T +1 415 354 4798
T +1 408 346 4325
T +1 415 318 2298
Jamie C. Yesnowitz
T +1 202 521 1504
T +1 312 602 8517
T +1 513 345 4540
T +1 215 814 1743
The California Office of Tax Appeals (OTA) recently issued its decision in the Appeal of L. Mazer and M. Mazer
(Appeal of Mazer
), holding that an individual taxpayer remained a California resident while working remotely in Malaysia because he maintained a California domicile and had merely left the state for a temporary or transitory purpose.1
The appellants in this matter, a husband and wife, historically filed joint California resident income tax returns prior to 2013. In February 2013, the husband relocated from California to Malaysia for the purpose of employment abroad. The initial term of the husband’s employment contract was for two years, with an open option for renewal. However, he returned to California after thirteen months as his employment arrangement had terminated. During the time he spent in Malaysia, his wife continued to live in their California home and remained a California domiciliary and resident. One-half of the husband’s wages earned in Malaysia was subtracted from the taxable income reflected on the couple’s joint 2013 California resident income tax return. The other half of the taxable income was reported as the wife’s community property share of her husband’s salary.2
On audit, the California Franchise Tax Board (FTB) assessed additional tax of $4,454 for the 2013 tax year, claiming that the taxpayers were both considered to be California residents taxable on all of their earned income. The taxpayers protested and, after the FTB affirmed its assessment, the OTA appeal followed.
The OTA began its analysis by focusing on California’s definition of a “resident,” which includes both: (i) every individual who is in California for other than a temporary or transitory purpose; or (ii) every individual domiciled in California who is outside California for a temporary or transitory purpose.3
To determine which of these alternative tests to apply, the OTA first considered whether the husband was domiciled in California.
Because it was undisputed that the husband’s domicile was California prior to his departure to Malaysia in 2013, California presumed that the husband’s domicile stayed in California, unless the taxpayers could demonstrate that it had changed. Citing the California Board of Equalization's decision in Appeal of Bragg
the OTA noted that in order to change domicile, a taxpayer must: (i) actually move to a new residence; and (ii) intend to remain there permanently or indefinitely.5
In applying these criteria, the OTA proceeded to analyze the husband’s actions through a consideration of the husband’s intent, focusing on his acts and declarations, rather than statements which could be more difficult to independently substantiate.
Upon review, the OTA concluded that the husband’s actions did not reflect an intent to abandon his California domicile and establish a new one in Malaysia. In particular, the OTA found it relevant that the marital abode was at all times maintained in California, and that the wife maintained her California residence with no indication of intent to join her husband in Malaysia. Further, the OTA found it probative that after his employment in Malaysia concluded earlier than anticipated, the husband returned to his California home.
Concluding that the husband was domiciled in California, the OTA proceeded to analyze whether he was outside of California for more than a temporary or transitory purpose under Cal. Rev. & Tax. Sec. 17014(a)(2). In particular, the OTA evaluated whether he took steps to substantially sever his connections to California and establish significant connections in Malaysia. Again, the OTA relied upon the non-exhaustive list of factors indicating residence which were provided in Appeal of Bragg
, including an individual’s registrations and filings with a state or governmental agency, connections through personal and professional associations, and the location of the individual’s physical and intangible property. Specifically, the OTA concluded that the husband did not make significant connections in Malaysia or attempt to sever his California connections, and the husband did not intend to stay in Malaysia indefinitely.
Further, the OTA found no indication that the husband’s employment was for a permanent or indefinite term based on his optionally renewable contract. Thus, the OTA concluded that, based on the Bragg
factors, there was insufficient evidence to support a conclusion that the husband was in Malaysia for a temporary or transitory purpose. Absent sufficient evidence that he substantially severed connections with the state of California, the OTA agreed with the FTB’s determination that the husband was a California resident during 2013 and subject to tax in California on his entire taxable income, including amounts earned in Malaysia.
To make its decision, the OTA in this case heavily relied upon the non-exclusive list of residency factors provided by the California Board of Equalization in Appeal of Bragg
In doing so, the Court affirmed that the location where an individual maintains their closest connection is fundamentally a facts and circumstances analysis. With this in mind, taxpayers who have left California for more than a temporary or transitory purpose should consider carefully documenting their facts to support this conclusion for California personal income tax purposes.
Notably, this decision comes at a time when individuals and businesses alike are re-evaluating how and where they do business. As a result of the COVID-19 pandemic, many are exploring the possibility of permanent or semi-permanent remote working arrangements which could have broad residency implications for individual taxpayers if they choose to work or move across state lines, along with nexus implications for the businesses for which the taxpayers work.7
As reproduced in Appeal of Mazer
, Appeal of Bragg
provided the following lists of nonexclusive factors for consideration when determining an individual’s closest connection, which the OTA divided into the following three categories:
Registrations and filings with a state or other agency, including:
- Homeowner’s property tax exemption
- Automobile registration
- Driver’s license
- Voter registration/participation history
- Address used and state of residence claimed on federal/state tax returns
Personal and professional associations, including the state of the taxpayer’s:
- Children’s school
- Bank and savings accounts
- Memberships in social, religious, and professional organizations
- Use of professional services, such as doctors, dentists, accountants, and attorneys
- Maintenance/ownership of business interests
- Professional license(s)
- Ownership of investment real property
- Presence/connections/residency as indicated by third-party affidavits/declarations
Physical presence and property, including:
- Location and approximate sizes and values of residential real property
- Where the taxpayer’s spouse and children reside
- Taxpayer’s telephone records (i.e., the origination point of taxpayer’s telephone calls)
- Origination point of the taxpayer’s checking account/credit card transactions
- Number/general purpose (vacation, business, etc.) of days the taxpayer spends in California versus other states
Individuals should carefully consider these and other factors when assessing the support for the cessation of their California residency. Further, businesses should be mindful of how a remote work environment may impact their state tax nexus footprint. Remote employees may have unintended nexus and tax consequences for employers that should continually be evaluated during the prolonged COVID-19 pandemic.
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.