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LEGAL RULING NO. 075

CALIFORNIA FRANCHISE TAX BOARD
Legal Ruling No. 075

June 27, 1958

GROSS INCOME: INCOME RECEIVED BY A CORPORATE BENEFICIARY OF A TRUST SUBJECT TO THE PERSONAL INCOME TAX LAW

Trust income reported by a corporate beneficiary must include U. S. bond interest and the full amount of capital gains or losses realized by the trust, even though such amounts are not taxable to the trust under the provisions of the Personal Income Tax Law.

Taxpayer, a corporation, operates a private cemetery. It is also the grantor and sole beneficiary of a trust set up to insure perpetual care of the cemetery property. The trust is administered by the trust department of a bank, and the investment income is paid over to the taxpayer. The trustee files a personal income tax return. In computing the trust net income, it excludes exempt interest of U. S. bonds and includes capital gains and losses only to the extent of the percentages set up by Section 18151. Taxpayer on its franchise tax returns only shows that amount which is shown on the fiduciary return to be distributable to the beneficiary. Thus, although taxpayer is subject to the Bank and Corporation Tax Law, it takes advantage of Personal Income Tax Law provisions regarding the exclusion of U. S. bond interest and percentage treatment of capital gains. Advice is requested whether taxpayer must report the U. S. bond interest and the full amount of capital gains and losses.

Interest on tax-exempt securities is includible in the measure of the franchise tax and there is no provision in the Bank and Corporation Tax Law for including capital gains and losses at other than their full amount. Therefore, it is only by reference to the Personal Income Tax Law that taxpayer can avoid inclusion of U. S. bond interest and the full amount of capital gains and losses in the measure of its franchise tax. It is conceded that the fiduciary made a correct return, giving proper treatment to both U. S. bond interest and capital gains and losses. But the provisions of the law and regulations which instruct a beneficiary of a trust to report on his return the amount of trust income which the fiduciary deducted as paid, credited or currently distributable to the beneficiary are not applicable to taxpayer because, being a corporation, it is not subject to the provisions of the Personal Income Tax Law for any purpose.  Therefore, it cannot report its trust income by reference to that law.  Consequently, when a corporate beneficiary receives from a fiduciary amounts representing U. S. bond interest or capital gains, it receives income which is includible in the measure of the franchise tax and which must be reported on its franchise tax return.