San Francisco Tax Preparation / CPA: CA – Gain from sale of goodwill apportioned at S corporation level

Filed in CCH NEWS FEED by on January 30, 2020

Shareholders had to apportion their share of gain from an S corporation’s sale of goodwill at the S corporation level. The sale resulted in long-term capital gain reported as apportionable business income. The shareholders asserted that the gain arose from the sale of intangible property that lacked a California source. Thus, they sourced the income to their state of domicile outside of California and treated the income as not subject to California income tax. But, a regulation provided explicit instructions for determining the shareholders’ pro rata share of a multistate unitary S corporation’s income from California sources. Specifically, the shareholders had to apportion business income at the S corporation level, not the shareholder level. A more general regulation excluded income from the sale of intangibles from California source income. That regulation might be appropriate for sourcing nonbusiness income received by an S corporation shareholder. However, following the more general rules over the more explicit rules in this case would have resulted in an incorrect application of the law. The 2009 Metropoulos Family Trust; The Evan D. Metropoulos 2009 Trust, California Office of Tax Appeals, Nos. 18010012, 18010013, 2019–OTA–385P, November 7, 2019

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