California Residency Audits: What Ajith Teaches About Domicile and Temporary Absences
California Residency Can Continue While You Are Living Somewhere Else
California residency for income tax purposes is not determined simply by counting where a taxpayer spends the most days or by asking where the taxpayer says home is. California law distinguishes between domicile and residency and then applies a facts and circumstances analysis to determine whether an absence from California, or a presence in California, is temporary or transitory.
Appeal of Ajith, 2024 OTA 521, illustrates that distinction. A California domiciliary attended college in Michigan, spent most of 2018 outside California, and worked for approximately three months in Washington. The California Office of Tax Appeals nevertheless concluded that he remained domiciled and resident in California for the entire year.
The decision is nonprecedential, so it does not establish binding law for other taxpayers. It is still useful because it shows how the Office of Tax Appeals applied California's established residency framework to a taxpayer whose physical presence, education, employment, addresses, filings, and longer term connections pointed in different directions.
Key Takeaways From Ajith
- California domicile and California residency are related but distinct concepts.
- A California domicile generally continues until the taxpayer both establishes an actual residence elsewhere and intends to remain there permanently or indefinitely.
- Living outside California for school, temporary employment, or another limited purpose does not automatically change domicile or residency.
- California residency is determined from objective facts and the taxpayer's overall connections, not merely statements of intent.
- A driver's license, tax return address, housing arrangement, employment, family connections, physical presence, and other records can all be relevant, but no single item is automatically controlling.
- A California resident is generally subject to California income tax on taxable income regardless of source, while a nonresident is generally taxed by California only on California source income.
- The taxpayer bears the burden of overcoming an FTB residency determination in an appeal.
What Happened in Appeal of Ajith?
The taxpayer was domiciled and resident in California before beginning his studies at the University of Michigan in 2015. He attended the university in person through 2019 and paid out of state tuition.
During 2018, the year at issue, he lived in Michigan from approximately mid January through mid May, worked in Washington from approximately mid May through mid August, and then returned to Michigan through approximately mid December.
His Michigan housing had the characteristics of student housing. He moved within Ann Arbor approximately once a year and, during 2018, shared a residence near campus with four other individuals under an approximately one year lease.
Several other facts continued to connect him with California. He retained his California driver's license, did not obtain a Michigan driver's license, did not file Michigan income tax returns, used his father's California residential address on his California returns, and had his 2018 Form 1098 T sent to that California address. He also returned to his family home in California during winter breaks.
The taxpayer filed a California resident income tax return for 2018 but excluded wages from his Washington summer employment when calculating California taxable income. The Franchise Tax Board later determined that, because he was a California resident, those wages were taxable by California.
FTB proposed additional tax of $5,924 plus interest. The taxpayer paid the assessment, filed a claim for refund, and ultimately appealed FTB's denial of a refund totaling $6,791.87.
California First Asks Where the Taxpayer Is Domiciled
Revenue and Taxation Code Section 17014 establishes two alternative ways an individual can be a California resident. An individual can be a resident because the individual is physically present in California for other than a temporary or transitory purpose. An individual domiciled in California can also remain a resident while outside California when the absence is only temporary or transitory.
Domicile is more permanent than residence. A person can have multiple residences, but only one domicile at a time. California's residency regulation generally describes domicile as the place of the individual's true, fixed, and permanent home and principal establishment, to which the individual intends to return when absent.
A domicile already established generally continues until another domicile is acquired. Changing domicile therefore requires more than an intention to leave California at some future date.
The precedential decisions in Appeal of Mazer, 2020 OTA 263P, and Appeal of Beckwith, 2022 OTA 332P, apply the principle that changing domicile requires both an actual physical residence in the new location and an intention to remain there permanently or indefinitely.
Why Ajith Did Not Establish a Michigan Domicile
The taxpayer clearly had substantial physical presence in Michigan. OTA found that he physically resided there for approximately eight months during 2018.
Physical presence alone, however, was not sufficient to establish a new domicile. OTA concluded that the taxpayer had not demonstrated an intention to remain in Michigan permanently or indefinitely.
OTA emphasized several facts:
- He did not obtain a Michigan driver's license.
- He retained his California driver's license.
- He did not file Michigan resident income tax returns while attending the university.
- His Michigan housing arrangements were temporary student arrangements.
- His father used a California address when cosigning the Michigan lease.
- The taxpayer used that same California address on his California tax returns.
- The University of Michigan sent his Form 1098 T to the California address.
- He returned to California after graduation and filed California resident income tax returns for 2019 through 2021.
Those facts supported OTA's conclusion that Michigan was where the taxpayer attended school rather than a place where he had established a new permanent or indefinite home.
Importantly, this does not mean that attending school outside California can never accompany a change in domicile. The issue is whether the complete factual record shows both an actual residence elsewhere and an intention to make that location the taxpayer's permanent or indefinite home.
Domicile Was Only the First Part of the Analysis
After determining that the taxpayer remained domiciled in California, OTA still had to determine whether his absence from California was for a temporary or transitory purpose.
Under California Code of Regulations, Title 18, Section 17014, that determination depends on the circumstances of the particular taxpayer. Where meaningful connections exist with multiple states, California examines which state represents the taxpayer's closest connection during the period at issue.
OTA relied on the framework developed through Appeal of Bragg and later precedential decisions. The relevant facts can generally be organized into three broad categories:
Registrations and Filings
This can include driver's licenses, vehicle registrations, voter registration, addresses used on tax returns, homeowner exemptions, and other government records.
