Federal and State Tax Residency Rules: New IRS Examination Guidance and Navigating State Tax Regulations

Transcription

1 FOR LIVE PROGRAM ONLY Federal and State Tax Residency Rules: New IRS Examination Guidance and Navigating State Tax Regulations TUESDAY, DECEMBER 18, 2018, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at ext.1 (or ext. 1). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service x1 (or x1) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

2 Tips for Optimal Quality FOR LIVE PROGRAM ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please immediately so we can address the problem.

3 Federal and State Tax Residency Rules: New IRS Examination Guidance and Navigating State Tax Regulations TUESDAY, DECEMBER 18, 2018 Michel R. Stein, Principal Hochman Salkin Toscher Perez P.C., Beverly Hills, Calif. Steven Toscher, Principal Hochman Salkin Toscher Perez P.C., Beverly Hills, Calif.

4 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

5 MICHEL STEIN, ESQ. Hochman Salkin Toscher Perez P.C Wilshire Blvd., Suite 300, Beverly Hills, California T: F: MICHEL R. STEIN is a principal at Hochman Salkin Toscher Perez, specializing in controversies, as well as tax planning for individuals, businesses and corporations. For almost 20 years, he has represented individuals with sensitive issue civil tax examinations where substantial penalty issues may arise, and extensively advised individuals on foreign and domestic voluntary disclosures regarding foreign account and asset compliance matters. Mr. Stein is well respected for his expertise and judgment in handling matters arising from the U.S. Government s ongoing enforcement efforts regarding undeclared interests in foreign financial accounts and assets, including various methods of participating in a timely voluntary disclosure to minimize potential exposure to civil tax penalties and avoiding a criminal tax prosecution referral. He has assisted hundreds of individuals who have come into compliance with their foreign reporting requirements through the OVDP, Streamline or otherwise. Throughout his career, Mr. Stein has represented thousands of individual, business and corporate taxpayers involved in civil examinations and administrative appeals, tax collection matters as well as with possible assertions of fraudulent conduct and in defending criminal tax investigations and prosecutions at every administrative level within the IRS. He has litigated tax cases in the U.S. Tax Court, the U.S. District Court, and various U.S. Circuit Courts of Appeal. He continues to provide tax advice to taxpayer s and their advisors around the world.

6 STEVEN TOSCHER, ESQ. Hochman Salkin Toscher Perez P.C Wilshire Blvd., Suite 300, Beverly Hills, California T: F: STEVEN TOSCHER specializes in civil and criminal tax controversy and litigation. He is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization, a Fellow of the Amer American College of Tax Counsel and has received an AV rating from Martindale Hubbell. In addition to his law practice, Mr. Toscher has served as an Adjunct Professor at the USC Marshall School of Business since 1995, where he teaches tax procedure. He has also served on the faculty of the American Bar Association Criminal Tax Fraud Program since He is a former Internal Revenue Agent with the Internal Revenue Service and a trial attorney with the Tax Division of the United States Department of Justice in Washington where he received its Outstanding Attorney Award. Mr. Toscher is past-chair of the Taxation Section of the Los Angeles County Bar Association and served as a member of the Editorial Board for the Los Angeles Lawyer during He is a member of the Accounting and Tax Advisory Board of California State University, Los Angeles, Office of Continuing Education. Mr. Toscher was the 2018 recipient of the Joanne M. Garvey Award. The award is given annually to recognize lifetime achievement and outstanding contributions to the field of tax law by a senior member of the California tax bar. Mr. Toscher is a frequent lecturer to professional groups and author on civil and criminal tax controversy topics. He is frequent contributor to the Los Angeles Lawyer, The Journal of Tax Practice and Procedure and Tax Management Bureau of National Affairs. He is a co-author of Tax Crimes, Bureau of National Affairs - Tax Management, Publication 636 2nd. Mr. Toscher received his Bachelor s Degree in Accounting from the University of Nevada, Las Vegas (with honors), and received his Law Degree from the University of San Diego (summa cum laude). Mr. Toscher is a member of the State Bars of California, Nevada, and Colorado. Mr. Toscher has been a member of the Faculty of the ABA Criminal Fraud Program for many years.

