California residents seeking to change their residency status and avoid California tax must be prepared to substantiate their relocation. Simply moving to another state is not enough to relinquish California residency and tax nexus. If audited, individuals must demonstrate to the California Franchise Tax Board (“FTB”) that they intended to relocate and did so permanently.

Canadian comedian Russel Peters (“Mr. Peters”) can attest to this. In a recent decision, the California Office of Tax Appeals (“OTA”) in the Matter of Peters (No. 22019564) upheld a $2.1 million state income tax assessment against the comedian, ruling that Mr. Peters was a resident of California, and not Nevada, for the 2012 to 2014 tax years (the “Tax Years”).

During the Tax Years, Mr. Peters maintained homes in both California and Nevada. In 2013, a superior court granted a legal separation between Mr. Peters and his former spouse. As part of the separation, Mr. Peters agreed to purchase a residence in Woodland Hills, California as a form of child support. Mr. Peters and his child held joint title to the property.

Mr. Peters filed California nonresident or part-year resident income tax returns during the Tax Years, listing a Canadian address. During the audit, the FTB determined that Mr. Peters was a California resident during the Tax Years and proposed additional tax assessments of $954,105 plus interest for 2012, $538,074 plus interest for 2013, and $625,923 plus interest for 2014. In making its determination, the FTB cited to Mr. Peters’s continued physical presence in California, his credit card transaction records, and his ownership of residential property in the state as evidence of continued ties to California. After Mr. Peters lost at the audit stage, he filed an appeal to the OTA, contesting his residency determination.

The OTA reviewed Mr. Peters’s appeal and upheld the FTB’s determination. It is important to note that during an appeal, the FTB’s determinations of residency are presumptively correct, and the taxpayer bears the burden of rebutting them by presenting sufficient evidence showing error in those determinations (Appeal of Bracamonte, 2021-OTA-156P). In ruling against Mr. Peters, the OTA noted a declaration by Mr. Peters’ former spouse in their custody case. The declaration stated they maintained a family abode in Studio City, California, until 2012, after which the spouse and child moved to a home in Woodland Hills, California. The OTA found that both Mr. Peter’s child and former spouse continued to reside in California, and Mr. Peters visited them whenever his touring schedule allowed.

Mr. Peters contested the FTB’s use of his credit card records to determine his physical presence on the basis that his staff members had made purchases on his behalf when he was not in state. The OTA disagreed finding that the FTB examined the transactions from a single credit card, of which Mr. Peters was the sole authorized user. When examining the FTB’s findings, the OTA did not find any evidence contradicting the FTB’s reconstruction of Mr. Peter’s physical presence.

What can taxpayers learn from this case so that they do not end up being the punchline of an residency audit? The FTB looks to multiple objective factors to determine residency and connections with California. 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 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 maintain accounts.
• 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, it is important to note that this list is not exhaustive and is intended only as a general guide. The FTB explicitly states in its guidance that the listed factors represent only a partial set of considerations and cautions taxpayers against relying solely on them. As a result, even after packing up, purchasing a new home in another state, and relocating one’s family, a taxpayer may still face a residency audit, and a corresponding tax bill, including penalties and interest, from the FTB. To make matters worse, if a taxpayer owes California tax and fails to file a non-resident return, the FTB may have unlimited time to initiate an audit. Jokes aside, these audits are no laughing matter.

When severing ties with California for residency purposes, it is essential to evaluate the full scope of a taxpayer’s circumstances to mitigate potential risks. It is best practice to engage a legal professional to advise on your move and assess your specific case. For questions on California residency issues or help with a California residency audit, contact Wilson Feng and the Hanson Bridgett Tax Group for assistance.