A California resident is taxable on their worldwide income for California personal income tax purposes. Due to California’s very high individual income tax rates (up to 13.3% in 2015), one of the more common questions posed to me (and one in which we handle often on audit) is whether an individual is deemed a “resident” of California when they spent time both within and without California during the tax year.
In 2015, the California Franchise Tax Board (the “FTB”) issued Legal Ruling 2015-01, entitled “Determining Whether a Tribal Member is “Living On” or “Living Off” His or Her Tribe’s Reservation for California Personal Income Tax Purposes” (the “Notice”). See the entire Notice here. Whether a Tribal Member is deemed “living on” or “living off” his or her Tribal Reservation will in all likelihood have a significant tax consequence to him or her. Those Tribal Members who live both on the Tribal Reservation and, as an example, own a residence off of the Tribal Reservation, are at risk of audit by the FTB. As discussed below, if the Tribal Member is deemed to have “closer connections” off of the Tribal Reservation, then he or she may be subject to unexpected California personal income tax.
The following addresses: (i) the general tax rules related to the taxation of California residents; (ii) the general California tax rules related to the taxation of Tribal Members; and (iii) the application of the recent Notice to certain Tribal Members “living on” and “living off” the Tribal Reservation.[i]
1. Taxation of California Residents – In General.
California imposes a tax upon the entire taxable income, from all sources, of a California resident, while nonresidents are only taxed on income from California sources.[ii]
California defines a “resident” as: “(1) every individual who is in this state for other than a temporary or transitory purpose; and (2) every individual domiciled in this state who is outside the state for a temporary or transitory purpose.”[iii] A “temporary or transitory purpose” must be considered in the context of the facts and circumstances of each particular case.[iv] Whether an individual is a California resident is a question of both subjective intent and objective facts.[v]
“Domicile” is defined in the California regulations as “the place where an individual has his true, fixed, permanent home and principal establishment, and to which place he has, whenever he is absent, the intention of returning.”[vi] Similarly, California courts have described “domicile” as “the concurrence of physical presence in a particular place with the intention to make that place one’s home.”[vii]
The California regulations also specifically state that “[a]n individual domiciled in California, who leaves the State, loses his California domicile the moment he or she abandons any intention of returning to California and locates elsewhere with the intention of remaining there indefinitely.”[viii]
The following factors (“General Closest Connection” factors) are generally used in determining residency, and quotes Regulations Section 17014(b) in stating that “[t]he underlying theory of residency is that you are a resident of the place where you have the closest connections. In using these factors, it is the strength of the ties, not just the number of ties, that determines your residency.”[ix]
- Amount of time spent in California compared to time spent outside of California;
- Location of spouse and children;
- Location of principal residence;
- Where your driver’s license was issued;
- Where your vehicles are registered;
- Where you maintain your professional licenses;
- Where you are registered to vote;
- Location of the banks where you maintain accounts;
- Location of your doctors, dentists, accountants, and attorneys;
- Location of the church, temple or mosque, professional associations, or social and country clubs of which you are a member;
- Location of your real property and investments;
- Location of your business interests; and
- Location of your social ties.
2. California Taxation of Tribal Members – In General.
Tribal Members that reside on tribal land are generally not subject to state income taxation.[x] In California, a Tribal Member is exempt from California personal income tax if all of the following three requirements are met: 1) the Tribal Member must be a member of a federally recognized Tribe; 2) the Tribal Member must live on their own Tribal Reservation; and 3) the income must be sourced in the same Indian country or Tribal Reservation in which the Tribal Member lives and where the Tribal Member is a member.[xi]
3. Application of Legal Ruling 2015-01 (the Notice) to Tribal Members.
In the Notice, the FTB recognizes the law that Tribal Members who are deemed “living on” his or her own Tribal Reservation are generally exempt from paying California personal income tax, although the Tribal member may still have a responsibility to file a California personal income tax return. The Notice compares and contrasts 4 different situations, including a situation where a Tribal Member both resides on his or Tribal Reservation and also owns a personal residence located outside of the Tribal Reservation.