7 Program Outline Federal Residency Rules IRC Section 7701(b) and Substantial Presence. Tax Treaty Residency. Recent IRS LB&I Practice Unit. State Regulatory Challenges: New Allocation and Residency Issues California Residency Rules and Guidelines New York Domicile Test and Critical Factors. Florida and Other Non-Personal Income Tax States. Managing Nonresident Audits Tax Planning Techniques and Best Practices for Dual-Resident Taxpayers 7

8 IRC Section 7701(b) and Substantial Presence 8

9 I.R.C. 7701(b) The tax laws of the United States refer only to RESIDENT and NONRESIDENT ALIENS. In general, RESIDENTS are taxed in the same manner as U.S. citizens on their worldwide income. Under IRC 7701(b), an individual is a U.S. resident alien if he or she: is lawfully admitted for permanent residence, meets the substantial presence test, or makes a first-year election. NONRESIDENT aliens are taxed according to special rules and (with certain narrowly defined exceptions) are subject to federal income tax only on income which is derived from sources within the United States. The residency rules for tax purposes are found in I.R.C. 7701(b). 9

10 Non-Resident and Resident Aliens Residents and nonresident aliens are taxed differently. Nonresident Aliens You're considered a nonresident alien for any period that you're neither a U.S. citizen nor a resident alien for tax purposes. Resident Aliens You're considered a resident alien for a calendar year if you meet the green card test or the substantial presence test for the year. 10

11 Non-Resident and Resident Aliens Green Card Test You're considered to have met the green card test, and are therefore a resident alien, if at any time during the calendar year you were a lawful permanent resident of the United States according to the immigration laws, and this status hasn t been revoked or administratively or judicially determined to have been abandoned. 11

12 Non-Resident and Resident Aliens Substantial Presence Test You satisfy the substantial presence test, and are therefore treated as a resident alien for a calendar year, if you have been physically present in the United States on at least: 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 years immediately preceding the current year. To satisfy the 183-day requirement, count: All of the days you were present in the current year, One-third of the days you were present in the first year before the current year, and One-sixth of the days you were present in the second year before the current year. 12

13 Non-Resident and Resident Aliens For purposes of the substantial presence test, the term United States doesn't include U.S. possessions and territories or U.S. airspace. The United States includes the following areas: All 50 states and the District of Columbia, The territorial waters of the United States, and The seabed and subsoil of those submarine areas that are adjacent to U.S. territorial waters and over which the United States has exclusive rights under international law to explore and exploit natural resources. 13

14 TAX TREATY RESIDENCY RECENT LB&I PRACTICE UNIT 14

15 TREATY PROCESS OVERVIEW LB&I PRACTICE UNIT A country s domestic law provides specific rules for the taxation of income of individuals that are residents or nonresidents of that country as defined under domestic law. The United States domestic tax law is embodied by the Internal Revenue Code (the Code or IRC ), Treasury regulations, and applicable rulings and case law. A country may, however, enter into a bilateral income tax agreement (a treaty or tax treaty ) with another country to modify the results that might otherwise occur under the countries domestic tax laws. The two countries that are parties to a particular tax treaty are called the Contracting States. Except in limited circumstances, generally only residents of a Contracting State may claim tax treaty benefits (that is, claim that the treaty reduces or eliminates the tax that otherwise would be due under a country s domestic law). Whether an individual is a resident of a Contracting State for treaty purposes is a threshold issue in any case in which an individual is claiming treaty benefits. The IRS LB&I Practice Unit will help you evaluate whether an individual is a resident of a Contracting State for purposes of a tax treaty. 15

16 TREATY PROCESS OVERVIEW LB&I PRACTICE UNIT If an individual is a resident according to only one Contracting State s domestic laws, normally no further analysis is required: that individual will be considered to be a resident of that Contracting State for treaty purposes. Where an individual is a resident under the domestic laws of both Contracting States, however, the applicable treaty usually provides tie-breaker rules that apply to assign a single Contracting State of residence for treaty purposes. The IRS LB&I Practice Unit will assist Agents in making a treaty residency determination and applying the tiebreaker rules, if applicable, in the case and can assist in evaluating whether an individual is a resident of a Contracting State for purposes of a tax treaty. 16

17 STEP 1 SUMMARY OF PROCESS STEPS LB&I PRACTICE UNIT Determine whether the individual properly claimed to be a U.S. resident under U.S. domestic law by determining whether the individual is a U.S. citizen or a U.S. resident alien under the lawful permanent resident, physical presence, or first-year election tests. If an individual is a U.S. resident under U.S. domestic law and is not a resident of the other Contracting State under its domestic law, that individual is a U.S. resident for treaty purposes. 17

18 STEP 2 SUMMARY OF PROCESS STEPS LB&I PRACTICE UNIT Determine whether the individual properly claimed to be a resident of a country that has a treaty with the United States under such country s domestic law. Generally, an individual who is a resident under the domestic tax law of a Contracting State is a resident of that Contracting State for purposes of a tax treaty (before application of applicable tie-breaker provisions within the treaty). Information on tax returns and immigration documents may provide evidence of an individual s country of residence for foreign domestic tax law purposes. Did the individual provide a certificate of residency? Upon request, the IRS will provide certification that an individual is a resident of the United States for purposes of the income tax laws of the United States. The individual may use this certificate as evidence of U.S. residence to claim income tax treaty benefits in foreign countries (provided that the treaty does not impose additional requirements). The other Contracting State might be able to provide an individual with a similar certification 18

