases. In 1993, FTB commenced a residency audit of Mr. Hyatt for tax years 1991 and 1992. Three years later, in 1996, FTB issued proposed assessments for both years, which Hyatt protested. Almost a decade later, in 2007, the protest concluded and FTB affirmed the proposed assessments, which Hyatt then appealed to the BOE—a separate appeal for each of the two tax years. Another 10 years later, on Aug. 29, 2017, the BOE held a hearing on the matters. The BOE ruled that with respect to 1991, Hyatt changed his residence/domicile from California to Nevada on October 20, 1991; that his licensing income received between that date and the end of 1991 was derived from a California source and constituted California taxable income; and he was not subject to a fraud penalty.

The BOE ruled that with respect to 1992, Mr. Hyatt was not a resident/domiciliary of California; his licensing income did not have a California source; and he was not subject to a fraud penalty. The BOE did not issue a written decision in the appeals for either 1991 or 1992, and FTB filed with the BOE petitions for rehearing in both matters. The petitions were then heard by the OTA when jurisdiction for such appeals moved from the BOE to the OTA on January 1, 2018. (See OTA Regulation Section 30106, Jurisdiction Over Transitioning Appeals.)

Thus, the first two decisions by the OTA involving residency did not address the underlying substantive issues, but considered them only tangentially in the context of whether rehearings should be granted. In the companion cases of Appeal of Gilbert P. Hyatt, 2019-OTA-001 and 2019-OTA-002, the OTA denied rehearing in both cases, thus allowing the BOE’s decisions to stand. The Hyatt decisions are instructive in the sense they indicate the OTA remained quite loyal to the years of law created on this issue by the BOE. For example, the OTA in Hyatt referred to the well-known Bragg factors set forth in Appeals of Stephen D. Bragg, 2003-SBE-002, May 28, 2003, where the BOE set forth a list of (nonexclusive) factors to aid in the residency determination; reiterated the residency determination cannot be based solely on the individual’s subjective intent, but must instead be based on objective facts; and reiterated that affidavits/declarations (and Mr. Hyatt submitted hundreds of them) “can be instrumental in the residency analysis.” (The BOE rules of practice allowed for the use of declarations/affidavits. The OTA Rules for Tax Appeals contain near identical language which states that affidavits and declarations under penalty of perjury may be considered as evidence. See OTA Regulation Section 5523.6(a).)

The OTA then proceeded during 2019 and 2020 to issue a number of nonprecedential decisions on the residency/domicile issue. (The OTA is required to issue a written opinion in all matters heard, with opinions being designated either precedential or nonprecedential. See OTA Regulation Sections 30501-30502.) All these cases involved small dollar amounts in dispute and the taxpayer(s) had waived their right to an oral hearing. Nevertheless, despite them not being precedential and not being terribly sophisticated in the discussion of the issues, one can see the OTA mimicking the typical “banter” found in the prior BOE decisions on the issue. In chronological order:

In Appeal of Jamie Ibarra, 2019-OTA-103, the taxpayer argued he was not a California resident during 2012. However, the OTA noted the taxpayer “provided no evidence in support of his assertions.” On the contrary, the taxpayer maintained a post office box in California, which he used as his address of record for this appeal. The OTA commented this post office box in California “creates a reasonable inference that appellant was a California resident” and also pointed out he had filed a California resident return for 2012. The OTA repeated the well-known doctrines from the BOE law that unsupported assertions by the taxpayer are not sufficient to satisfy a taxpayer’s burden of proof, and that a taxpayer’s failure to produce evidence that is within their control “gives rise to a presumption that such evidence, if provided, would be unfavorable to the taxpayer’s case.” Needless to say, the taxpayer lost.

The taxpayer also lost in Appeal of Stephen Johnson, 2019-OTA-127, where he argued—for the first time in his reply brief in the appeal—that he was a part-year resident of California for 2010 because he moved in October 2010 to Reno, Nevada. The evidence the taxpayer provided the OTA was his own statement of the move and a statement by a friend which (“merely”) claimed the friend personally picked up mail from a California post office box and forwarded it to the taxpayer at his home address in Reno. However, the statement did not qualify as an affidavit because it was not made under penalty of perjury. The taxpayer also filed a California resident return for 2010, and used a California address on his 2010 California (resident) return and on his 2010 federal and amended federal returns.

