Articles Posted in CA FTB

The FTB is implementing an automated dialer to make outbound collection calls to individual income-tax taxpayers in an effort to prevent collection actions such as tax liens, bank levies, and wage garnishments. The state FTB tax agency will implement a similar system for business entities in September 2012.

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The CA FTB is contacting more than 100,000 California business entities that have not filed their 2010 state income tax returns. (FTB News Release (June 14, 2012)) When a business is contacted, they will have 30 days to either file or show why no return is due. Otherwise, the FTB will assess tax based on the information reported to them from other agencies.

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The CA FTB state tax agency has begun using information obtained through the Financial Institution Record Match (FIRM) program from banks and other financial institutions to find assets and collect on unpaid delinquent tax debts from California taxpayers. If you have outstanding FTB tax liabilities, your bank accounts may be levied by the FTB, and your wages could be garnished and levied.

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Taxpapers.jpgFranchise Tax Board is Contacting Thousands of Businesses to File Delinquent Tax Returns

Sacramento: The state is contacting more than 40,000 California businesses that have not filed their 2008 state income tax returns with the Franchise Tax Board (FTB).

The notices inform the businesses that they have 30 days to file a return or show why there is no tax filing requirement. Businesses that disregard these notices could face tax assessments that may include penalties, interest, and fees.

FTB annually reviews more than 5 million income records received from the Internal Revenue Service, the State Employment Development Department, the State Board of Equalization, financial institutions, and other business entities, then compares that data to tax returns already filed to identify noncompliance. Last year, FTB collected approximately $38 million from non-filing businesses the agency notified.

California faces an annual tax gap of $6.5 billion per year. The tax gap is the difference between taxes owed and taxes paid. The failure to file tax returns is one part of the tax gap along with underreporting of income, overstatement of tax deductions, and the underpayment of taxes owed.

CALIFORNIA FRANCHISE TAX BOARD

CA RESIDENCY RULES & AUDIT

RESIDENCY LAWS, TERMS, AND RESIDENCY CONCEPTS

DEFINITION OF RESIDENT

R&TC Section 17014(a) defines “resident” as:

  • Every individual who is in this state for other than a temporary or transitory purpose;
  • Every individual domiciled in this state who is outside the state for a temporary or transitory purpose.

Under this definition, an individual may be a resident of California although not domiciled in California, and, conversely, may be domiciled in California without being a resident of California. Residency determines what income is taxable by California (CCR Section 17014).

The theory behind California residency law is to define the class of individuals who should contribute to the support of this state (CCR Section 17014).

R&TC Section 17014(b) provides a special rule for certain United States Government
officials and their spouses. If those individuals have a California domicile, we will consider their absences from this state as temporary or transitory. They remain California residents.

This rule applies to the following persons:

  • Any elected U.S. official.
  • Anyone on the staff of a member of the U.S. Congress.
  • Any presidential appointee, subject to Senate confirmation, other than military and Foreign Service career appointees.

R&TC Section 17014(c) provides that any individual who is a resident of California remains a resident even though temporarily absent.

TEMPORARY OR TRANSITORY PURPOSE

CCR Section 17014(b) provides a detailed discussion of the meaning of “temporary or
transitory purpose.” According to this regulation, the determination of whether or not an
individual is in this state for temporary or transitory purposes depends to a large extent upon the facts and circumstances of each particular case. Generally, we consider an individual to be in California for a temporary or transitory purpose, and therefore a nonresident of California, if he or she is:

  • Simply passing through this state.
  • 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.

Example 1

James and Janice are domiciled in Minnesota where they have maintained their family home for seven years. James works for a state agency in Minnesota. In October 2005, James took a six-month leave of absence to become a temporary consultant for a California company. James and Janice moved to Los Angeles, CA in October 2005, where they rented an apartment and opened a checking account. Their home in Minnesota was left vacant and they retained their Minnesota bank accounts. They stayed in California from October 2005, to April 2006, and returned to Minnesota in April 2006.