19 STEP 2 (cont.) SUMMARY OF PROCESS STEPS LB&I PRACTICE UNIT In the absence of a valid certificate of residency provided by the other Contracting State, to determine whether an individual is a resident of the other Contracting State you will need to: Consider the other Contracting State s domestic laws on residency, and Evaluate the individual s specific facts in light of those rules. Consideration of the domestic law of the other Contracting State-Research the domestic tax law of the other Contracting State to determine how the tax residency of an individual is established. For example, in most countries, the right to impose worldwide taxation on an individual is based on residency rather than citizenship. In other words, in most countries, an individual is not considered to be a tax resident solely because he or she is a citizen of that country 19

20 STEP 2 (cont.) SUMMARY OF PROCESS STEPS LB&I PRACTICE UNIT Evaluation of the individual s facts: Various resources can help you gather information needed to determine whether an individual is a resident of the other Contracting State under its domestic tax laws. For example: Responses on Form 1040NR, Schedule OI, may indicate whether, for each country s domestic law purposes, the individual is a U.S. resident alien, a resident of a foreign country, or a resident of both countries. Responses on Form 9210, Alien Status Questionnaire, may provide helpful information. For example, Item 12 asks the individual whether he or she filed a foreign income tax return with the other Contracting State and, if so, to provide a copy of the return. The exchange of information ( EOI ) process available under tax treaties and tax information exchange agreements can be used to develop information from outside of the United States. 20

21 STEP 2 (cont.) SUMMARY OF PROCESS STEPS LB&I PRACTICE UNIT Dual residents: An individual who is treated as a resident under U.S. domestic law and as a resident of the other Contracting State under the domestic law of a foreign country is a dual resident. A dual resident is generally subject to tax in both countries. However, such an individual will often claim to be treated as a resident of a single country for purposes of the treaty. Additional requirement for dual resident aliens: A U.S. resident alien who is claiming foreign residency under a treaty s tie-breaker rules must timely file Form 1040NR with an attached Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b). 21

22 SUMMARY OF PROCESS STEPS LB&I PRACTICE UNIT STEP 3 Where an individual would be a resident of both Contracting States, the treaty s tie-breaker rules apply to determine a single Contracting State of residence for purposes of the treaty. The tests in a treaty s tie-breaker provision are applied in the order in which they are stated and generally determine residence based on: The existence and location of a permanent home; Center of vital interests; Habitual abode; and Nationality. 22

23 STEP 3 (cont.) SUMMARY OF PROCESS STEPS LB&I PRACTICE UNIT Permanent home: In most treaties, the first tie-breaker test is the permanent home test. A permanent home is one that is retained for permanent and continuous use and is not a place retained for a short duration. An individual has a permanent home in the United States if he or she: purchased a home in the United States, intended to reside in that home for an indefinite time, and actually did reside in that home. Center of vital interests: In most treaties, the second tie-breaker test is the center of vital interests test. The test is where the individual s personal and economic relations are closer. Assess the location of the individual s personal, community, and economic relations. 23

24 SUMMARY OF PROCESS STEPS LB&I PRACTICE UNIT STEP 3 (cont.) Habitual abode: In most treaties, the third tie-breaker test is the habitual abode test. An individual s habitual abode is located in the Contracting State in which the individual has a greater presence during a calendar year. Although the length of time is not specified, the comparison must cover sufficient length of time and take into account the intervals at which the stays take place for it to be possible to determine where residence is habitual. For example, an individual who is present in the United States more frequently and at longer intervals than in the other Contracting State during a calendar year likely has a habitual abode in the United States. Determine whether the individual has a habitual abode in the United States by calculating how much time the individual spent in in the United States in a tax year. Note that this is not just a day counting test however. 24

25 SUMMARY OF PROCESS STEPS LB&I PRACTICE UNIT STEP 3 (cont.) Nationality: In most treaties, the fourth tie-breaker test is the nationality test. A national of a Contracting State is an individual who is either a citizen or a national of that Contracting State. An individual who is not a U.S. citizen is unlikely to be defined as a U.S. national under the tie-breaker rules in U.S. tax treaties. Because these tests are applied in the order in which they appear in the treaty, if a single Contracting State of residence can be determined under the first tie-breaker test, for example, then you do not need to proceed to the next test. If an individual remains a resident of both Contracting States after application of the tiebreaker rules, the competent authorities will try to assign a single Contracting State of residence through mutual agreement. 25

