California residents looking to change residencies should be prepared to substantiate their relocation. Relinquishing California residency status is not as simple as packing up and leaving to move to another state. Taxpayers must be able to prove to the California Franchise Tax Board (“FTB”) that they intended to relocate and relocate permanently.

It is true that the FTB looks to objective factors to determine residency and connections with California. What factors can the FTB consider? The FTB’s Guidelines for Determining Resident Status lists a few:

• Amount of time one spends in California versus amount of time one spends outside California
• Location of spouse/RDP [Registered Domestic Partner] and children
• Location of principal residence
• State that issued driver’s license
• State where vehicles are registered
• State where one maintains their professional licenses
• State where one is registered to vote
• Location of the banks where one maintains account
• The origination point of one’s financial transactions
• Location of medical professionals and other healthcare providers (doctors, dentists, etc.), accountants, and attorneys
• Location of one’s social ties, such as their place of worship, professional associations, or social and country clubs of which one is a member
• Location of one’s real property and investments
• Permanence of one’s work assignments in California

However, be wary as this list is not exhaustive and is merely provided to serve as a guide. The FTB explicitly states that these factors are only a partial list of the factors to consider and cautions against relying on these factors alone.

A founder who is potentially exiting California in preparation for the sale of their company cannot simply check the box on these factors alone. Even after the founder and his family have packed their belongings, purchased a new home in another state, and moved across state lines, they may still end up with a residency audit and a corresponding tax bill (along with penalties and interests) from the FTB. To make matters even more complicated, if one owes California tax and never files a non-resident tax return, the FTB may have unlimited time to move forward with an audit.

What other factors can the FTB look at when determining residency? The unfortunate short answer found in the available case law is that the FTB may consider almost anything in determining a person's residency status. For example, in the Appeal of James E. Duncan, 82-SBE-006 (January 5, 1982), the California State Board of Equalization (“SBE”) examined whether a taxpayer had performed all “other functions of living” in that state. In determining the taxpayer's residency status, the SBE considered where this particular taxpayer purchased an automobile and rented a home. More recently in the Appeal of Stephen D. Bragg, 2003-SBE-002 (May 28, 2003), the SBE held that the following factors are also relevant in determining residency:

• The approximate size and value of all residential real property
• Where the taxpayers’ children attend school
• Where the taxpayers claim the homeowner’s property tax exemption
• Telephone records showing the origination of their phone calls
• Where they file their state and federal tax returns, and the state of residence claimed on those returns
• The state where they are employed

When it comes to properly severing ties with California, it is critical for founders and their families to examine the entire picture to insulate against potential risks. In particular, founders should build a comprehensive database of documents showing how the founder and their family have satisfied the various residency standards. It is best practice to work with a legal professional to advise on your move, provide guidance on your particular facts, and help develop and substantiate adequate documentation.