The OTA found the taxpayer had not provided any evidence that “he actually moved to another taxing jurisdiction and intended to remain there permanently or indefinitely.” This latter language is important because “domicile” is defined as the location where a person has the most settled connection and the place to which a person intends to return when absent. A person can have only one domicile at a time (but can have many residences). In order to change domicile, the OTA reiterated prior law that a taxpayer must actually move to another residence and intend to remain there permanently or indefinitely. Here, the taxpayer had been domiciled in California and it was presumed that domicile did not change until it was “clearly shown that it changed”—a standard which the taxpayer did not meet.

The taxpayers (i.e., husband) also lost in Appeal of Matthew Palmer and Kristin Stone, 2019-OTA-183, where more facts are discussed in the opinion than in the prior matters above. Taxpayer-husband moved to Colorado after accepting a job there in 2012, and filed a part-year resident Colorado tax return in 2013. Taxpayers filed California resident returns for 2012, 2013 and 2014. Following termination of his Colorado job in August 2013, he returned to California and lived with his wife. The husband argued he had moved from California to Colorado to take a job (and to divorce his wife) and to remain there indefinitely, meaning that he was not a California domiciliary during 2013.

FTB agreed the husband was a nonresident of California from January 2013 through September 2013, but argued he was a California resident for the remainder of 2013 and that he was a California domiciliary during all of 2013. The OTA ruled against the taxpayers and held the husband was a domiciliary of California for 2013. (There was no dispute the appellant-wife was a resident and domiciliary of California for 2013.) The appellants had filed a California married joint return in 2013 using a California address, and the husband filed his part-year 2013 resident Colorado return using a California address. The husband had a vehicle registered to him with the California DMV during most of 2013; had not obtained a Colorado driver license; never registered a vehicle in Colorado; never registered to vote in Colorado; and never purchased any real property in Colorado (lived in an apartment or corporate housing). The OTA found that “[o]nce he moved back to California, he left no trace that he intended to establish a domicile in Colorado.” The OTA stated that it was “left with appellant-husband’s stated intention alone,” which is insufficient to establish he intended to create his domicile in Colorado.

The taxpayer also lost in Appeal of David Gray, 2019-OTA-282, which involved the safe harbor provision of Revenue and Taxation Code 17014(d). The taxpayer left California and lived and worked in Kuwait for most, if not all, of 2012. However, he filed a California resident return for 2012 and did not argue he was domiciled in Kuwait. He had retained his home in California; his wife and dependent child continued to reside at the California home; and he returned to his home in California when the work ended. It appears his sole argument to the OTA was that he had been outside of California for other than a transitory or temporary purpose because he was in Kuwait for 546 days. The statutory safe harbor provision in section 17014(d) provides that an individual who is domiciled in California, but who is absent for an uninterrupted period of at least 546 days under an employment-related contract, shall be considered outside California for other than a temporary or transitory purpose. The FTB argued, and the OTA agreed, that the evidence, at best, showed a total of only 491 days—far short of the 546 days required under the statutory safe harbor. Finally, in response to the taxpayer’s contention: “The burden of proof was on F.T.B. to prove that I am guilty,” the OTA stated “this case is not about guilt or innocence. It is a civil tax dispute in which appellant bears the burden of proof.”

For a change of pace, the taxpayers “won” in Appeal of Rajesh Sharma and Poonam Gupta, 2019-OTA-326. They had previously argued to FTB on protest, i.e., a process before filing the appeal, they had moved from California to North Dakota in 2013. FTB did not find the argument persuasive and affirmed the proposed assessments. The taxpayer appealed to the OTA and then presented in their briefing before the OTA additional documentation substantiating their relocation to North Dakota. Upon review of this additional evidence, FTB accepted the taxpayers’ argument and conceded the issue. The OTA’s “win” opinion simply sustained the FTB’s revised determination the taxpayers had indeed left California.

The taxpayer lost in Appeal of Donovan, 2020-OTA-102, where he had moved from California to Florida before moving back to California. His employer had authorized his relocation from California to Florida, but five months later, he accepted employment with a different company and moved back to California. The OTA rejected his argument that his relocation to Florida was “intended to be a permanent move,” because such an unsupported assertion is not sufficient to satisfy the taxpayer’s burden of proof to show the FTB’s assessment was erroneous. The OTA noted that FTB had requested, but the taxpayer had not provided, information such as opening a new bank account, lease agreement, voting registration, or possession of a Florida driver’s license.