26

27 DETERMINING AN INDIVIDUAL S RESIDENCY FOR TREATY PURPOSES SUMMARY OF PROCESS STEPS LB&I PRACTICE UNIT STEP 1 STEP 2 STEP 3 Analyze U.S. Residency Claim-Determine whether the individual properly claimed to be a U.S. resident under U.S. domestic law by determining whether the individual is a U.S. citizen or a U.S. resident alien under the lawful permanent resident, physical presence, or first-year election tests. Analyze Treaty Country Residency Claim-Determine whether the individual properly claimed to be a resident of a country that has a treaty with the United States under such country s domestic law. Apply Treaty s Residency Tie-Breaker Rules-If you determine that an individual is a resident of both Contracting States, apply the treaty s residence tiebreaker rules. Where an individual would be a resident of both Contracting States, the treaty s tie-breaker rules apply to determine a single Contracting State of residence for purposes of the treaty. 27

28 OTHER CONSIDERATIONS LB&I PRACTICE UNIT Impact of the Saving Clause. Generally, with specific exemptions, the saving clause reserves the right of a Contracting State to continue to tax its citizens and residents (as defined by the treaty s residence article) under the Contracting State s domestic law as if a treaty were not in effect. Even if a U.S. citizen is a resident of the other Contracting State under the tie-breaker rules, the United States may tax the U.S. citizen as if the treaty had not come into force unless an exception to the saving clause applies. Competent Authority. A taxpayer seeking to clarify their U.S. residency status may do so by contacting the U.S. Competent Authority. Generally, U.S. Competent Authority assistance is limited to situations where (a) resolution of a residency issue is necessary to avoid double taxation (for example, where the IRS and the tax authority of the other Contracting State each claim they are entitled to tax the same item of income) or to determine the applicability of a particular treaty benefit and (b) the issue requires consultation with the foreign competent authority to ensure consistent treatment under the applicable U.S. tax treaty. Special rules govern whether the U.S. Competent Authority will consider cases pending before IRS Appeals or a U.S. court. 28

29 OTHER CONSIDERATIONS LAWFUL PERMANENT RESIDENT Expatriation. An individual may be subject to an expatriation tax if, among other conditions: the individual has been an LPR at any time during at least 8 of the previous 15 years and the individual s LPR status has been revoked or they have taken the position that they are a resident of a treaty country. 29

30 CALIFORNIA RESIDENCY 30

31 PRESENTATION OVERVIEW Overview of California Taxation Definition of Resident Temporary or Transitory Purpose Seasonal Visitor or Tourist (6 Months) Presumption of Residency Definition of Domicile Safe Harbor (18 Months) Residency Examinations Practical Advice Elective or Appointed Office FTB Protest Procedure FTB Taxpayers Rights Advocate 31

32 OVERVIEW OF CALIFORNIA TAXATION RESIDENTS - taxable on worldwide income, R&TC 17041(a) and (c); File form 540/540A NON-RESIDENTS - only taxable on CA source income - "source" pertains to the place of origin, R&TC 17041(b) and (d) and 17951; File Form 540NR PART-YEAR RESIDENT" - is both a CA resident during a portion of the tax year and a CA NON-Resident during a portion of the tax Non-Residents Joint Return must be filed if one spouse was a resident for the entire year and the other spouse was a nonresident for all or part of the year unless: (i) Either spouse was an active member of the United States armed forces or (ii) Either spouse was a nonresident for the entire year and had no income from California sources during the year - If either exception applies, the couple may file jointly or separately -R&TC 18521(c) and (d) 32

33 OVERVIEW OF CALIFORNIA TAXATION PART-YEAR Residents taxable on CA source income during the period they were NON-Residents [R&TC 17041(b), (d) and (i)(1)(a)] and taxable on worldwide taxable income during the period they were residents [R&TC 17041(a), (c) and (i)(1)(b)] carryover items, deferred income, suspended losses, or suspended deductions shall only be includable or allowable to the extent that the carryover item, deferred income, suspended loss, or suspended deduction was derived from sources within this state, calculated as if the nonresident or part-year resident, for the portion of the year he or she was a nonresident, had been a nonresident for all prior years [R&TC 17041(i)(3)] amount of any net operating loss sustained in any taxable year during any part of which the taxpayer was not a resident of this state shall be limited to the sum of the following: (A) The amount of the loss attributable to the part of the taxable year in which the taxpayer was a resident. (B) The amount of the loss which, during the part of the taxable year the taxpayer is not a resident, is attributable to California source income and deductions allowable in arriving at taxable income of a nonresident or part-year resident. [R&TC 17041(i)(2)] 33

