A three-judge panel of California’s Office of Tax Appeals (“OTA”) issued a precedential decision ruling that taxpayers remained domiciled in and residents of California at the time they sold their aviation business despite renting an apartment in Nevada prior to purchasing a home in the same area.

At the time of the sale, the taxpayers were in the process of moving from California to Nevada and establishing residency there.  However, the taxpayers had not relinquished their residence in California, had left much of their personal property at their sizeable California home, and maintained a post office box address, numerous bank accounts, and healthcare providers in California.  Additionally – and most importantly to the OTA – the taxpayers spent a majority (over two-thirds) of their time during the disputed period in California.  The OTA stated that the “sheer amount of time spent in California” was “a factor of greater significance than mental intent and the formalities that tie one to a particular state.”

While acknowledging the taxpayers’ purported intent to change their California domicile, the OTA reasoned that the taxpayers did not “adopt some other permanent home” when they took possession of their rented apartment in Nevada and moved essential items, registered to vote, and obtained a post office box, driver’s licenses, and bank accounts in the state.  The panel focused on the temporary nature of the rental property, stating that it “was marked with impermanence” as the taxpayer even testified that the rental apartment was “a temporary place to live” to make purchasing a home in the same area easier.  Thus, while the taxpayers’ possession of a rental apartment was part of their plan to find a permanent home, it was not an actual move to a new residence with the intent to remain there permanently, and the taxpayers still maintained the strongest connection with California.  Accordingly, on the date of the sale of their business, the taxpayers were residents of California and subject to personal income tax on the gain from the sale.

For an overview of California law regarding domicile and residency, see our prior post on “What Makes a California Resident?” In addition, Eric Coffill, senior counsel in the Eversheds Sutherland Sacramento office, reviews the lessons to be learned from Bracamonte for California residents wishing to become nonresidents in an article for Bloomberg Tax.