In the September 2013 issue of Tax News, the Franchise Tax Board (“FTB”) addressed gain sourcing on the sale of partnership interests.
As a rule, individual taxpayers generally source the gain to their state of residence (R&TC Section 17952). However, if the partnership interest has acquired a business situs in California, the taxpayer may have to source the gain on the sale to California. A corporate taxpayer, on the other hand, may have to pay California taxes on a gain from the sale of a partnership interest even if the taxpayer is a passive investor and the partnership interest was a nonbusiness asset.
R&TC Section 25125(d) generally requires the nonbusiness gain or loss from the sale of a partnership interest to be allocated based on the ratio of the partnership’s tangible property in state to everywhere at the time of sale. This rule will apply unless more than 50 percent of the value of the partnership’s assets consists of intangibles. If the partnership meets the more-than-50-percent test, the gain from the sale will need to be allocated based on the partnership’s sales factor in the year preceding the sale.
The takeaway is that when determining how to report the sale of a partnership interest by an S corporation and how to report the flow-through to shareholders, you may need to source the sale differently for corporation tax purposes than for shareholders.
The views express in this article are those of the author and do not necessarily reflect the position or policy of Berkeley Research Group, LLC.
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