Similar to the General Closest Connection factors used in determining whether a non-Tribal Member is deemed a resident of California for tax purposes, the Notice specifically states the factors that the FTB will use to determine whether a Tribal Member is deemed “living off” of the Tribal Reservation. If so, and as noted above, if after applying the following closest connection factors the Tribal Member is deemed “living off” the Tribal Reservation because he or she is deemed to have closer connections off of the Tribal Reservation, the Tribal Member will be subject to California income tax on all of his or her income, even the income earned on the Tribal Reservation. The closest connection factors are as follows:
- The location of all residential property that the Tribal Member either owns or has been granted the right to occupy, and the approximate sizes and values of each of the residences;
- The address used for correspondence with government agencies, financial institutions, and the like;
- Utility and service provider usage, if applicable;
- Declarations as defined by section 116.130 of the California Code of Civil Procedure specifically, a written statement signed by an individual which includes the date and place of signing, and a statement under penalty of perjury under the laws of this state that its contents are true and correct.
- The location wherein the taxpayer’s spouse and children reside;
- The location wherein the taxpayer’s children attend school;
- The origination point of the taxpayer’s checking account and credit card transactions;
- The location wherein the taxpayer maintains memberships in social, religious, and professional organizations;
- The address at which the taxpayer registers his or her motor vehicles; and
- The address at which the taxpayer maintains a driver’s license.
As noted above and stated in the Notice, “[u]nder the “closest connections test,” if it is determined that a Tribal Member’s closest connections are with a dwelling or dwellings on his or her own tribe’s reservation, he or she will be deemed to be “living on” his or her tribe’s reservation. But if a Tribal Member’s closest connections are with a dwelling located outside his or her own tribe’s reservation, then he or she will be deemed to be “living off” the tribe’s reservation.”
In summary Tribal Members who live on their Tribal Reservation, but also own and spend time on property, including a residence, outside of the Tribal Reservation, should be aware that they may be subject to California personal income tax depending on the application of the above closest connection factors listed in the Notice.
If you have any questions regarding FTB taxation, or any other tax questions, please do not hesitate to contact Eric Swenson at 619-515-3235 or Ted Griswold at 619-515-3277. Lastly, the above discussion is not intended to be legal advice and should not be relied upon for any purpose.
Eric Swenson is Senior Counsel on the Tax team at Procopio as well as a member of Procopio’s Native American Law Practice Group. His practice encompasses both tax controversy and tax planning. Eric has represented corporations, individual, and nonprofits before the various tax authorities, including the Internal Revenue Service, Franchise Tax Board and California Board of Equalization. Eric can be reached at 619-515-3235.
[i] This article does not address the federal (IRS) tax treatment of Tribal Members. Nevertheless, it is generally understood that Tribal Members are U.S. citizens and, similar to other U.S. citizens, subject to federal income taxes on their receipt of income. See Squire v. Capoeman, 351 U.S. 1 (1956) (per capita distributions of net gaming revenues taxable).
[ii] Rev. & Tax Code Section 17041(a).
[iii] Rev. & Tax Code Section 17014(a).
[iv] Cal. Code of Regs., tit. 18, Section 17014(b).
[v] Appeal of Anthony V. and Beverly Zupanovich, 76-SBE-002 (1976).
[vi] Cal. Code of Regs., tit. 18, Section 17014(c).
[vii] Estate of Glassford, 114 Cal.App.2nd 181 (1952).
[viii] Cal. Code of Regs., tit. 18, Section 17014(c).
[ix] This is a partial list of the factors, and each taxpayer must consider all the facts and circumstances of their particular situation to determine residency status. See FTB Pub. 1031, p. 2 and Appeal of Stephen D. Bragg, 2003-SBE-002.
[x] Oklahoma Tax Commission v. Chiasaw Nation, 515 U.S. 450 (1995).
[xi] See FTB Pub. 674, Income Taxation of Native Americans; see also the Notice (Legal Ruling 2015-15).