Noble v. Franchise Tax Board (118 Cal. App. 4th 560, 2004)

Opinion

MOSK, J.

INTRODUCTION

Plaintiffs and appellants Homer E. Noble (Homer) and Stephanie F. Noble (Stephanie), his spouse, filed an action against defendant and respondent Franchise Tax Board (FTB) seeking a declaration that appellants were not residents of California for tax purposes as of and after March 1, 1994, and particularly March 7 and March 25, 1994. Those were dates on which certain securities were sold resulting in capital gains. Thus, appellants claimed they should not be taxed on these transactions as if they had been residents of California. The FTB counters that appellants were residents of California until after March of 1994 and thus were taxable on all income from all sources during that period of residency. We affirm the judgment of the trial court and hold that notwithstanding appellants’ intention to move to Colorado in the future, the physical facts demonstrate that they had not relinquished their California residency as of March 1994 and were therefore subject to the California tax on the securities transactions that occurred during that month.

BACKGROUND

The parties stipulated to certain facts and added additional facts by way of testimony and exhibits. On March 7, 1994 and March 25, 1994, Homer sold securities resulting in a net capital gain, and the transactions were reported on a 1994 Form 540NR (“California Nonresident or Part Year Resident Income Tax Return”) as not being subject to the California income tax because of a change of residency on March 1, 1994. The appellants contended that all the securities sold were the sole and separate property of Homer due to a 1976 antenuptial agreement that the appellants could not produce.

The appellants lived in Colorado until 1988 when they both became California residents and domiciliaries. Homer continued to own property and obtain property in Colorado, and appellants used Colorado attorneys, accountants, and securities brokers and maintained bank accounts in Colorado. During 1993, they filed California income tax returns that reflected their California residency.

In 1992, appellants considered permanently returning to Colorado and began looking for residential property there. In 1993, Homer contracted to purchase a 130.92-acre parcel in Colorado that included a residence, and the escrow closed on February 25, 1994. The parties stipulated that during 1993 it was the “intention of the Nobles[:] (a) to change their domicile and residence and that of their minor son David from California to Colorado, (b) to complete the move to Colorado as soon as possible after the closing of escrow” on the Colorado property. Sometime after a visit to that property in April 1994, however, appellants decided not to reside there. That Colorado property or a portion of it had been reported as a rental property for purposes of depreciation beginning on February 26, 1994. On May 14, 1994, Stephanie contracted to buy a house in Colorado, and escrow closed on June 1994. Appellants ultimately inhabited that residence. On July 15, 1994, they moved part of their household goods to Colorado and the remainder on November 30, 1994. They began paying maintenance and utility expenses for this Colorado residence in July 1994.

In January 1994, appellants had removed their son from a California school, with Stephanie providing home schooling at appellants’ principal residence in California. In late February 1994, appellants began to have brokers show their California residence for the purpose of selling it. They listed it for sale on June 6, 1994 and sold it on November 24, 1994. They continued to pay maintenance and utility expenses on this California residence through November 1994. Appellants assert Homer was in Colorado for a substantial period in January 1994. In February, Homer was in Colorado for nine days.

According to the stipulation between the parties, the following occurred or existed after March 1, 1994:

“12. (a) The Rancho Santa Fe property [in California] remained the property of the Nobles and was used by them as a residence along with their furniture and furnishings. . . .

“(b) Homer maintained a lease on a California business office in Encinitas, California through July 15, 1994. The Nobles contend that the reason was to maintain the office until his secretary could find other employment.

“(c) Homer held a membership allowing him and Stephanie access to the Turf Club at Del Mar Race Track, Del Mar, California, during the annual race meet, which operated there during July-September 1994.

“(d) The Nobles maintained a safe deposit box at Rancho Santa Fe Bank in Rancho Santa Fe, California, the last renewal occurring July 8, 1993.

“(e) Annual California automobile registrations were maintained by the Nobles on three automobiles in California.

“(f) California drivers’ licenses were maintained by the Nobles.

“(g) The Nobles maintained their primary personal checking account in California at Rancho Santa Fe Bank .... The statements were sent to the Rancho Santa Fe property address.

“(h) The Nobles maintained a post office box in Rancho Santa Fe, California.

“(i) Two credit cards were used with invoices being sent to the Nobles’ California addresses. The number of California payees exceeded the number of Colorado payees.