34 OVERVIEW OF CALIFORNIA TAXATION COMMUNITY INCOME Community income is divided equally between spouses. If a married couple files separate returns, each spouse must report all income from his or her separate property and one-half of any community income. Law of the state where the earning spouse is domiciled determines whether or not income is considered community income. If the acquiring spouse is domiciled in a community property state, their income is considered community income. If the acquiring spouse is domiciled in a separate property state, their income is considered separate income. 34

35 OVERVIEW OF CALIFORNIA TAXATION DEFERRED GAINS AND LOSSES (LIKE-KIND EXCHANGES) Gain or loss from the sale or exchange of real or tangible personal property located in California is sourced to California at the time the gain or loss is realized. California Property Exchanged for Out-of-State Property - If a nonresident exchanges real or tangible property located within California for real or tangible property located outside California, the realized gain or loss will be sourced to California. Taxation will not occur until the gain or loss is recognized; TP must track the deferred California sourced gains/losses to report to California in the year of disposition of the property received in the exchange. Out-of-State Property Exchanged for California Property - If a taxpayer exchanges real or tangible property located outside California for real or tangible property located within California, the gain is recognized when the taxpayer sells or otherwise disposes of the California property in a nondeferred transaction has a California source and is taxable by California. 35

36 OVERVIEW OF CALIFORNIA TAXATION INTANGIBLE PERSONAL PROPERTY Income of nonresidents from stocks, bonds, notes, or other intangible personal property is not income from sources within this state unless the property has acquired a business situs in California; situs of the stock is the residence of its owner. R&TC EXCEPT that if a nonresident buys or sells such property in this state or places orders with brokers in this state to buy or sell such property so regularly, systematically, and continuously as to constitute doing business in this state, the profit or gain derived from such activity is income from sources within this state irrespective of the situs of the property. 36

37 OVERVIEW OF CALIFORNIA TAXATION (COMPENSATION FOR PERSONAL SERVICES) TP MOVES OUT OF CA - The critical factor in determining the source of income from personal services is not the residence of the taxpayer, the place where the contract for services is entered into, or the place of payment - it is the place where the services are actually performed. R&TC TP MOVES IN TO CA - If a TP is a California resident when compensation is received, the compensation is taxable by California. 37

38 DEFINITION OF RESIDENT Resident defined by R&TC 17014(a) as: Every individual who is in CA for other than a temporary or transitory purpose; and Every individual domiciled in CA who is outside CA for a temporary or transitory purpose. TP may be a CA resident of CA although not domiciled in CA, and, conversely, may be domiciled in CA without being a resident of CA - residency determines what income is taxable by CA Resident of California remains a resident even though temporarily absent - R&TC 17014(a) The theory behind CA residency law is to define the class of individuals who benefit and should contribute to the support of CA 38

39 TEMPORARY OR TRANSITORY PURPOSE Generally, in CA for a temporary or transitory purpose, and therefore a nonresident of CA, if: Simply passing through Here for a brief rest Here for a vacation Here for a short period to complete a particular transaction, perform a particular contract, or perform a particular engagement- CCR Section 17014(b) Not a temporary and transitory purpose if to improve their health and the illness is of such a character as to require a relatively long or indefinite period to recuperate, or is here for business purposes which will require a long or indefinite period to accomplish, or is employed in a position that may last permanently or indefinitely, or has retired from business and moved to California with no definite intention of leaving - CCR 17014(b) 39

40 TEMPORARY OR TRANSITORY PURPOSE State with which a person has the closest connections during the taxable year is the person's state of residence - connections maintained in CA and other states are important objective indications of whether presence in or absence from CA is for a temporary or transitory purpose - CCR 17014(b) Facts and circumstances test 40

41 TEMPORARY OR TRANSITORY PURPOSE Did the person substantially sever their CA connections upon departure and take steps to establish significant connections with the new place of abode Were the CA connections maintained in readiness for TP to return? Mere formalisms such as changing voting registration to another state or statements to the effect that the taxpayer intended to be a resident of another state are not controlling Retention of some contacts such as bank accounts and a driver's license may only be a reflection of the taxpayer's past and may not be inconsistent with an absence for other than temporary or transitory purposes 41

42 SEASONAL VISITOR OR TOURIST SIX MONTH - REBUTTABLE PRESUMPTION OF NONRESIDENCY - If the persons presence in California does not exceed an aggregate of six months within a taxable year and the person is domiciled outside CA and maintains a permanent abode at the place of his domicile rebuttable presumption the person will be considered as Being in CA for a temporary or transitory purpose - CCR 17014(b) Person must not engage in any activity or conduct within CA other than that of a seasonal visitor, tourist, or guest Following connections with CA will not, alone, cause a seasonal visitor, tourist, or guest to become a resident status: Owning or maintaining a home Opening a bank account for paying personal expenses Having membership in local social clubs 42