Determination:

James and Janice were in California for a short period in order for James to complete a
particular engagement as a temporary consultant. James and Janice are nonresidents of
California because they were in California for a temporary or transitory purpose.

An individual will be considered to be in California for other than temporary or transitory
purposes, and therefore a California resident, if he or she is in this state:

  • To recuperate from injury or illness for a relatively long or indefinite period.
  • For a business purpose which will require a long or indefinite period to accomplish.
  • For employment in a position that may last permanently or indefinitely.
  • For retirement with no definite intention of leaving shortly.

Example 2

Bob is domiciled in Ohio and has lived there for 50 years. Two years ago Bob developed a serious medical condition. His doctor told him to live in California until he recovers. The illness may last for several years. Bob took his doctor’s advice and moved to California two years ago.

Determination:

Bob is in California for an indefinite period in order to recuperate from an illness. He is a
California resident because his stay in California is not for a temporary or transitory purpose.

CCR Section 17014(b) provides that the state with which a person has the closest
connections during the taxable year is the person’s state of residence. In the Appeal of
Richard L. and Kathleen K. Hardman, 1975-SBE-052, August 19, 1975, the Board of
Equalization held that the connections which a taxpayer maintains in this and other states are important objective indications of whether presence in or absence from California is for a temporary or transitory purpose.

In the Appeal of Stephen D. Bragg 2003-SBE-002, May 28, 2003, the Board of Equalization included the following list of factors which, while not exhaustive, inform taxpayers of the type and nature of connections the Board of Equalization and the Franchise Tax Board find informative when determining residency:

  • The location of all of the taxpayer’s residential real property, and the approximate sizes and values of each of the residences.
  • The state wherein the taxpayer’s spouse and children reside.
  • The state wherein the taxpayer’s children attend school.
  • The state wherein the taxpayer claims the homeowner’s property tax exemption on a residence.
  • The taxpayer’s telephone records (i.e., the origination point of taxpayer’s telephone calls).
  • The number of days the taxpayer spends in California versus the number of days the
  • taxpayer spends in other states, and the general purpose of such days (i.e., vacation, business, etc.).
  • The location where the taxpayer files his tax returns, both federal and state, and the state of residence claimed by the taxpayer on such returns.
  • The location of the taxpayer’s bank and savings accounts.
  • The origination point of the taxpayer’s checking account transactions and credit card transactions.
  • The state wherein the taxpayer maintains memberships in social, religious, and professional organizations.
  • The state wherein the taxpayer registers his automobiles.
  • The state wherein the taxpayer maintains a driver’s license.
  • The state wherein the taxpayer maintains voter registration and the taxpayer’s voting participation history.
  • The state wherein the taxpayer obtains professional services, such as doctors, dentists, accountants, and attorneys.
  • The state wherein the taxpayer is employed.
  • The state wherein the taxpayer maintains or owns business interests.
  • The state wherein the taxpayer holds a professional license or licenses.
  • The state wherein the taxpayer owns investment real property.
  • The indications in affidavits from various individuals discussing the taxpayer’s residency.

It is particularly relevant to determine whether the taxpayer substantially severed his or her California connections upon departure and took steps to establish significant connections with the new place of abode. It is also necessary to determine whether the connections in California were maintained in readiness for his or her return. See the Appeal of Richard L. and Kathleen K. Hardman, supra.

Whether a person was in California for other than a temporary or transitory purpose must be determined by examining all of the facts. 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. See the Appeal of Tyrus R. Cobb, 1959-SBE-014, March 26, 1959.

Note that 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. See the Appeal of Richard L. and Kathleen K. Hardman, supra.

SEASONAL VISITORS, TOURISTS, AND GUESTS

CCR Section 17014(b) provides that an individual whose presence in California does not
exceed an aggregate of six months within a taxable year and who is domiciled without the state and maintains a permanent abode at the place of his domicile will be considered as being in this state for temporary or transitory purposes. However, he or she must not engage in any activity or conduct within this state other than that of a seasonal visitor, tourist, or guest.

