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The California Court of Appeal held that California income tax applies to the entire amount of trust income that is derived from California sources, even though a trust is managed in part by a non-resident trustee. The taxpayer had requested a refund on income taxes paid on capital gains, claiming that the income was incorrectly sourced to California. The taxpayer argued that under Section 17743 of the Revenue and Taxation Code, the gain should be sourced to California based on the proportion of trustees that were resident in California, without regard to the source of the income. Taxpayer also argued that Section 17041, subdivision (i) of the Revenue and Taxation Code, which provides that gross income of nonresident taxpayers are subject to tax if such income is derived from sources within California, did not apply to trusts because the term “resident” did not include trusts.
The California Court of Appeal disagreed with the taxpayer, holding that the Revenue and Taxation Code requires treating individuals and trusts similarly. The Court cited to section 17743 of the Revenue and Taxation Code, which incorporates the trust provisions of the federal Internal Revenue Code, and Section 17041, subdivision (e) of the Revenue and Taxation Code, which mandates that a trust’s taxable income must be calculated in the same way as if the trust were an individual. Further, the Court cited to the condition of Section 17743 of the Revenue and Taxation Code that it only apply where taxability “depends on the residence of the fiduciary.” The Court concluded that, according to Section 17041, subdivision (i), the taxability of gross income only depends on the residence of the taxpayer or fiduciary when the income is derived from a source outside of California. This case represents one of several recent state tax cases, many with different outcomes, ruling on the sourcing of income from trusts.
Steur v. Franchise Tax Board, No. A154692 (Cal. Ct. App. June 29, 2010).
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