Personal and Professional Associations
This can include employment, business interests, school attendance, financial relationships, professional services, family relationships, social connections, and other day to day associations.
Physical Presence and Property
This can include where the taxpayer actually spends time, where homes are owned or leased, where personal belongings are maintained, and the nature and permanence of the taxpayer's living arrangements.
These are not mechanical tests. The factors are nonexclusive, and their relative importance depends on the taxpayer's circumstances.
Why the Temporary Absence Issue Mattered
OTA concluded that California remained the taxpayer's closest connection and that his absences for college and temporary employment were temporary or transitory.
The taxpayer's principal reason for living in Michigan was attending the University of Michigan. His summer employment repeatedly took him away from Michigan, including California jobs in 2016 and 2017 and the Washington position in 2018. He also returned to his California family home during winter breaks.
OTA contrasted those facts with an earlier student residency decision involving a taxpayer who moved family and business connections to another state, obtained resident student status there, registered to vote there, and returned to California only occasionally.
The comparison illustrates why the word student is not itself determinative. The analysis turns on what the taxpayer actually did and whether the taxpayer established lasting connections to the new state that were stronger than the continuing California connections.
Why the Washington Wages Were Taxable by California
California residents are generally taxed on their entire taxable income regardless of where the income is earned. Nonresidents, by contrast, are generally subject to California tax only on income derived from California sources.
Once OTA concluded that the taxpayer remained a California resident during 2018, the location of the Washington summer job did not make the wages exempt from California income tax merely because the services were performed outside California.
This distinction is important for employees, executives, business owners, remote workers, and others who temporarily work outside California. The sourcing rules for a nonresident and the worldwide income rules applicable to a California resident are fundamentally different analyses.
Changing a Driver's License Is Evidence, Not a Residency Election
One of the most important lessons from California residency cases is that administrative changes should not be treated as a checklist that automatically creates nonresident status.
A new driver's license, voter registration, mailing address, bank account, or tax return filing can support a taxpayer's position, but California examines the complete factual picture.
Conversely, retaining California registrations or addresses can be evidence of continuing California connections, particularly when those records are consistent with where the taxpayer actually lives, works, maintains family relationships, owns property, and conducts day to day activities.
The better approach is consistency. If a taxpayer has genuinely changed domicile and residency, the taxpayer's housing, physical presence, employment, family circumstances, government records, tax filings, financial activity, and other objective evidence should generally tell the same factual story.
What Ajith Does Not Establish
Appeal of Ajith is a nonprecedential Office of Tax Appeals opinion. It should therefore not be treated as controlling authority for another taxpayer's residency dispute.
It also does not establish that every California student attending school elsewhere remains a California resident, that every temporary work assignment preserves California residency, or that any single registration or filing determines the outcome.
California residency cases are highly factual. Precedential authorities such as Mazer and Beckwith, the California residency statutes and regulations, and applicable court decisions provide the controlling framework. Ajith is useful as an example of how that framework can be applied to a particular set of facts.
Residency Planning Before Leaving California
Residency planning should begin with the taxpayer's actual facts rather than a list of administrative steps.
A meaningful analysis should consider:
- Where the taxpayer actually intends to establish a permanent or indefinite home
- When the taxpayer physically establishes that new residence
- The location and use of California and out of state homes
- The location of a spouse, children, and other significant family relationships
- Employment, business ownership, and management responsibilities
- Where the taxpayer spends time before and after the claimed residency change
- Driver's licenses, vehicle registrations, voter registrations, and government filings
- Addresses used on federal and state tax returns and financial records
- Professional, financial, social, and community relationships
- The location of significant personal property
- Whether California source income continues after the taxpayer becomes a nonresident
The objective is not to manufacture evidence of a move. It is to document a genuine change in the taxpayer's life and ensure that the tax filings accurately reflect that change.
For broader planning involving residency, state income taxes, business income, investments, and income earned in multiple states, see my Proactive Tax Planning services.
California Residency and California Source Income Are Separate Questions
Successfully becoming a California nonresident does not necessarily end all California income tax obligations.
A nonresident can remain subject to California tax on California source income. Depending on the facts, that can include income from services performed in California, California businesses, California partnerships or other pass through entities, and gain connected with California real property.
This distinction is particularly important when someone moves before selling California real estate or continues to own California investments or business interests after departure.
Real estate investors can review additional California sourcing and disposition issues through my Real Estate Tax Planning for Investors resource page.
Documentation Matters in a California Residency Dispute
In Ajith, OTA reiterated that an FTB residency determination is presumed correct in an appeal and that unsupported statements are not enough to overcome it.
That makes contemporaneous documentation important. Tax returns, leases, closing records, calendars, travel information, employment records, driver's licenses, registrations, financial records, and other objective evidence may become relevant when FTB challenges the date or substance of a claimed residency change.
Documentation is most useful when it was created as part of the taxpayer's normal activities and consistently supports what actually occurred. Reconstructing several years of residency facts after an FTB notice arrives is generally more difficult than preserving the relevant records as the move occurs.
Need to Evaluate a California Residency or Multistate Tax Issue?
I assist taxpayers with California residency analysis, multistate tax planning, California source income issues, and review of FTB notices involving residency and income sourcing.
The analysis begins with the taxpayer's actual timeline, physical presence, domicile, business and personal connections, tax filings, and the income items California is seeking to tax.
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