The following connections with California will not, by themselves, cause a seasonal visitor, tourist, or guest to lose his or her status as such:

  • Owning or maintaining a home.
  • Opening a bank account for paying personal expenses.
  • Having membership in local social clubs.

Example 1

Bill and Sue lived and worked in North Dakota for 20 years until their retirement in the
summer of 2005. Beginning the winter of 2005, Bill and Sue spend four months each year in California. They spend the remaining eight months in North Dakota. While in North Dakota, they live in a home they have owned since 1995. They hold valid North Dakota driver’s licenses, are registered to vote in North Dakota, and maintain North Dakota bank accounts.

Bill and Sue also own a California home, which they use while in California. They also
opened a California checking account for their personal expenses and are members of a
California country club. While in California, they do not engage in any California business
activities.

Determination:

Bill and Sue are considered to be seasonal visitors, in California for temporary or transitory purposes. Therefore, they are nonresidents of California.

PRESUMPTION OF RESIDENCE

R&TC Section 17016 states: “Every individual who spends in the aggregate more than nine months of the taxable year within this state shall be presumed to be a resident. The presumption may be overcome by satisfactory evidence that the individual is in the state for a temporary or transitory purpose.”

Note that R&TC Section 17016 merely provides a presumption of residence. The
presumption can be overcome. For example, in the Appeal of Edgar Montillion Woolley,
1951-SBE-005, July 19, 1951, the Board of Equalization ruled that the taxpayer was in
California for a temporary or transitory purpose even though he was in California for more that nine months during the year. The decision was based on the fact that during his stay in California, Mr. Woolley lived in a hotel on a weekly basis and his departure was delayed because of illness and a studio strike.

CCR Section 17016 provides that presence within California for less than nine months does not constitute a presumption of nonresidency. On the contrary, a person may be a California resident even though not in this state during any portion of the year.

DEFINITION OF DOMICILE

Domicile is an integral part of the definition of resident. An individual domiciled in California and absent from the state for a temporary or transitory purpose is considered to be a California resident. An individual’s domicile also determines whether income received by a husband or wife is community or separate income.

CCR Regulations Section 17014(c) defines the term “domicile” as the place where an
individual has his or her true, fixed, permanent home and principal establishment. It is the place to which, whenever absent, he or she has the intention of returning. It is the place in which a person has voluntarily fixed his or her habitation and the habitation of his or her family. It is the place where a person has the present intention of making a permanent home, until some unexpected event shall occur to induce him or her to adopt another. It is not a place where a person is living for a mere special or limited purpose.

As stated by the California Court of Appeal, “domicile” is the one location with which, for
legal purposes, a person is considered to have the most settled and permanent connection.

It is the place where they intend to remain and to which, whenever they are absent, they have the intention of returning. See Whittell v. Franchise Tax Board, 231 Cal.App.2d 278 (1964).

An individual 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 California domiciliary leaving the state retains his or her California domicile as long as he or she has the definite intention of returning here. This is true regardless of the length or reason of the absence. An individual domiciled in California who leaves the state loses his or her California domicile at the moment he or she abandons any intention of returning to California and locates elsewhere with the intention of remaining there indefinitely.

The concept of domicile involves not only physical presence in a particular place, but also the intention to make that place one’s home. See the Appeal of Anthony J. and Ann S. D’Eustachio, 1985-SBE-040, May 8, 1985.

In order to change one’s domicile, a person must actually move to a new residence and
intend to remain there permanently or indefinitely. See Noble v. Franchise Tax Board 118 Cal.App. 4th 560 (2004).

The burden of proving the acquisition of a new domicile is on the person asserting that
domicile has been changed. See the Appeal of Frank J. Milos, 1984-SBE-042, February 28, 1984.