Thus, until early in 2020 (Donovan was decided on Feb. 13, 2020), the OTA had not had the opportunity to address the change of residency issue in the context of a relatively well developed factual case. In addition to small dollar amounts in issue and waived hearings in the above cases, some of the “residency” issues in the decisions above were raised at the 11th hour (e.g., Johnson); or had little or no evidence presented (e.g., Donovan); or the taxpayers had not reported out-of-state income and only later argued the rationale for not doing so was because they were not California residents at the time it was earned (e.g., Gray). One can understand why these taxpayers did not fare well before the OTA on their arguments they were no longer California residents.

That brings us to Appeal of L. Mazer and M. Mazer, 2020-OTA-263P, which was decided by the OTA on July 23, 2020. The importance of Mazer is that, to date, it is the only citable, precedential decision issued by the OTA regarding the residence/domicile issue. Thus, it deserves special attention because it currently sets the (precedential) standard for the OTA going forward. As in the prior cases, the amount in issue was small (under $5,000 in tax) and the taxpayers also waived their right to an oral hearing. But here the facts and details of the case were better known and developed.

The issue in Mazer was residence and domicile of the appellant-husband for 2013. The undisputed facts showed that in February 2013, taxpayer-husband moved from California to Malaysia for employment with Symmid. In March 2014, he ended his employment with Symmid and returned to his home in California, which he shared with his wife. Appellant-wife continued to live in their California home during 2013 and remained a domiciliary and resident of California during the 2013 tax year. They filed a California resident return for 2013, but excluded a portion of the income the husband earned in Malaysia. The FTB audited the return and issued a proposed assessment.

In response, the husband argued he had been a nonresident of California while in Malaysia, so the income earned there was not taxable by California. The husband had signed a contract for employment in Malaysia (starting February 2013) with a duration of employment of two years and which stated it “may be renewable.” The contract also stated that it would provide the husband with a leased car, leased apartment, petrol/toll allowance, a cell phone, and payment for the phone bill.

Mazer provides a good summary by the OTA of how it (correctly) recognized the difference between (1) the domicile issue and (2) the residency issue. The definitional California statute, which is California Revenue and Taxation Code section 17014(a), contains two alternative tests for “resident.” If an individual is domiciled in California, the issue is whether the individual is outside California “for a temporary or transitory purpose.” If an individual is not domiciled in California, the issue is whether the individual is in California “for other than a temporary or transitory purpose.” An individual can only have one domicile at any given time. Thus, domicile is the preliminary inquiry.

The OTA stated it was undisputed that prior to leaving for Malaysia, the husband’s domicile was in California and would continue to be California unless he can show it had changed. The OTA concluded that the husband had not proven that he changed his domicile from California to Malaysia because he was domiciled in California prior to leaving California for an employment-related contract expected to last two years and during that period, his wife continued to maintain a home in California, to which he returned at the end of his employment in Malaysia. “The maintenance of a marital abode is a significant factor in resolving the question of domicile” and an “expectation of returning to one’s former place of abode defeats the acquisition of a new domicile.”

Accordingly, as a domiciliary of California, the OTA stated the husband will be considered a resident of California unless he can establish that he was outside of California for other than a “temporary or transitory purpose.” The OTA cited decisional law for the proposition that an absence for a specified duration of two years or less has been held to be only temporary/transitory, but that even a shortened stay of less than two years will not automatically be temporary/transitory if there is an intent the stay be “long, permanent, or indefinite,” i.e., not temporary/transitory. The issue then became, under the temporary/transitory test, the state with which the husband had the “closest connections” during the year in dispute—California or Malaysia. On this point, the OTA examined the 19 factors in Bragg which are commonly organized into three categories:

(1) registrations and filings with a state or other agency,

(2) personal and professional associations; and

(3) physical presence and property. The OTA found that upon application of the Bragg factors, the husband was in Malaysia for a temporary or transitory purpose – and thus still a resident of California.

“Because appellant-husband’s connections with Malaysia were only those provided by his employer as a matter of job convenience and not significant, and he made no attempt to sever his substantial connections with California, we find that his presence in Malaysia was for a temporary or transitory purpose.”

