The Office of Tax Appeals (OTA) recently issued an opinion in In the Matter of the Appeal of: Q. Tran and R. Medina, OTA Case No. 21088364, addressing critical questions of California residency for the 2007, 2008, and 2009 tax years. This case provides valuable insights into the rigorous standards taxpayers must meet to demonstrate a change in domicile and residency for California tax purposes.

Case Overview and Factual Background

Appellants, Q. Tran and R. Medina, a married couple, appealed actions by the Franchise Tax Board (FTB) proposing substantial additional tax assessments, late-filing penalties, and applicable interest for the 2007, 2008, and 2009 tax years. The core issue at appeal was whether the appellants were California residents during these "Tax Years at Issue".

Prior to 2007, the appellants were undisputed residents and domiciliaries of California, maintaining their principal residence in Newport Beach (the "California home") and owning an investment property in Anaheim (the "California investment property"). Both Q. Tran and R. Medina held California professional licenses (physician and surgeon, and nurse, respectively), though these expired in 2005. Q. Tran was registered to vote in California until October 2008.

In October 2006, Q. Tran purchased a smaller residential condominium in Henderson, Nevada (the "Nevada property"). Subsequently, in February 2007, appellants obtained Nevada driver’s licenses, surrendering their California licenses. R. Medina registered a California vehicle in Nevada in March 2007 and a newly purchased vehicle in Nevada in June 2008. In October 2008, they registered to vote in Nevada. Appellants also established business connections in Nevada, becoming owners and members of a Nevada LLC and officers/directors of a Nevada corporation, while simultaneously maintaining ownership in a California LLC that owned the California investment property.

Despite these overt actions to establish connections in Nevada, significant California ties persisted throughout the Tax Years at Issue. Appellants’ immediate family members, including both of their mothers, Q. Tran’s father, and R. Medina’s sisters, resided in California. Appellants’ self-prepared physical presence calendars showed frequent and often extended stays at the California home and visits with family in California. For instance, in 2007, they stayed at the California home seven times and visited Q. Tran’s parents for approximately five days. In 2008, they stayed at the California home for over two months and visited Q. Tran’s parents three times for about two weeks each. R. Medina consistently received specialized medical treatment at a California clinic, with visits ranging from one to four times a month in 2007 and three to seven times a month in 2008, frequently accompanied by Q. Tran. Q. Tran also testified to online wagering while physically present in California.

Appellants filed joint California Nonresident or Part-Year Resident Income Tax Returns (Forms 540NR) for the tax years in question, reporting only California-source income from their investment property and business interests. The FTB, however, determined they remained California residents, leading to the proposed assessments.

Taxpayer’s Request for Relief

During the appeal process, R. Medina specifically requested innocent spouse relief. The FTB agreed to fully grant this request, and Q. Tran did not contest it. Consequently, R. Medina is entirely relieved of any liabilities for tax, penalties, and interest for the Tax Years at Issue, leaving Q. Tran solely liable for the amounts due. Appellants did not specifically contest the late-filing penalties, FTB’s disallowance of certain claimed business expenses, or interest, effectively conceding these points.

Legal Framework for California Residency

The FTB’s determinations of residency are presumptively correct, and the taxpayer bears the burden of proving error (Appeal of Housman and Pena, 2022-OTA-375P). Unsupported assertions are insufficient to meet this burden, and without credible, competent, and relevant evidence, the FTB’s determinations must be upheld (Ibid.).

California taxes residents on their entire taxable income, regardless of source, while nonresidents are taxed only on income derived from California sources (Revenue and Taxation Code (R&TC) §§ 17041(a), (b), (i); 17951). A "resident" is defined as: (1) every individual who is in California for other than a temporary or transitory purpose; and (2) every individual domiciled in California who is outside California for a temporary or transitory purpose (R&TC § 17014(a)(1)-(2); Cal. Code Regs., tit. 18, § 17014). A "nonresident" is defined as "every individual other than a resident" (R&TC § 17015). The key question under either test is whether the taxpayer’s purpose in entering or leaving California was temporary or transitory in character (Appeal of Mazer, 2020-OTA-263P).