Adam, who is domiciled in Illinois, comes to California on business, but intends to return to Illinois as soon as his business in California is completed. He maintains a California home while in California and stays in California for 11 months.

Determination:

Adam retains his Illinois domicile. His stay in California is for a limited purpose.

Example 2

Mark moved from Alaska to California in October 2000, to begin a permanent job. He sold his home in Alaska and purchased a home in California. He moved all his personal
belongings to California, opened a California bank account, and obtained a California driver’s license. He has no intention of returning to Alaska.

Determination:

Mark became a California domiciliary in October 2000, when he moved to California. He
came to California with the intention to remain here indefinitely with no fixed intention of
returning to Alaska.

Example 3

Allen and his wife Ellen were both born and raised in California. Upon graduation from a
California college, Allen obtained employment in Los Angeles, CA. In 1999, Allen was sent to France for a one-year assignment. Ellen remained at their home in California with their two children. While in France, Allen rented an apartment and joined a local soccer league. He returned to California in 2000.

Determination:

Allen remained a California domiciliary during his absence. He did not sever his ties with
California and the ties established with France did not show that he intended to remain
there permanently.

DOMICILE V RESIDENCY

Domicile and residency are not synonymous. California distinguishes them as two separate concepts. For income tax purposes, residency determines what income is taxable to California. Domicile is an important component of residency and determines whether income is split between spouses.

Domicile is the place where an individual has his or her true, fixed, permanent home and
principal establishment (CCR Regulations Section 17014(c)). 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. See Whittell v. Franchise Tax Board, 231 Cal.App.2d 278 (1964).
An individual can have only one domicile at any given time, but can have several
residences. See Whittell v. Franchise Tax Board, supra.

The key distinction between domicile and residency is intent. A 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. (Appeal of Robert J. and Kyung Y. Olsen, 1908-SBE-134, October 28, 1980.) A determination of residence cannot be based solely upon the declared intention of the parties, but must have its basis in objective facts. (Appeal of Nathan H. and Julia M. Juran, 1968-SBE-004, January 8, 1968.) In determining residency, voluntary physical presence is a factor of greater significance than the mental intent or outward formalities of ties to another state. See Whittell v. Franchise Tax Board, supra.

Frequently, a person’s domicile and residence are the same physical location. See Whittell v. Franchise Tax Board supra. However, a person’s domicile and residence may not be the same. See the Appeal of Warren L. and Marlys Christianson, 1972-SBE-022, July 31, 1972.

An individual may be a resident although not domiciled in this state and, conversely, may be domiciled in this state without being a resident. (CCR Section 17014 and the Appeal of Terance and Brenda Harrison, 1985-SBE-059, June 25, 1985.)

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At Mike Habib, EA, a SoCal tax firm, we understand that being notified that your tax return is being challenged by the IRS or the FTB can be scary. When you are faced with an audit, or a collection action, by the IRS, or the FTB, you may not know where to turn or what to do. We have the skill set and representation expertise to deal with the IRS and the FTB on your behalf. We understand their rules and are experienced in negotiating the lowest possible tax debt settlement allowed by law.

Tax Relief Services offered:

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California – Corporate Income Tax: FTB Has Begun Contacting Return Nonfilers for 2007

The California Franchise Tax Board (FTB) has begun contacting more than 35,000 companies that did business in California in 2007, but failed to file a California corporation franchise or income tax return for that year. Businesses contacted by the FTB will have 30 days to file their delinquent tax return or show why one is not due. If no such action is taken, the FTB will issue a tax assessment that may include penalties and fees.

The FTB annually reviews more than 5 million income records from government agencies and financial institutions, and matches them against tax records filed to determine whether some businesses have yet to file. Businesses receiving notices from the FTB may obtain more information by calling the FTB at 866-204-7902. Callers should be prepared to provide their 15-digit notice number.

News Release, California Franchise Tax Board, September 14, 2009
If you owe back taxes to the CA FTB, or the IRS, please call Mike Habib, EA to know your options to resolve your tax matters. You can reach Mike Habib at 1-877-78-TAXES [1-877-788-2937].

