For the first time in over 20 years, the California Court of Appeal has issued a published decision interpreting the California residency provisions of Revenue and Taxation Code section 17014. In Homer E. Nobel et al. v. Franchise Tax Board, [fn1] the court addressed whether the taxpayers were residents of California for personal income tax purposes. Despite the taxpayers' clear intent to change their domicile and residence to Colorado, the court held the taxpayers were still California residents. Before addressing the Court of Appeal's decision in Nobel, a brief review of California's residency law is instructive.
The California personal income tax is imposed on the entire taxable income of residents of the state. [fn2] While residency cases are intensively factual in nature, there are several legal standards under which those facts are to be evaluated. The legal analysis begins with the statute. "Resident" is defined to include: "(1) Every individual who is in the 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." [fn3] Any individual who is not a resident is, by process of elimination, a nonresident. [fn4] Presence within California for more than nine months of a taxable year creates a rebuttable presumption of California residence. [fn5]
"Residence" and "domicile" are distinct concepts for California tax purposes. "Domicile" denotes the one location with which a person has the most settled and permanent connections and where the person intends to remain. [fn6] "Residence" denotes any factual place of abode of some permanency, that is, "more than a mere temporary sojourn." [fn7] A taxpayer may have several residences simultaneously for different purposes, as well as more than one residence for tax purposes. However, a taxpayer may have only one domicile at any given time. [fn8] A domicile cannot be lost until a new one is acquired. [fn9]
Regarding domicile, the Court of Appeal has previously defined "domicile" as the "one location with which for legal purposes a person is considered to have the most settled and permanent connection, the place where he intends to remain and to which, whenever he is absent, he has the intention of returning ...." [fn10] Similarly, FTB Regulation 17014(c) states:
Domicile has been defined as the place 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.... Another definition of "domicile" consistent with the above is the place where an individual has fixed his habitation and has permanent residence without any present intention of permanently removing therefrom. [fn11]
If an individual is domiciled in California, then he or she remains a resident of California unless he or she is outside California for other than temporary or transitory purposes. [fn12] Although in every instance the determination of this purpose "will depend to a large extent upon the facts and circumstances of each particular case," it can be stated that an individual is in California for temporary or transitory purposes if he or she is simply passing through on his or her way to another state or country, or is here for a brief rest or vacation, or to complete a particular transaction that will require presence in California for a short period. [fn13]
Once acquired, a domicile is presumed to continue until it is shown to have changed. [fn14] In order to change domicile, the California State Board of Equalization has required a showing that a taxpayer (1) left the state without any intention of returning, and (2) was located elsewhere with the intention of remaining there indefinitely. [fn15] In determining the taxpayer's intent, "the 'acts and declarations of the party must be taken into consideration.'" [fn16]
In the Noble decision, the Court of Appeal echoed many of the long-standing domicile and residency principles discussed above. However, the fact the taxpayers intended to move to another state or the fact they "considered themselves in 'transition' ha[d] no legal significance" according to the Court.
Homer and Stephanie Noble, former residents of Colorado, had been California residents and domiciliaries since 1988. After moving to California, the Nobles continued to own property in Colorado, continued to use Colorado attorneys, accountants and securities brokers, and maintained bank accounts in Colorado. In 1992, the Nobles considered permanently returning to Colorado and began looking for residential property there.
In 1993, Mr. Noble contracted to purchase a 130-acre parcel in Colorado, which included a residence, and the escrow closed on February 25, 1994. However, the Nobles ultimately decided not to move to the 130-acre property and instead treated it as a rental property. In May 1994, Mrs. Noble contracted to purchase a house in Colorado, and escrow closed in June 1994. During July 1994, the Nobles moved part of their household goods to the new house purchased by Mrs. Noble, and the remainder during November 1994.
On March 7, 1994, and March 25, 1994, Mr. Noble sold securities resulting in a net capital gain. Based on a change of residency as of March 1, 1994, the taxpayers filed California Nonresident returns for 1994, reporting the capital gain as nontaxable for purposes of the California income tax. On audit, the Franchise Tax Board concluded the Nobles were domiciled in California, absent for temporary or transitory purposes, and therefore California residents through July 15, 1994.
The Nobles did not contend they had physically moved to Colorado by March of 1994. To the contrary, during March 1994, the Nobles, among other connections, continued to reside in their California home, which they did not list for sale until June 1994; continued the registration of their vehicles in California; continued their California drivers' licenses; maintained their primary personal checking account and other checking accounts in California; maintained a post office box in California; paid significant amounts for medical and dental care rendered in California; continued a membership in a California club for Mr. Noble; continued to receive cellular phones and credit card statements in California; continued to lease a business office in California for Mr. Noble; and continued to receive Mr. Noble's brokerage statements at his California business mailing address.
However, the Nobles did contend they intended to move to Colorado and the "transition" of their move to Colorado had "progressed far enough" by March 1, 1994, so that their California residency had ended, and their presence in California had become for a "'temporary or transitory' purpose." The stipulated facts showed that during 1993 it was the intention of the Nobles to change their domicile and residence and that of their minor son from California to Colorado, to complete the move to Colorado as soon as possible after the closing of escrow on the 130-acre residential Colorado property, and that the Nobles had spent a substantial amount of time in Colorado between February and July 1994.