Domicile vs. Residence

A critical distinction exists between domicile and residence. Domicile is defined as the single location where individuals have the most settled and permanent connection, intending to remain there and return when absent (Whittell v. Franchise Tax Bd. (1964) 231 Cal.App.2d 278, 284). It encompasses both physical presence and the intent to remain permanently or indefinitely (Appeal of Beckwith, 2022-OTA-332P). In contrast, a residence is "any factual place of abode of some permanency, that is, more than a mere temporary sojourn" (Whittell, supra, 231 Cal.App.2d at p. 284). While individuals can have several residences simultaneously, they can only have one domicile at any given time (Whittell, supra, 231 Cal.App.2d at p. 284; Cal. Code Regs., tit. 18, § 17014(c)). When multiple residences are maintained, determining domicile depends significantly on the individual’s intentions as manifested by their acts and declarations (In re Marriage of Leff (1972) 25 Cal.App.3d 630, 642). The maintenance of a marital abode is a significant factor in determining domicile (Appeal of Beckwith, supra).

To change domicile, taxpayers must satisfy two conditions: (1) take up actual, physical residence in a particular place; and (2) intend to remain there permanently or indefinitely (Noble v. Franchise Tax Bd. (2004) 118 Cal.App.4th 560, 567-568). A domicile once acquired is presumed to continue until shown to have been changed (Noble, supra; Cal. Code Regs., tit. 18, § 17014(c)). The burden of proof for establishing a change of domicile rests on the party asserting such change (Appeal of Beckwith, supra; Appeals of Bragg (2003-SBE-002) 2003 WL 21403264). Individuals’ acts must provide clear proof of a current intention to abandon the old domicile and establish a new one (Chapman v. Superior Court (1958) 162 Cal.App.2d 421, 426-427). Intent is determined from acts, not merely unsubstantiated statements (Noble, supra, 118 Cal.App.4th at pp. 567-568). If doubt remains after presentation of facts, domicile is found to be unchanged (Appeal of Beckwith, supra).

For individuals determined to be California domiciliaries, the residency inquiry shifts to whether they were "outside [California] for a temporary or transitory purpose" (R&TC § 17014(a)(2)). This is a question of fact, determined by examining all circumstances, not solely subjective intent (Cal. Code Regs., tit. 18, § 17014(b); Appeal of Mazer, supra). When individuals have significant contacts with more than one state, the state with the closest connections during the period in question is considered the state of residence (Appeal of Bracamonte, 2021-OTA-156P). These contacts are objective indicators of whether presence in or absence from California was temporary or transitory.

The OTA often considers nonexclusive factors from Appeals of Bragg, supra, to determine the state with the closest connection, categorized into: (1) registrations and filings with a state or other agency; (2) personal and professional associations; and (3) physical presence and property (Appeal of Mazer, supra). The weight given to any factor depends on the totality of circumstances, and residency status generally depends on activities throughout the entire year (Cal. Code Regs., tit. 18, § 17014(e)). Notably, physical presence is considered a factor of greater significance than mental intent and formalities that tie one to a state (Noble, supra, 118 Cal.App.4th at p. 567; Whittell, supra, 231 Cal.App.2d at 278).

Application of Law to the Appellants’ Circumstances

Given that appellants were undisputed California domiciliaries prior to 2007, their domicile was presumed to remain California unless they demonstrated a change (Noble, supra). The OTA proceeded to analyze their claim of a change in domicile based on their acts, rather than their unsubstantiated statements of intent to move to Nevada for Q. Tran’s professional gambling career (Appeals of Bragg, supra).

