In the recent case of Appeal of Jerome James (February 26, 2013), the California State Board of Equalization (SBE) determined that an NBA player was a resident of California for the years at issue. This issue has taken on greater importance since California raised its maximum income tax rate to 13.3%, which is one of the highest in the nation. Many high-income people have moved to other states and others are considering doing so.
The Franchise Tax Board (FTB) is well aware that some taxpayers take minimal steps to make it look like they have become “resident” in another state, while in reality they still live in California a significant amount of the time. As a result, the FTB has a very active program to audit the tax returns of those who claim to have moved from California to another state. The FTB is especially interested in cases in which taxpayers “move” very shortly before receiving a substantial amount of income or gain.
Jerome James was born and grew up in Florida. He attended college in Florida and after college spent the fall of 1998 playing basketball in Europe for the Harlem Globetrotters. In December 1998 he was signed by the Sacramento Kings. He rented a home in Sacramento and moved in. The season did not start until February 1999 due to an owner lockout over stalled negotiations on a new collective bargaining agreement with the NBA Players Association.
After the end of the season in May, Mr. James returned to Florida for a month and then went to Utah for the NBA summer league. He sustained a knee injury in July and, following surgery, remained in California for rehabilitation, living in a residence hotel. He purchased a home in Sacramento in December 1999. Although the knee injury prevented him from playing during the 1999-2000 season, he remained in Sacramento for rehabilitation of his knee.
The Kings released him in October 2000 just prior to the start of the season, and he played the 2000 – 2001 season in Yugoslavia. In September 2001, he signed with the Seattle Supersonics. He rented a furnished home in Seattle while retaining ownership of his Sacramento home. His son and the boy’s mother lived with him in Seattle during that season. The boy’s mother then moved with the boy to Los Angeles, and Mr. James returned to Sacramento for the summer of 2002.
He played for Seattle again during the 2002-2003 season, living in a rented house and again returning to Sacramento after the season in the summer of 2003. In May 2003, he purchased a second, larger home in Sacramento and furnished it, while retaining his original Sacramento home.
He returned to Seattle for the 2003-2004 season, once again living in a rented house. By this time he had reconciled with the mother of his son. They now also had a second son, and they all lived together in Seattle during that season. Upon audit, the FTB determined that Mr. James was still a California resident for the 2003 tax year and until March 23, 2004, after which time he entered into a lease of a Seattle home with an option to purchase it and sold his two Sacramento residences.
In its analysis, the SBE first determined that Mr. James had become domiciled in California. A person’s domicile is his “permanent” home, the place to which he intends to return whenever he is temporarily absent. The significance of domicile here is that once a person becomes domiciled in California, he will remain a resident of California even when he is out of the state as long as his absence from the state is for a temporary or transitory purpose.
The SBE determined that Mr. James had become domiciled in California in August 1999 when he returned from Florida to rehabilitate his knee. He was living there with the woman who became the mother of his two sons, and he purchased a home in Sacramento before the end of the year.
The SBE then determined that his absences to play in Yugoslavia and subsequently in Seattle were temporary. He lived during the season in rented properties and returned to Sacramento each summer after the season ended. He filed California resident income tax returns through 2002 and registered several cars and a boat in California. He also used some California advisors. He had obtained a California driver’s license and even renewed it in February 2003 while he was playing in Seattle. His bank and other financial accounts remained in California. As it often does, the FTB had obtained the taxpayer’s credit card bills as a means of establishing his physical presence at various times. This analysis confirmed his spending the entire off-seasons in California.
Based on all the facts, the SBE concluded that Mr. James retained his California tax residency until March 2004, when he acquired an option to purchase a home in Seattle and then sold his California residences. All these cases involve a weighing of factors that demonstrate a closer connection to either California or the other state in which the taxpayer claims he was resident. In order to establish residency outside California, one should do everything one can to sever California ties, including selling home and business interests that are located in California, buying a home in one’s new location and attending to all the little details such as registering vehicles, updating estate planning documents to conform to the law of the new state, getting a driver’s license, registering to vote, obtaining local advisors, moving bank and financial accounts, joining social clubs in the new location and minimizing the number of days spent in California. It is also important to keep accurate records of one’s physical location each day and retain credit card and utility bills that will substantiate those records.