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In my previous articles on avoiding California residency, we saw that residency questions are ultimately decided by establishing the state with which someone has the "closest connection" during a tax year. It was noted that relying on presumptions and mechanical tests (including the 29 factor test listed in the Corbett case) will not necessarily win the day.

As pointed out in the prior articles, certainly someone who wishes to avoid California residency should align and document as many favorable objective (Corbett) factors as they possibly can. But if the stakes are high (such as leaving California in advance of a major stock sale), an understanding of the practicalities of a Franchise Tax Board ("FTB") challenge is important.

For example, I'm frequently asked "how long do I have to stay out of California after the sale?" The practical answer is "at least 4 years". That is because, assuming a California tax return is filed for the year of the sale, that return may not be selected for audit for 2-3 years. FTB audits typically take longer and are more thoroughly documented (especially in cases of residency determinations) than IRS audits.

The issue here is "domicile"--the place where the taxpayer has their true, fixed, permanent home regardless of where they are physically located. Someone can be outside of California for several years, but, because they have the intention of returning, still retain their domicile in California.

Four years is not a binding rule, nor is it a "safe harbor" of any kind! The practical point is that, by the time a residency audit kicks into gear, you certainly don't want to be back in California, but trying to maintain that when you left, you never had any intent to return! If the stakes are high enough, and assuming a part year resident return is filed for the year you leave California that includes the sale, the applicable California statute of limitations for California would typically be 6 (not the normal 4) years.

I often tell clients that factual issues, not legal issues, are the most difficult ones to argue. The factual issue of where you actually intend to return to is hard to definitively prove.

People overlook the fact that the FTB can access social media and internet information. If you move out of California but are posting on Facebook and Twitter how you can't wait to get back, you've just given the FTB some great evidence of domicile!

Another practical issue is what state to establish residency in. For obvious reasons, the FTB is very skeptical of California residents who say they have moved to Nevada. The close proximity of Lake Tahoe (to Northern California) and Las Vegas (to Southern California) makes the FTB much more skeptical of claims of Nevada residency than, for example, residency in Texas or Florida.

To reiterate, it absolutely is possible to leave California soon before a major financial transaction (such as the correctly structured sale of a business), but only if you are serious about doing it the right way and carefully managing all aspects of the move, including making sure all possible evidence supports your intent to leave California and establish a "closer connection" to your new residence for an indefinite period.

Understanding the scope and practicalities involved means that such a move should not be undertaken lightly--it will entail a major lifestyle change.

Click below to download a printable version of this blog.

The Practicalities of Avoiding California Residency DLK Blog
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