What themes can be gleaned from the line of decisions above? There are a number of them. First, while it is not a matter of “guilt” or innocence as Mr. Gray proclaimed (Gray, supra), it is abundantly clear under the law that FTB’s determination of residency is presumed correct and it is the taxpayer who bears the burden of showing error in that determination. That is why the OTA decisions above on the issue are typically cast in terms of whether the taxpayer has “established” (Donovan and Palmer) or “shown” (Sharma) or “demonstrated” (Johnson & Ibarra) they are no longer residents/domiciliaries of California. In other words, all ties go to the FTB because FTB has its finger on the scales of justice. The decisions repeatedly make the point that unsupported assertions of a change of residency are insufficient to satisfy a taxpayer’s burden of proof. One cannot expect to win a tax case in the absence of presenting persuasive evidence in support of one’s position, even when gathering and presenting that information may well be burdensome and time consuming. Taxpayers must take this burden of proof requirement very seriously.

Second, the factual analyses involving residence and domicile are very granular and as Mazer points out, the 19 Bragg factors are no more than “a guide” to approaching the temporary/transitory issue and cannot and should not be thought of as an exclusive list of relevant items and considerations (for either a taxpayer or the FTB to examine). The above decisions, with the possible exception of the (precedential) Mazer decision from the OTA in July 2020, are of little assistance in charting a course for a successful move out of California, because they were so poorly developed in terms of their factual presentations and because of the OTA’s heavy focus on the burden of proof issue. The devil is truly in the details.

Third, the OTA decisions on the issue, at least so far, remain true to the prior BOE decisional law on the issue, i.e., OTA has not yet departed from the traditional legal analysis seen in the California cases for decades. In one sense, this is not surprising because the OTA rules provide that a precedential decision by the BOE that was adopted prior to operation of the OTA on Jan. 1, 2018, may be cited as precedential authority by the OTA. (OTA Regulation Section 30504.) The exception is where the OTA “removes the precedential status” of a BOE opinion by publishing on the OTA website a notation the previously precedential opinion is no longer precedential. To date, the OTA has not removed the precedential value of any BOE decision, much less involving the residency/domicile issue. However, the OTA remains free to apply those decisions as it sees fit, but its applications so far seem consistent with prior BOE practices.

Fourth, looking purely at the metrics so far, it is an understatement to say that taxpayers have not fared well so far on the residency/domicile issue at the OTA. Other than in Hyatt, where the OTA on denials of rehearing affirmed portions of the BOE’s prior decisions in Mr. Hyatt’s favor, the only taxpayer “win” on the residence/domicile issue in the nine OTA decisions discussed above was in Sharma where FTB actually conceded the issue at OTA. In all fairness to the FTB and the OTA, the decisions above provide a litany of examples where a taxpayer did not undertake the heavy lifting that is often required to win the day, or the factual scenario simply was not strong for the taxpayer. Unfortunately, that work cannot be ignored simply because the cost-benefit analysis is difficult because the dollars in issue are small (as in the above cases). In addition, so many of the factual scenarios in the above cases involve a taxpayer leaving California, but then soon thereafter returning to California, and that is a difficult factual situation for arguing that an individual originally departed California with the intent to leave permanently for an indefinite time.

Should this abysmal taxpayer record discourage taxpayers from pursing these cases at the OTA? I think not, at least on the basis of the cases discussed above which have so far reached the OTA. Again, these were small cases, often where taxpayers represented themselves, often involving taxpayers returning to California, where hearings were waived, and where the taxpayers did not extensively and tactically develop and present the facts and their contentions to the OTA.

Finally, watch for another upcoming residency decision from the OTA. On Dec. 14, a full-day hearing was held in Appeal of J. Bracamonte and J. Bracamonte, OTA No. 18010932, in which there was full briefing by the parties and numerous exhibits presented by experienced counsel for both parties. It appears the only issue in Bracamonte is not whether the taxpayers changed their residence/domicile from California, but precisely when that happened. Taxpayers argued it occurred shortly before a large income realization event, i.e., the sale of a business, which is not taxable to them if they were nonresidents on that date. FTB argued the change took place shortly after that event, with a total period of perhaps only 8-9 months in issue. A written decision by the OTA is expected in approximately 100 days. With only one precedential decision so far by the OTA (Mazer), any additional decisional guidance from the OTA on residence/domicile will be welcomed, especially in the context of a well-developed and well-presented case.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Eric J. Coffill 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.