43 PRESUMPTION OF CA RESIDENCY NINE MONTH - PRESUMPTION OF RESIDENCY - Every individual who spends in the aggregate more than nine months of the taxable year within CA shall be presumed to be a resident - R&TC The presumption may be overcome by satisfactory evidence that the individual is in CA for a temporary or transitory purpose Provides that presence within California for less than nine months does not constitute a presumption of non-residency - CCR

44 DEFINITION OF DOMICILE Subjective Intention The place where the person intends to remain and to which, whenever they are absent, they have the intention of returning Where an individual has their true, fixed, permanent home and principal establishment -most settled and permanent connection Place to which, whenever absent, they have the intention of returning Place in which a person has voluntarily fixed his or her habitation and the habitation of his or her family Place where a person has the present intention of making a permanent home, until some unexpected event shall occur to induce them to adopt another Not a place where a person is living for a mere special or limited purpose - CCR 17014(c) 44

45 DEFINITION OF DOMICILE Intention Can have only one domicile at a time If an individual has acquired a domicile at one place, the individual retains that domicile until another is acquired elsewhere A CA domiciliary leaving CA retains their CA domicile as long as they have the definite intention of returning to CA Domicile lost when person abandons any intention of returning to CA and locates elsewhere with the intention of remaining there indefinitely Concept of domicile involves not only physical presence in a particular place, but also the intention to make that place one's home To change domicile, a person must actually move to a new residence and intend to remain there permanently or indefinitely Burden of proving the acquisition of a new domicile is on the person asserting that domicile has been changed - CCR 17014(c) 45

46 DOMICILE vs. RESIDENCY The key distinction between domicile and residency is intent Can have only one domicile at any given time, but can have several residences Domicile requires both physical presence in a particular locality and the intent to make this locality one's permanent abode Residence is any factual place of abode of some permanency that is more than a mere temporary sojourn New domicile is acquired by the actual change of residence in a new place of abode, coupled with the intention to remain there either permanently or indefinitely without any fixed or certain purpose to return to the former place of abode A determination of residence cannot be based solely upon the declared intention of the parties, but must have its basis in objective facts In determining residency, voluntary physical presence is a factor of greater significance than the mental intent or outward formalities of ties to another state May be a resident although not domiciled in this state and, conversely, may be domiciled in this state without being a resident.- CCR 17014(c) 46

47 SAFE HARBOR 18 Months Outside CA Person who is domiciled in CA but is absent from CA for an uninterrupted period of at least 546 consecutive days (18 months) under an employment-related contract shall be considered outside the state for other than a temporary or transitory purpose and is a nonresident of CA A taxpayer's return to CA for up to 45 days during the tax year will be disregarded in determining the 546 consecutive day Safe Harbor applies to a spouse accompanying the taxpayer Safe Harbor N/A if: The individual or spouse has income from intangibles in excess of $200,000 in any taxable year the employment related contract is in effect. The principal purpose of the individual's absence is to avoid taxes. &TC 17014(d) 47

48

49 RESIDENCY EXAMINATIONS Most residency cases by the taxpayer filing Form 540NR Relevant Internal FTB Inquiries: Responses to the residency questions contained on Schedule CA (540NR) Address on the return, the W-2s and 1099s State tax information on the W-2s Employer, tax preparer and other addresses disclosed on the return Social security number of taxpayer, spouse, and dependents Federal identification numbers of partnerships, S corporations, and LLCs Location of assets that were sold or exchanged, rentals and other investments Location of banks and financial institutions 49

50 RESIDENCY EXAMINATIONS Relevant Internal FTB Inquiries: Location of farms on Schedule F Taxpayer's occupation Moving expense information (including reimbursement on W-2) Large income from intangibles Income, expenses, and deductions which may indicate connections within and without CA Schedule C activity and address. Investment activity (determine whether the taxpayer maintains a passive or active role in the activity) Closely held corporations Other state tax credit Other audit issues Related Entities Tax Returns 50

51 RESIDENCY EXAMINATIONS Other Relevant FTB Inquiries: Personal Residences - For each personal residence located in California, the claimed state, or elsewhere that the taxpayer occupied during the years under audit - purchase price, date of purchase, and assessed value, brief description of the residence, homeowner's/renter's insurance policy, furnishings/shipment of household goods, homeowner's property tax exemption information, dates of occupancy, own or leased, etc. Personal Transportation make and model of vehicle, values, dates of ownership, states of registration, table reflecting vehicle expenses paid by the taxpayer, the date of payment, and the location of the payee. Pets and where veterinary expenses occurred Businesses and employment - nature of the business and extent of the persons involvement with the business activities Voters registration and voting history; drivers license Bank accounts, cancelled checks, credit cards, airline tickets, travel expense reports, third party confirmations, and correspondence Memberships; location of family and medical, legal, and accounting professional advisors 51

