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California Gold – (Part 1) – Samuel Landis
Samuel Landis has represented some of the largest tax cases in both the entertainment and music industry due to his exceptional quality of work and his commitment to maintaining the utmost level of discretion and privacy for his clients.
Living in California will prove one thing to anyone who gives it a try: if it can be taxed, it will be by California. Perhaps that is an exaggeration on my part … then again, perhaps it is not.
California taxes the entire income of each and every one of its residents, regardless of what state or country was the source of that income; and it is very easy to become a resident of California if you have any connection with the state or stop by for anything other than a cursory visit.
Your residence, of which you might have several during the tax year, is anywhere you are living “for other than a temporary or transitory purpose.” [R&TC § 17014]
So, if you had lived in California during any one tax year for “other than a temporary or transitory purpose,” then you were officially a resident of California during that year.
You may be asking, what is a “temporary or transitory purpose?” Well, that is a question which cannot be answered in the abstract. There is a statute which states that whenever a person stays in California for more than nine months in a tax year then that person is presumed to be a resident of the State. [RT&C § 17016]
Many people incorrectly interpret this to mean that if you stay in California for less than nine months, then you will not be considered a resident by the Franchise Tax Board (FTB). Unfortunately, while that is a reasonable assumption, it is incorrect.
To assist both attorneys and taxpayers in understanding its laws, California has promulgated a Code of Regulations. The regulation drafted relevant expressly states that living in California for less than nine months does not lead to the presumption that you were not a resident of California during your stay. In other words, the statute states that you might be considered a resident no matter how long you have stayed in California but once you hit the nine-month mark, you will be presumed to be a resident and the burden will be on you to prove otherwise. So, even tax laws which appear to help you understand whether or not you are a “resident” of California for tax purposes are not really that helpful.
The California regulations to help attorneys and taxpayers interpret what exactly is “temporary or transitory purpose” basically states that no answer can be given until the specific facts of the matter are known. So, not much help there. [18 CCR § 17401]
That regulation does provide an explanation of the purpose of the tax laws; which is to classify anyone as a resident of California (and, thereby, fully taxable by the state) if that person gained benefit of state services during their stay in California. Given this purpose, the regulation provides two general “tests” to help the taxpayer determine if they have been in California “for other than a temporary or transitory purpose” and, therefore, are a resident of the state subject to having all of their income taxed by the state.
TEST 1: The Identifiable Purpose Test
The first test is called the Identifiable Purpose Test. Because California is eager to tax anyone who it believes has benefitted from state services while living in California, that test states that anyone who comes to California for other than a particular purpose (i.e., to complete contracted work or to attend a wedding or for a similar affair) and, otherwise, anyone who comes to California for other than a “short period” is a resident.
As you may note, even when a person comes to California for a particular purpose, if completing that purpose cannot be done in a “short period” then he is out of luck, he is now a resident of California. What exactly is a “short period” is, unsurprisingly, not defined. The regulation mentions “passing through” the state and, so, the implication is the stay should be very brief and the person should immediately leave the state upon completing whatever purpose brought him to California.
The Identifiable Purpose Test expressly does have an Annual Vacationing exception. Under the regulation, a person can come to California every tax year for up to six months of cumulative vacation time in the state as long as they retain an abode in the other state in which they are domiciled and “they do not engage in any activity or conduct within [California] other than that of a seasonal visitor, tourist or guest.” If they stick to these rules, they will not be a resident of California, despite their extensive up-to-six-month stay in the state. However, if you do decide to vacation in California, do not mix
business with pleasure!
In part two of this series, I will discuss the feared “Close Connection Test” that allows the State of California to cast a wide net and capture substantial taxes from former California residents.