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Editor’s Note: Resident or Non-Resident status of taxpayers who leave California (or who are not California residents at all) are a frequent target of the California Franchise Tax Board.  The issue is simple – – if a taxpayer is not a “resident” of California, there are no State income taxes to be paid.  However, determining residency in another State is a complex matter involving adequate tax planning.  Frequently, taxpayers do little, if any, research before hand; are ultimately audited by the California Franchise Tax Board, and are held to be residents and hence, subject to California personal income tax.

In a decision not be cited as precedent, the State Board of Equalization (SBE), in Appeal of Panhwar., SBE, Dkt. No. 526808, 10/25/2011, upheld the Franchise Tax Board’s (FTB’s) assessments against the taxpayers who failed to substantiate their claim that they were nonresidents during the years in issue.

The taxpayers lived and owned businesses in California, and in 2004 began operating two businesses in Arizona. Their 2004 and 2005 returns reflected the proration of their income between Arizona and California. The taxpayers argued that this new investment was a substantial portion of their assets and liabilities, and required them to spend a great deal of time in Arizona during the 2004 and 2005 tax years, and therefore they met the safe harbor provided by California Rev. & Tax. Code § 17014(d) for taxpayers who are not in the state for a substantial amount of time due to employment related absences.

The taxpayers stated their intent was to move to Arizona, and that they had more significant contact with Arizona based on their exposure to risk, and should be considered part-year residents.

The SBE found that the taxpayers failed to show that the absences were due to an employment-related contract and not for temporary or transitory purposes, and that they intended to permanently abandon their California domicile and establish one in Arizona. The evidence showed the taxpayers for 2004 and 2005 had filed California resident income tax and Arizona nonresident income returns.

In addition, the taxpayers retained their principal residence in California, registered two business entities in California using that home address, sent their children to school in California, and maintained their California drivers’ licenses and vehicles. The taxpayers did not provide any evidence to support their presence in Arizona for the majority of the 2004 and 2005 tax years, and thus failed to qualify for the safe harbor. (Appeal of Panhwar., SBE, Dkt. No. 526808, 10/25/2011 (not to be cited as precedent).)

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Meet Paul Raymond

Meet Paul Raymond

Mr. Raymond is a sought after speaker in tax controversy law by many attorney, accountant, and business groups and at the request of the Internal Revenue Service, has presented programs at the IRS Nationwide Tax Forum, attended by tax professionals throughout the United States.

Additionally, he continues to be an active member in the Section of Taxation, American Bar Association, where he was the Past Chair of the Employment Taxes Committee.

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Member CA Bar Member Orange County Bar US Tax Court Attorney