The California Court of Appeals ruled on June 13 that nonresident shareholders of flow-through S corporations are subject to California tax on their pro-rata share of intangible income on the sale of shares in a subsidiary. The ruling is another example of states’ initiatives to collect taxes from out-of-state businesses conducting operations in their states.
The court ruled on a particular entity, or goodwill, that had acquired a business located in California. The nonresident shareholders argued that the income from the entity should be treated as intangible income sourced to the state of their domiciles under personal income tax law. But the court ruled that even if the personal income tax law applied, the income would still be taxable by California because the goodwill had acquired a location there, that the management and disposition of the intangible property was an integral part of the goodwill’s operation, and that the intangible income of a multi-state operation must be apportioned.
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