52 RESIDENCY EXAMINATIONS IMPORTANT FACTORS The location of all residential real property and the approximate sizes and values of each of the properties. The state where a spouse / significant other and/or children, if any, reside. However, spouses can be residents of different states. The state wherein children, if any, attend school. The state wherein the homeowner s property tax exemption is claimed on a residence. Telephone records evidencing presence in CA. The number of days spent in California versus the number of days spent in other states and the general purpose of such days (vacation, business, etc.). The location where the tax returns are filed, both federal and state, and the state of residence claimed on such returns. The location of bank, savings and brokerage accounts. The origination point of checking account transactions and credit card transactions. The state wherein memberships in social, religious, and professional organizations are maintained. The state wherein cars are registered and maintained. 52

53 RESIDENCY EXAMINATIONS The state wherein the person maintains a driver s license or state identification card. The state wherein the person maintains voter registration and their voting history. The state wherein the person obtains professional services, such as doctors, dentists, and accountants. The state where the person has business interests and is employed. The state wherein the person maintains or owns business interests. The state wherein person holds a professional license or licenses. The state wherein the person owns investment real property. Indications in affidavits from various individuals discussing the person's residency. Statements of residency and domicile in the person's estate planning documents. 53

54 PRACTICAL ADVICE Sever all ties to California - if possible. Any retained interests are potentially determinative against the taxpayer. Sell the California family home - anything less is extremely risky. (If the family home is retained for some reason, terminate the claimed homeowners exemption). Best to not retain any direct or indirect interest in any real estate in California that might somehow be deemed a personal residence. In many situations, the taxpayer has returned to California after an absence, during which there was a financial liquidity event. The FTB uses the return to California as evidence of a temporary absence from the state (and an ongoing domicile in California). Buy a home in the new state of residency and move the personal furniture, establish a local presence and actually live there. Retain all documents regarding the move. Enroll children, if any, in schools in the new state of residency. 54

55 PRACTICAL ADVICE Promptly obtain a driver s license in the new state of residency and terminate the CA driver s license (before it expires). Register to vote (and vote) in the new state of residency. Do not maintain a car, plane or boat registered in California. Do not spend any significant amount of time working, visiting, or conducting personal business in California. File all required tax returns in the new state of residency. Change the estate planning documents to recite their residency in the new state of residency. Join social, athletic and religious organizations in the new state of residency. Transfer financial and brokerage accounts to the new state of residency. 55

56 PRACTICAL ADVICE Transfer financial and brokerage accounts to the new state of residency. If there is retained California source income, file California Non- Resident returns (which will start the applicable statute of limitations) Change California professional licenses to an "inactive" status, if possible. Maintain a business diary of activities and meetings conducted in the new state of residency. Maintain a personal diary of activities and presence in the new state of residency. 56

57 PRACTICAL ADVICE For at least 5 years, maintain all documents supporting a change in residency such as: moving and storage receipts for the furniture, plane tickets, baggage claim receipts, termination notifications for telephone and utilities, etc. In the event of an examination, the FTB may request the opportunity to review the foregoing information together with: copies of bank and credit card statements, cancelled checks, and ATM and debit card transactions, copies of cellular phone records, employment records, utility bills for any home in California (to be compared with utility usage for any home outside California), Voting records in the new state of residency, if available. 57

58 ELECTIVE OR APPOINTED OFFICE TP (and spouse) domiciled in CA shall be considered outside CA for a temporary or transitory purpose while: Holding an elective office of the government of the United States, or Employed on the staff of an elective officer in the legislative branch of the government of the United States as described above, or Holding an appointive office in the executive branch of the government of the United States (other than the armed forces of the United States or career appointees in the United States Foreign Service) if the appointment to that office was by the President of the United States and subject to confirmation by the Senate of the United States and whose tenure of office is at the pleasure of the President of the United States - R&TC 17014(b) 58

59 FTB PROTEST PROCEDURE Written protest must clearly state what is being protested and must be filed by the protest by date shown on the front of the accompanying notice. Include: Name and address Social security or taxpayer identification number The amounts and taxable years being protested A statement of facts, supporting information and explanation of why the FTB assessment is erroneous TPs signature or of authorized representative (FTB Form 3520 POA), including telephone contact numbers and mailing address Request for a hearing A copy of the Notice of Proposed Assessment (NPA) AT THE CONCLUSION OF FTB PROTEST REVIEW, WILL ISSUE NOTICE OF ACTION (NOA) EITHER WITHDRAWING, REVISING, OR AFFIRMING THE NPA 59