Much of the court's analysis focused on the physical acts of the taxpayer for purposes of making the residency determination. Specifically, the court stated that a "resident's intent to move unsupported by physical acts is not the determinative factor as to whether a taxpayer has changed his or her residence or domicile for tax purposes." [fn17] Continuing, the court stated that "[p]hysical presence in the state has been 'a factor of greater significance than the mental intent or outward formalities of ties to another state." [fn18]
The court also turned to case law interpreting other California statutes, i.e., other than the income tax statute at issue, involving residency and domicile. "[U]nder the Government Code, a change in residence or domicile requires a 'union of act and intent,' (Gov. Code § 244, subd.(f); Chambers v. Hathaway (1921) 187 Cal. 104") and in that connection, when 'a person actually removes to another place with an intention of remaining there for an indefinite time, and as a place of present domicile, it becomes his place of residence or domicile ".' (Estate of Weed (1898) 120 Cal. 634, 639 ")." [fn19] "'A domicile once acquired is presumed to continue until it is shown to have been changed, and to constitute the new domicile two things are indispensable: First, residence in the new locality, and second, the intention to remain there ".' (Murphy v. Travelers Ins. Co. (1949) 92 Cal. App. 2d 582, 587.)" [fn20] Summarizing these residency principles in its own words, the court stated:
If one is a resident of the state, that person cannot be in the state for "a temporary or transitory purpose" until that person's acts as well as his or her intent show that he or she has moved out of the state. That one may intend to move from California at some time in the future does not make that person someone who is in California for a temporary or transitory purpose. If it did, every person who contemplates plans for a future would not be taxable as a resident. One is a resident for tax purposes until there are sufficient indicia of an actual change of such residence. [fn21]
The court also emphasized the purpose of the definition of "resident" under section 17014, stating the purpose "'is to include in the category of individuals who are taxable upon their entire net income " all individuals who are physically present in this State enjoying the benefit and protection of its laws and government ".'" [fn22]
Applying these principles to the Nobles' facts, the court held the "uncontradicted facts establish that no matter what their intention for the future, as of March 1994, appellants had not relinquished either their residence in California, as defined by section 17014, or California domicile, which can be an element of residence under section 17014". That they considered themselves in 'transition' has no legal significance." [fn23] Based on the Nobles' continued California contacts, the court also held that such "overwhelming facts of California contacts demonstrate that appellants were, during March of 1994, physically present in this State enjoying the benefit and protection of its laws and government "." [fn24]
The court's decision in Noble has made it clear that intent alone is insufficient to establish new residency. Moreover, intent coupled with physical acts of starting to move or transition to another state is also insufficient to establish new residency. The court was much more focused on whether the taxpayers had relinquished their physical California residence and whether they had affirmatively relocated to another state for purposes of making the residency determination. Nevertheless, the Noble decision confirms the long-standing residency principles under California law.
1: 118 Cal. App. 4th 560 (2004).
2: Cal. Rev. & Tax. Code § 17041.
3: Cal. Rev. & Tax. Code § 17014; see also Cal. Code Regs. tit. 18, § 17014(a).
4: Cal. Rev. & Tax. Code § 17015; Cal. Code Regs. tit. 18, § 17014(a).
5: Cal. Rev. & Tax. Code § 17016; Cal. Code Regs. tit. 18, § 17016.
6: Whittell v. Franchise Tax Board, 231 Cal. App. 2d 278, 284 (1964).
7: Id.; see also Smith v. Smith, 45 Cal. 2d 235, 239-40 (1955).
8: Whittell, supra, 231 Cal. App. 2d at 284.
9: Estate of Phillips, 269 Cal. App. 2d 656, 659 (1969); Aldabe v. Aldabe, 209 Cal. App. 2d 453, 466 (1962).
10: Whittell, supra, 231 Cal. App. 2d at 284.
11: Cal. Code Regs. tit. 18, § 17014(c).
12: See Cal. Code Regs. tit. 18, § 17014(a).
13: Cal. Code Regs. tit. 18, § 17014(b).
14: Cal. Code Regs. tit. 18, § 17014(c); Murphy v. Travelers Ins. Co., 92 Cal. App. 2d 582, 587 (1949).
15: See Appeal of Terrance and Brenda Harrison, Cal. St. Bd. of Equal., June 25, 1985, 1985 Cal. Tax LEXIS 106; see also Estate of Peters, 124 Cal. App. 75 (1932).
16: Appeal of Joe and Gloria Morgan, Cal. St. Bd. of Equal., July 30, 1985, 1985 Cal. Tax LEXIS 88; see also Appeal of Harrison, supra (stating "[i]t is the 'intent' of the person that determines domicile"); Chapman v. Superior Court, 162 Cal. App. 2d 421, 426 (1958); Estate of Phillips, supra, 269 Cal. App. 2d at 659.
17: Noble, supra, 118 Cal. App. 4th at 567.
18: Id., quoting Whittell, supra, 231 Cal. App. 2d at 285.
19: Noble at 568.
21: Noble at 568.
22: Noble at 568, quoting Cal. Code Regs. tit. 18, § 17014.
23: Noble at 569.
24: Id. at 569.