You don’t have to be a tax lawyer to know that the way to avoid becoming a resident of California is to spend less than six months in the state during any calendar year. Right? Well, not exactly. The “six-month presumption,” as it’s called, which is mentioned in one form or another in almost every Google search result of California residency rules, isn’t all that it’s cracked up to be. That’s not to say the amount of time spent in California doesn’t play an important role in determining legal residency. Just the opposite. It’s critical. But the real rule is more complex and has to be understood in the context of how California determines residency. It isn’t by counting days. In fact, relying on the six-month figure as a somehow magical way to avoid California residency can get a taxpayer in tax trouble.
What Is The Six-Month Presumption?
The six-month presumption is established by regulation. You would think it says something simple like: if you spend no more than six months in California during any calendar year, you’re not a resident. That’s the popular online version. And frankly it’s the version many auditors for the Franchise Tax Board (California’s tax authority) seem to have in mind. But that’s not the legal rule.
Rather, the rule has various qualifiers: if a taxpayer spends an aggregate of six months or less in California during the year, and is domiciled in another state, and has a permanent abode in the domicile state, and does nothing while in California other than what a tourist, visitor, or guest would do, then there is a rebuttable presumption of nonresidency. What would a tourist, visitor or guest do? According to the regulations, nothing much more than owning a vacation home, having a local bank account for local personal expenses, and belonging to a “social club” (read “a country club”).
These qualifiers call for some parsing.
Parsing The Presumption
First, the six months of the presumption is an aggregate figure. It’s not six months in a row. If you spend a total of more than 183 days in California during any calendar year in any order whatsoever, you don’t get the presumption. The six-month presumption is really a 183-day presumption.
Second, you have to be a domiciliary of another state and have a permanent home there (owned or rented). Domicile differs from residency as a legal concept. For residency law purposes, domicile is defined by case law and the regulations as “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.” A significant body of case law has grown up around determining domicile. But for simplistic practical purposes, it’s where you are registered to vote, perform jury duty and have a driver’s license. If you aren’t a domiciliary of another state (that is, you don’t treat it as your permanent home even while away from it) and if you don’t have an abode there, you don’t get the six-month presumption. Period. It doesn’t matter if you only spend six days, rather than six months, in California.
Third, to get the presumption you must have only the kinds of limited contacts a tourist or visitor might have. The regulations envision this as restricted to owning a vacation home, having a local bank account, and joining a country club. Needless to say, the regulations are somewhat passé. Nobody needs a local bank account anymore due to interstate banking. And a country club is not something most out-of-state millennials with software companies seem keen on joining. But the point is, if a taxpayer has any other contacts (investment property, a foreign LLC registered with the Secretary of State, temporary employment, even a car registered here), the presumption evaporates.
Finally, the presumption is rebuttable. This means even if you meet all the requirements, the FTB retains the right to offer evidence proving you are a California resident. The evidence may consist in showing any facts or circumstances that indicate your stay in California is not temporary or transitory. Essentially, anything goes.
As the above suggests, it isn’t easy getting the presumption. And even if you do, the FTB can attempt to rebut it. And beyond that, the benefit of the presumption is further eroded by a special rule the FTB almost always invokes: namely, the determinations of taxing authorities are presumptively correct. In short, if an FTB auditor concludes a taxpayer is a resident, the taxpayer bears the burden of proving otherwise on appeal, even if he qualified for the six-month presumption. This conflict between presumptions has never been reconciled by case law. As a practical matter, however, the FTB not surprisingly usually insists on the presumption of correctness. “The FTB’s tax assessments are presumptively correct” is usually the first sentence in the argument of the FTB’s brief in response to a taxpayer’s residency appeal.