60 FTB TAXPAYERS RIGHTS ADVOCATE Taxpayers unable to resolve their problems with us through regular channels may contact the FTB Taxpayers Rights Advocate by: Website: ftb.ca.gov Telephone: Fax: Mail: EXECUTIVE LIAISON SECTION MS A381, FRANCHISE TAX BOARD, PO BOX 157, RANCHO CORDOVA CA

61 NEW YORK TEST Permanent Place of Abode 61

62 INCOME TAX DEFINITIONS RESIDENT You are a New York State resident for income tax purposes if: your domicile is New York State (see Exception below); or your domicile is not New York State but you maintain a permanent place of abode in New York State for more than 11 months of the year and spend 184 days or more in New York State during the tax year (Statutory Residents) 62

63 INCOME TAX DEFINITIONS DOMICILE In general, your domicile is: the place you intend to have as your permanent home where your permanent home is located the place you intend to return to after being away (as on vacation, business assignments, educational leave, or military assignment) You can only have one domicile. Your New York domicile does not change until you can demonstrate that you have abandoned your New York domicile and established a new domicile outside New York State. 63

64 INCOME TAX DEFINITIONS PERMANENT PLACE OF ABODE In general, a permanent place of abode is a residence (a building or structure where a person can live) that: you permanently maintain, whether you own it or not, and is suitable for year-round use. A permanent place of above usually includes a residence your spouse owns or leases. 64

65 INCOME TAX DEFINITIONS Exception: If your domicile is New York but you meet all three of the conditions in either Group A or Group B, you are not a New York State resident. Group A You did not maintain any permanent place of abode in New York State during the tax year; and You maintained a permanent place of abode outside New York State during the entire tax year; and You spent 30 days or less (a part of a day is a day for this purpose) in New York State during the tax year. 65

66 INCOME TAX DEFINITIONS Exception (cont): Group B You were in a foreign country for at least 450 days during any period of 548 consecutive days; and You, your spouse (unless legally separated) and minor children spent 90 days or less in New York State during this 548-day period; and During the nonresident portion of the tax year in which the 548-day period begins, and during the nonresident portion of the tax year in which the 548-day period ends, you were present in New York State for no more than the number of days which bears the same ratio to 90 as the number of days in such portion of the tax year bears to 548. The following formula illustrates this condition: number of days in the nonresident portion x 90 = maximum number of days allowed in New York State

67 GAIED v. NEW YORK STATE TAX APPEALS TRIBUNAL 22 NY3rd 592 (February 18, 2014) Petitioner purchased an apartment building on Staten Island. Petitioner s parents lived in the building, and Petitioner stayed in their apartment on occasion to attend to their medical needs. Petitioner leased the other two apartments in the building to tenants. For the tax years in question, Petitioner filed nonresident income tax returns in New York. The Department of Taxation and Finance later issued a notice of deficiency, determining that Petitioner owed additional New York income taxes because he maintained a permanent place of abode at the Staten Island property during the relevant years. The Tax Appeals Tribunal sustained the deficiency, concluding that in order to qualify as a statutory resident under the Tax Law, a taxpayer need not actually dwell in the permanent place of abode but need only maintain it. Petitioner challenged the Tribunal s determination, contending that the standard to be applied when determining whether a person maintains a permanent place of abode in New York should turn on whether he maintained living arrangements for himself to reside at the dwelling. The Court of Appeals agreed with Petitioner, holding that in order for an individual to qualify as a statutory resident, there must be some basis to conclude that the dwelling was utilized as the taxpayer s residence. [Justia US Law, Opinion Summary] 67

68 FLORIDA RESIDENCY 68

69 RESIDENCY REQUIREMENTS There are no general rules for establishing residency in Florida. Residency is program specific. That is, it is attached to a specific purpose or need, such as taxes or in-state tuition. 69

70 ESTABLISHING FLORIDA RESIDENCY A Florida resident has a true, fixed and permanent home in Florida. Certain actions establish residency; other actions only indicate intent to establish residency. Combining the two action groups result in a well-documented change of residency to Florida. Actions to establish residency the minimum requirements: File a Declaration of Domicile Apply for a Homestead Property Tax Exemption Register to Vote 70

71 ESTABLISHING FLORIDA RESIDENCY Actions to Indicate Intent to Establish Residency: Florida Driver s License Income Tax Returns Wills and Estate Planning Tax Agency Physical Presence Stocks and Ownership Interests 71