Excess Distribution S-Corp

[Tax Prep by Deb]

I have an S-corp that has distributions in excess of shareholder's basis.  I understand that it is considered captial gains, and so far so goo.

The wrinkle is the corporation is located in California but the shareholder's reside in Oklahoma.  Drake is adjusting it out of California and I am just concerned that this is not correct.  Any help would be greatly appreciated.

[BulldogTom]

I think you are overthinking it Deb.   It is just a Cap Gain.   If the TP sold shares of his stock in his S Corp for a Gain, would you put it on his CA NR?   I don't think so, so I think Drake is doing this correctly.

Just thinking out loud....I did not research this (and I am not doing any research for a couple weeks, I am taking a break).

Tom
Longview, TX

[Tax Prep by Deb]

That is the same conclusion I am coming up with, I've tried researching, but I'm getting no where!  I value your opinion.  Thanks so much for responding!

[mircpa]

@Tax Prep by Deb

I believe this shareholder who is resident of OK should file CA 540 NR with its share of CA K1 income & capital gain. Include CA 540 NR California adjustments.

[Abby Normal]

8 minutes ago, mircpa said:

@Tax Prep by Deb

I believe this shareholder who is resident of OK should file CA 540 NR with its share of CA K1 income & capital gain. Include CA 540 NR California adjustments.

But, in this case, it's not CA capital gain. If the cap gain was on the K1 as being incurred by the S corp, then yes, it would be taxable in CA. But this is the shareholder's personal capital gain.

It's hard to imagine the K1 not showing some income, loss or deductions for CA.

[mircpa]

If this business is based in CA then it CA source K1 income & capital gain regardless of where shareholder lives.

[BulldogTom]

13 hours ago, mircpa said:

If this business is based in CA then it CA source K1 income & capital gain regardless of where shareholder lives.

I respectfully disagree.   If I buy stock in a company that only does business in CA, and after a couple years I sell that stock for a gain, and I am not a resident of CA when I sell the stock, I put that gain on my home state return.   I don't think the stock is held in CA, I think it is held in OK by the owner of the stock and the gain goes to the OK return.  

Tom
Longview, TX

[mircpa]

@BulldogTom

I believe it is CA based business S corporation, when 1120S gets generated it also generates CA K1 which would have K1 income or loss and capital gain which is sourced to CA. S corporations in CA files 100S & K1 100S

 

[Lee B]

The capital gain may or may not be reflected on the K 1 depending on the origin of the shareholders basis.

[BulldogTom]

@mircpa   You are probably correct.   This is what I found. (I was not going to do anymore research for the next 2 weeks, and here I go looking up CA R&T code sections).   The attachment to the business sited in CA seems to change the general rule that Capital Gains from the sale of stock are not taxable to non-residents.   Since an S corp distribution in excess of basis is a return of capital, the Cap Gain would be a CA sourced item of income.  Bolding below is mine.

Tom
Longview, CA

Cal. Code Regs. Tit. 18, § 17952 - * Income from Intangible Personal Property

State Regulations

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(a) Income of nonresidents from rentals or royalties for the use of, or for the privilege of using in this State, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property is taxable, if such intangible property has a business situs in this State within the meaning of (c) below.

(b) Income of nonresidents from intangible personal property such as shares of stock in corporations, bonds, notes, bank deposits and other indebtedness is taxable as income from sources within this State only if the property has a situs for taxation in this State, except that if a nonresident buys or sells stock, bonds, and other such property in California, or places orders with brokers in California to buy or sell such property, so regularly, systematically and continuously as to constitute doing business in this State, the profit or gain derived from such activity is taxable as income from a business carried on here, irrespective of the situs of the property for taxation.

(c) Intangible personal property has a business situs in this State if it is employed as capital in this State or the possession and control of the property has been localized in connection with a business, trade or profession in this State so that its substantial use and value attach to and become an asset of the business, trade or profession in this State. For example, if a nonresident pledges stocks, bonds or other intangible personal property in California as security for the payment of indebtedness, taxes, etc., incurred in connection with a business in this State, the property has a business situs here. Again, if a nonresident maintains a branch office here and a bank account on which the agent in charge of the branch office may draw for the payment of expenses in connection with the activities in this State, the bank account has a business situs here.

If intangible personal property of a nonresident has acquired a business situs here, the entire income from the property including gains from the sale thereof, regardless of where the sale is consummated, is income from sources within this State, taxable to the nonresident.