The Real Six-Month Rule: Purpose, Not Time; Plurality, Not Majority
With this in mind, a nonresident might wonder whether the six-month presumption is worth anything. The answer: yes and no. The real rule is not how much time you spend in California, but the purpose for spending time here. If you are a domiciliary of another state, and if you come to California for a temporary or transitory purpose, it doesn’t matter how much time you spend here – you are not a California resident as a matter of law. The example I like to give: a rock star from Seattle who rents a beach house in Malibu for the sole purpose of partying for a whole year straight is not a legal resident of California. In contrast, if that rock star moves to Malibu permanently to be part of the LA music scene and immediately goes on a world tour, he’s a California resident even if he spent only one day at the mansion. The purpose of the time spent in California is determinative, not the amount of time.
Now of course, quantity has a quality all its own. If you spend a great deal of time in California (say, more than half a year), the FTB might legitimately argue that your stay here isn’t temporary, any claims about intent notwithstanding. For residency purposes, it’s not what a taxpayer says he intends, it’s what his actions show he intends, that determine whether the purpose of a stay in California is temporary or not. Most of us aren’t singers in a rock ‘n’ roll band. Where we spend most of the year is usually a pretty good indicator of our state of residence. In fact, there is a rebuttable nine-month presumption against taxpayers spending time in California, but I won’t get into that here – like the six-month presumption, it rarely plays a determinative role in legal residency cases.
Furthermore, FTB auditors seem as enamored with the six-month figure as the internet is. If a nonresident spends less than six months in California, it will likely show up in the auditor’s report, if only in an attempt to rebut a presumption that probably doesn’t apply in the first place.
But to use a more realistic example to demonstrate the importance of purpose: if a software engineer comes to California under a contract to perform independent contractor services, which terminates in seven months (the time contemplated necessary to complete the project), the engineer would not be deemed a California resident, as long as the taxpayer’s other conduct is consistent with nonresidency, such as staying in short-term living accommodations, retaining a dwelling in his home state, avoiding representations of residency (like registering to vote), and so forth. The purpose for spending the seven months in California is temporary (and relatively short-term), even if it is a majority of the tax year.
To flip this around, note further that, short of having a contract for a time-limited project in California, the applicable rule is not whether you spend less than the majority of your time in California, but whether you spend more time in your home state than in California, however long that time is. It’s not California vs. the world, but California vs. your home state. The difference is crucial, and it is a common mistake in bad residency tax planning. Thus, if a nonresident’s time profile is five months in California, four months in his home state, and the balance of the year traveling elsewhere, the FTB will use this as an argument for residency. The concept is, the place where you spend most of your time (not necessarily the majority of the year) is more likely to be your home than not. It’s a plurality rule, not a majority rule. Like almost all California residency rules, this plurality rule isn’t dispositive. As I indicated, a time-limited contract would be an exception, and I’ve often successfully argued in residency audits that special circumstances, such as a job that involves a great deal of travel, override the rule. But nonresidents (and their tax advisers) ignore the plurality rule in making residency plans at their peril. The best way to prevail in the category comparing time spent in California and your home state is always to spend more time in your home state than in California. Period.
There is nothing magical about six calendar months in residency law. In fact, very few taxpayers ever qualify for the six-month presumption due to its many legal requirements. Worse, the six-month figure can lead taxpayers into a false sense of security (and an audit), since the purpose of a stay in California has more weight in determining legal residency than any particular number of months spent here. That said, regardless of the legalities of the presumption, it makes sense for seasonal visitors, vacationers, temporary workers, and other nonresidents who visit California, to limit their time here as much as possible. Especially at the audit level (where there are no lawyers on the FTB side), the six-month figure looms large. But don’t let the six-month tail wag the residency dog. The real issue nonresidents face is to make sure a stay in California not only looks like it’s for temporary purposes, but in fact is for temporary purposes, as a matter of law.
Manes Law is the premier law firm in California residency tax planning, consultations, audits and appeals. We have over two decades of success assisting Californians who want to change their legal residency, businesses moving their situs to other states, and nonresidents purchasing vacation homes or investment property in California. Learn more at our website: www.calresidencytaxattorney.com.