The OTA first evaluated the actual, physical presence component of changing domicile. Appellants’ own 2007 residency timeline showed significantly more days in California than Nevada, and Q. Tran himself conceded he was likely in Nevada for less than half of 2007. While appellants provided Washington Mutual account statements for 2008 and 2009 to purportedly show more Nevada days, these were deemed not credible evidence of overall physical presence. The account was solely Q. Tran’s, not indicating R. Medina’s location, and showed no transactions for at least five months in early 2008 when appellants were documented as being in California. Furthermore, appellants failed to provide records from other financial institutions, weakening their claim that unaccounted-for days should be treated as Nevada days. The OTA concluded that appellants failed to provide credible proof that FTB’s physical presence determinations were in error, finding that appellants were physically present in California for a substantial amount of time compared to their time outside California, demonstrating a significant connection to the state.

Regarding the maintenance of a marital abode, it was undisputed the California home was their marital abode before the Tax Years at Issue. Appellants provided no evidence they abandoned their California home or moved significant personal property to Nevada (Appeal of Bracamonte, supra). Despite claims of staying with family when in California, appellants’ own residency timelines showed numerous returns to the California home in 2007 and an extended stay in 2008. R. Medina’s 2009 timeline also indicated stays in Newport Beach, where the California home was located. The OTA found appellants had not shown they abandoned their California domicile based on this factor.

Concerning the intent to remain permanently or indefinitely, while appellants stated they moved to Nevada for Q. Tran’s gambling career and he had no plans to return, their actions contradicted this. Q. Tran admitted to online wagering while in California. Crucially, appellants regularly returned to California for R. Medina’s ongoing specialized medical treatment (multiple times a month in 2007 and 2008) and for frequent, often extended, family visits due to family circumstances and needs. This consistent return for significant personal reasons undercut their stated intent to abandon California. The OTA found that appellants had not demonstrated sufficient proof of their intention to abandon their California domicile and establish a new one in Nevada (Chapman, supra). Thus, the OTA presumed appellants remained domiciled in California during the Tax Years at Issue.

Since appellants were determined to be California domiciliaries, the OTA proceeded to determine residency by assessing whether their absence from California was for a temporary or transitory purpose (R&TC § 17014(a)(2)). This involved applying the "closest connections" factors:

Registrations and Filings: This category presented a mixed picture. While appellants acquired Nevada driver’s licenses, registered vehicles in Nevada, and eventually registered to vote in Nevada (October 2008), they also maintained a California voter registration until October 2008 and remained owners of a California LLC. The OTA concluded this category favored California residency for the period Q. Tran was registered to vote in California, shifting to non-residency only after October 2008.
Personal and Professional Associations: This factor strongly favored California connections. Appellants’ extended family resided in California, prompting regular and lengthy visits to assist family members and for holidays. R. Medina’s frequent and necessary medical treatments in California, often accompanied by Q. Tran, further solidified these ties. Despite claims of professional gambling in Nevada, Q. Tran also engaged in online wagering while in California and provided no evidence of professional associations as a gambler in Nevada.
Physical Presence and Property: The OTA reiterated that appellants’ physical presence in California far outweighed their presence in Nevada. This factor carries greater weight than subjective intent (Noble, supra; Whittell, supra). Furthermore, appellants maintained their larger California home and California investment property, alongside their smaller Nevada property. This factor also strongly supported California residency.

Conclusion and Implications

Based on the totality of the circumstances, the OTA determined that appellants’ strongest connections were with California, and they availed themselves of California’s benefits and protections the most. Consequently, their time spent in Nevada was for a temporary and transitory purpose.

The OTA held that appellants were California residents during the 2007, 2008, and 2009 Tax Years at Issue. The FTB’s actions proposing additional tax assessments were sustained. However, consistent with the FTB’s agreement, R. Medina was granted full innocent spouse relief, making Q. Tran solely liable for the determined amounts due.

This case underscores that a mere change in formal registrations or statements of intent are insufficient to establish a change in domicile or residency for California tax purposes. Taxpayers must demonstrate a clear and decisive shift in their physical presence, the abandonment of their prior marital abode, and acts that unequivocally manifest an intent to permanently or indefinitely remain in a new location, rather than just temporary or transitory absences from their California domicile. The Q. Tran and R. Medina decision serves as a reminder to tax professionals to thoroughly evaluate all objective connections and activities when advising clients on multi-state residency matters.

Prepared with assistance from NotebookLM.