California Residents Flee Taxes, Taxing Authorities Give Chase

July 17, 2006

This morning’s Wall Street Journal reports California’s tax authorities are sending a clear message to residents moving to lower-tax Nevada—you can run, but you can’t hide.

As wealthy residents continue fleeing the state’s notorious tax burden, California’s Franchise Tax Board is tightening the screws on expatriates with audits to assure ex-residents are paying taxes on all income and capital gains earned while inside the state’s borders. From the article:

California software entrepreneur David Duffield arrived in this Lake Tahoe resort a decade ago with big plans. He spent $50 million on a lakeshore estate and started a Nevada property-development business. What’s more, by taking a big chunk of his wealth to Nevada, Mr. Duffield expected to save millions on taxes.

Then California accused him of shuffling assets to evade taxes, sticking him with a $19 million tax bill — one of the state’s largest ever. The 65-year-old billionaire founder of PeopleSoft Inc. denies the charge and vows further appeals.

Scores of wealthy Californians “go Nevadan” each year, relocating to a neighboring state famous for its low taxes. Among the transplants are Pierre Omidyar, founder of eBay Inc., and Andreas Bechtolsheim, a co-founder of Sun Microsystems Corp. But as Mr. Duffield’s experience shows, what looks appealing on paper can prove far messier in real life.

Nevada transplants account for more than 20% of all tax disputes made public earlier this year by California tax authorities. Complex cases can take a decade or longer to sort out.

Brady Anderson, a native Californian who played center field for the Baltimore Orioles in the early 1990s, was dunned with a $322,410 California tax bill after claiming Nevada residency in 1993 and ’94. The tax authorities “looked at where Brady was, every single day, and they subpoenaed credit-card receipts,” recalled his accountant, Joseph Geier.

Mr. Anderson settled earlier this year, paying much but not all of the contested amount, Mr. Geier said. The defense focused on 1994, a year when he bought a sizable Nevada home. He didn’t fare as well for 1993, when his residency claim was based on a rented Nevada apartment used in the off-season.

“If you come here from California, you can expect to be audited,” said Peggy Taylor, a former PeopleSoft executive who prevailed in her own tax dispute after leaving the San Francisco area and moving to Incline Village in the late ’90s. “Audits are winnable, but it’s grueling.”

Click here to read the full piece. For more on California’s state-local tax burden, business tax climate and more, be sure to visit the California section of our website.

(Link via TaxProf Blog.)

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