Nonresident Shareholders Intangible Income Ruled Subject to California Tax

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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About the Author(s)
Bryan M. Holm, CPA, MST, Manager, State and Local Tax Bryan Holm is a Manager in the Cherry Hill, NJ office of HBK CPA's and Consultants. He joined the firm in 2021 as a member of the HBK State and Local Tax (SALT) team. His background includes work with top 10 accounting firms. Prior to specializing in state and local taxation, Bryan worked in tax resolution for the Internal Revenue Service. He has served clients in a variety of industries including private equity firms, manufacturing, the restaurant industry, retail, construction, and the banking industry. Bryan has provided a variety of state and local tax services to clients, including; Audit Defense, Refund Reviews, Nexus Reviews, Voluntary Disclosure Agreements, Income/Franchise Tax Compliance, M&A Due Diligence, and SALT Consulting and Advisory Services. Bryan has also been a speaker and writer on state and local tax matters.
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