California – Multiple Taxes: Wildfire Relief Extended to Taxpayers in Three More Counties

For taxes and fees they each administer, the California State Board of Equalization (BOE) and the Employment Development Department (EDD) have extended relief to qualifying taxpayers and fee payers who have been affected by wildfires in the counties of Los Angeles, Monterey, and Placer. Both agencies have recently extended similar relief for those affected by wildfires in Santa Cruz and Yuba counties, as reported.

EDD Relief

Employers in Yuba County who were directly affected by the damage resulting from the fire may request up to a 60-day extension of time from EDD to file their state payroll reports and/or deposit state payroll taxes without penalty or interest. Written request for extension must be received within 60 days from the original delinquent date of the payment or return to file or pay. Related information is available on the EDD Web site at http://www.edd.ca.gov/Payroll_Taxes/.

BOE Relief

For taxes and fees it administers, the BOE is giving extensions for filing, audits, billing, notices, and assessments, and relief from subsequent penalties to any individual or business that, as a result of the recent wildfires in Los Angeles, Monterey, and Placer counties, cannot meet tax filing and payment deadlines. A state of emergency was declared in each of the counties due to the wildfires.

Affected taxpayers and fee payers can get special relief in the form of a one-month extension of time to file or pay taxes and fees. Deadlines also are extended for filings that were delayed by the disruption of the normal activities of the U.S. Postal Service or other private mail and freight companies.

Relief from interest and penalties may be provided for those persons who are unable to file their returns or pay taxes and fees in a timely manner. Business owners and fee payers also can replace copies of BOE tax records at no charge.

Relief from the interstate user tax under the International Fuel Tax Agreement applies only to California tax. Also, any claim in either county for property tax relief must be filed with the county assessor’s office.

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Clarification of the “Cash for Clunkers” Tax Rules

September 2009 – The federal “Cash for Clunkers” program has generated a lot of interest among consumers and we have received many inquires about the tax implications of this popular program. As a result, we are clarifying state tax rules for people who trade in their used vehicle under the “Cash for Clunkers” program.

The “Cash for Clunkers” program, Federal law, H.R. 2346, The Consumer Assistance to Recycle and Save Program, allows qualifying consumers to receive a $3,500 or $4,500 voucher from the federal government when they trade in qualifying old vehicles and purchase or lease a new one. This federal law provides the value of the voucher received by the consumer is not considered as gross income of the purchaser for purposes of the federal income tax.

California law does not conform to H.R. 2346. For state income tax purposes trade-ins are treated as normal sales or exchanges, and in some cases the value of the voucher received may be subject to state tax. That is to say, the person subtracts his or her basis (generally the cost of the used vehicle) of the car traded-in from the amount realized (the applicable voucher amount, plus any other salvage value the dealer offers as part of the exchange) to determine whether a gain or loss was realized on the disposition of the used vehicle. For example, if the family car was originally purchased for $19,500 and traded in for a $4,500 discount under the “Cash for Clunkers” program, there is no taxable gain. The $15,000 difference is a personal loss under tax law and may not be deducted for tax purposes. However, if the family car was purchased for $3,000 and it was traded in for a $3,500 discount, the $500 difference needs to be reported as income for state tax purposes.

Different tax rules apply for vehicles used in a person’s trade or business. For example, when a person trades in the old company truck for a new company truck, under the “Cash for Clunkers” program, the gain or loss could be postponed for tax purposes under the “like-kind exchange” rules.

Any scrap value received by the consumer for the trade-ins is also used in computing the gain or loss from these sales or exchange transactions.

We will provide instructions about how to report taxable gains for the “Cash for Clunkers” program in its tax return instructions when the 2009 tax forms are published later this year. Taxpayers and practitioners can check FTB’s website at ftb.ca.gov for tax forms and other helpful information.

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