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Valentino v. Franchise Tax Bd.

Court of Appeal of California, Fourth Appellate District, Division One

March 23, 2001, Decided

No. D036034.


 [*1286]  [**305]   WORK, Acting P. J. 

The sole issue presented by this appeal is whether California source income of an S corporation, passed through to a nonresident, is subject to California tax. Gene and Maureen Valentino (the Valentinos) appeal a judgment in favor of the State of California Franchise Tax Board (the Board) entered after the trial court denied the Valentinos' motion for summary judgment on their complaint for refund of taxes and, on stipulated facts, found in favor of the Board. The Valentinos contend that the income the Board seeks to tax was derived from the ownership of stock, and under Revenue and Taxation Code 1 section 17952, the income must be classified as an "intangible" which is taxed by the state of residence of [***2]  the shareholder (Florida), rather than the state in which the corporation conducts business (California). The Board contends the Legislature intended to tax subchapter S corporations and their shareholders in the same manner as partnerships are taxed and thus it properly demanded payment of taxes from the Valentinos on income derived from their ownership of Cellular 2000 Telephone Company, Inc. (Cellular 2000) stock. As we shall explain, we conclude California source income of an S corporation, passed through to a nonresident shareholder, is subject to California tax. Accordingly, we affirm the judgment.


The Valentinos are married and reside in Pensacola, Florida. They at all relevant times owned stock in Cellular 2000, a Delaware corporation qualified to do business in California. Cellular 2000 did business in California and was taxed as an S corporation for federal and California [***3]  tax purposes. It filed a form 100S, California S corporation Franchise or Income Tax Return for income years ending December 31, 1993, December 31, 1994, and December 31, 1995. The income earned by it was derived from California sources for the income years relevant to this matter. Cellular 2000 paid the California franchise tax of 2.5 percent on its net income derived from sources within the state for income year ending December 31, 1993. It further paid a California franchise tax of 1.5 percent on its net income derived from sources within the state for income years ending December 31, 1994, and December 31, 1995. (§ 23802, subd. (b)(1).)

 [**306]  The Valentinos filed form 540NR, California Nonresident or Part-Year Resident Income Tax Return, for taxable years 1993 and 1994 with the Board. They filed form 540NR for taxable year 1995, but did not report California income or identify any California tax liability. Later, they filed  [*1287]  amended returns with the Board to eliminate all income from Cellular 2000 and to request a refund of all tax paid for taxable years 1993 and 1994. The Board issued the refunds as requested and started an audit to determine if the refunds [***4]  for taxable years 1993 and 1994 were proper. Upon completion of the audit, the Board issued notices of proposed assessment for taxable years 1993 and 1994, as well as for taxable year 1995. The Valentinos protested the proposed assessments, which were later affirmed by the Board. Notices of action affirming the assessments were issued on March 30, 1998. They paid the tax and interest amounts for tax years 1993, 1994 and 1995 as referenced in the notices of action on May 27. Later, they were billed and they paid additional interest due for the three tax years in the amount of $ 708.78. The total amounts of payments they made to the Board were $ 7,247.47 for 1993; $ 16,207.93 for 1994; $ 25,236.75 for 1995; and the additional payment for all three years of $ 708.78.

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87 Cal. App. 4th 1284 *; 105 Cal. Rptr. 2d 304 **; 2001 Cal. App. LEXIS 223 ***; 2001 Cal. Daily Op. Service 2403; 2001 Daily Journal DAR 2983

GENE VALENTINO et al., Plaintiffs and Appellants, v. FRANCHISE TAX BOARD, Defendant and Respondent.

Prior History:   [***1]  APPEAL from a judgment of the Superior Court of San Diego County, Super. Ct. No. GIC739989. Ronald S. Prager, Judge.

Disposition: Affirmed.


shareholders, nonresident, partnership, stock, taxed, Taxation, sourcing, pro rata share, refund, corporation income, source of income, intangible, do business, purposes, taxable year, realized, entity, corporate income, gross income, conducting business, tax law, corporate-income-producing, pass-through, regulation, dividends, reporting, mobilia, notice

Business & Corporate Compliance, Administration, Special Return Provisions, S Corporations, Business & Corporate Law, Corporate Finance, Franchise Tax, Annual Report Filings, Tax Law, S Corporations, Shareholders, Pro Rata Income Taxation, Federal Income Tax Computation, General Overview, Valuation, Business Interests, Federal Taxpayer Groups, Election of S Status, Effects of S Election, Tax Liability Determination, C Corporations, Shareholder Taxation, State & Local Taxes, Income Taxes, Income & Loss Computations, Personal Property Taxes, Intangible Personal Property, Corporations & Unincorporated Associations, Conditions & Restrictions, Federal Estate & Gift Taxes, Nonresident Aliens, Imposition of Tax, Foreign Base Company Income, Foreign Personal Holding Companies, Foreign Estates, Partnerships & Trusts, International Taxes, Foreign Persons in US, US Real Property Investments, Nonresident & Resident Aliens, Nonresident Alien Status & Taxation, General Partnerships, Federal Tax Administration & Procedures, Partnership Proceedings, Limited Liability Companies & Partnerships, Allocations of Basis, Special Entities, Partnerships, Management Duties & Liabilities, Rights of Partners