“(j) Four personal and business checking accounts were maintained in California, with bank statements being sent to the Nobles’ California addresses. Checks written on such accounts substantially exceeded checks written on the pre-existing Colorado checking accounts, and substantially more checks were made to California payees than to Colorado payees.

“(k) The mailing address for statements from the pre-existing Colorado brokerage account was Homer’s California business address.

“(1) Cellular phones were used by the Nobles with invoices being sent to the Nobles’ California addresses.

“(m) The Nobles paid for medical and dental care rendered in California, with checks totaling $1,441 issued by the Nobles relative thereto, after March 1, 1994, representing 10 visits to California physicians. Colorado medical expenses weren’t incurred until August 1994.

“(n) The Nobles were not in Colorado during March 1994, but were in Colorado extensively during April 1994.”

Homer testified he maintained his major personal bank account in the Scripps Bank in La Jolla and an office in Encinitas until after March of 1994. In addition, Homer wrote a- check on July 15, 1994, for the rental of a moving truck and noted on it, “Moving to Denver.” Appellants opened a checking account in Colorado in August 1994, obtained Colorado drivers’ licenses in September to October 1994, and registered to vote in Colorado in September to October 1994. On their 1994 tax returns, appellants depreciated the value of horses they had in California.

The parties agreed that appellants’ business and personal contacts were “substantially greater” in California than in Colorado through July 15, 1994. “By the end of 1994, the Nobles’ move to Colorado had been completed, with virtually all of the foregoing contacts with California severed, and they have not returned to California as residents.”

Appellants filed a 1994 Colorado income tax return “indicating that the ‘Taxpayer’ was a ‘Part-time resident’ [of Colorado] from April 15, 1994 to December 31, 1994 and that the ‘Spouse’ was a resident of Colorado from March 1, 1994 to December 31, 1994. ... On the first page of such return, Homer is designated as ‘Yourself’ and Stephanie is designated as ‘Spouse.’ FID [Appellants] also filed a Federal income tax return for 1994, as well as a non-resident returns with the states of Arizona, Kentucky, Louisiana, New Mexico, New York, North Dakota, and Oklahoma. Each of these returns listed the Nobles’ address [in Colorado], The Oklahoma return, which reported no tax due, indicated under ‘Residency status’ that the Nobles’ were nonresidents and that their ‘State of Residence’ was California.”

The FTB, after an audit, concluded that the appellants were California residents until July 15, 1994. The FTB’s position was that appellants’ contacts with California before March 1, 1994 “continued to substantially exist with California at and subsequent” to the time they contend they became residents of Colorado, and that they had not physically moved from their residence in California to Colorado as of March 1, 1994.

Thus, the FTB concluded “that Mr. and Mrs. Noble were domiciled in California, absent for temporary or transitory purposes, and therefore residents of California through July 15, 1994. As such, they are taxable on all income from all sources earned during the period January 1, 1994 through July 15, 1994, as determined by California statutes. [][] Mr. and Mrs. Noble became domiciled in and residents of Colorado on July 16, 1994. Their absences from Colorado after July 15, 1994 were for temporary or transitory purposes. As such, only income from California sources earned after July 15, 1994 would be taxed by California as determined by California statutes.”

The State Board of Equalization sustained the position of the FTB. Appellants filed their declaratory relief action. They sought a declaration that for California resident tax purposes they were solely Colorado residents from March 1, 1994 to December 31, 1994; alternatively, that Homer was solely a Colorado resident for that period; alternatively, that Homer or both appellants were solely Colorado residents from March 7, 1994 through December 31, 1994; or alternatively, that Homer or both appellants were solely Colorado residents from May 25, 1994 through December 31, 1994. The matter was tried by the trial court without a jury on the basis of the stipulation, further testimony, and exhibits. The trial court ruled in favor of the FTB. Appellants appealed.

DISCUSSION

A. Applicable Provisions

The California income tax is imposed on the entire taxable income of residents of the state. (Rev. & Tax. Code, § 17041.) At the time in question, California taxed the income of part-year residents derived from sources within the state, and taxed their income from whatever sources derived during the period of residence in the state. (Former § 17041, amended by Stats. 2001, ch. 920, § 2.5, eff. Oct. 14, 2001; former § 17303, repealed by Stats. 2001, ch. 920, § 10, eff. Oct. 14, 2001.) Under section 17014, subdivision (a), a “Resident” includes: “(1) Every individual who is in this state for other than a temporary or transitory purpose. [