TaxTalk highlights: real estate withholding, trusts and online sales taxes.

A recently widowed client sold her residence. Her lawyer had assigned the residence to the surviving spouse's trust, so she gave the real estate agent that trust's ID number. Since the trust functioned as a grantor trust, no tax return was filed under that ID number.

California had required a real estate withholding tax to be completed with the sale, and now the client was due a sizeable refund--except the withholding was credited to the trust, not to her.

A phone call to the Franchise Tax Board brought a solution to this dilemma: Two forms were required--Form 592, Nonresident Withholding Annual Return, and Form 592-B, Nonresident Withholding Tax Statement. The trust was listed as the withholding agent on the forms, and the client as the recipient on Form 592-B. With these forms, the FTB Withholding Division transferred the withholding tax to the client's account.

Installment Sale by Ex-resident

A question arose on the TaxTalk list-serve regarding California tax implications when a California resident is about to sell a California corporation's stock via an installment sale, but will be moving out of state "to avoid the California tax on the sale."

The bottom line: tread carefully. This tactic won't work much of the time.

See the article "Deferred Gain on the Installment Sale of Intangible Asset, AB 115's Unraveling Begins" (Spidell's CA Tax Letter, October 2003).

The article cites an FTB regulation which says, in effect, that a nonresident is taxed on gains from an intangible asset sold on an installment sale while a California resident, because the intangible was sourced to California when the taxpayer was a resident.

In the FTB's "Internal Procedures Manual--Residency and Sourcing Technical Manual," revised January 2004, Example 9, tells of a taxpayer who sold stock in 1999 in an installment sale, while a California resident. He became a Florida resident Feb. 1, 2002, and received installment proceeds May 1, 2002, comprised of principal (capital gain) and interest.

The holding was that the capital gain is taxable by California because he was a California resident when he sold the stock. The interest income is not taxable by California because he was a nonresident when he received it.

Offsets FTB Will Make Against Personal Income Tax Refunds

Several listserve participants said that some of their individual tax return clients were surprised that their tax refunds had been reduced by some outstanding amounts due to other agencies.

Here's a list (according to Spidell) of offsets that will be made:

* Child Support Delinquencies (Sec. 19721);

* Delinquent motor vehicle fees, penalties and parking tickets (Sec. 10878);

* Court-imposed fines, penalties or other court ordered amounts for cities and counties (Sec. 19280);

* Department of Industrial Relations delinquencies (Sec. 19290);

* Delinquent student loans (Sec. 19568);

* Federal income taxes; and

* EDD delinquencies, per an inter-agency agreement.

Community Property Agreement When Doing a Trust

This summary was posted on TaxTalk with the thought that it may be of interest to those who work with estates and trusts.

Where a husband and wife established a revocable trust into which the husband transferred all of his separate property, and the trust agreement provided that the property transferred to the trust is community property unless husband or wife as transferor identifies it as separate property, the husband did not transmute separate property to community property because the trust agreement provision was not an "express declaration" of the intent to create a transmutation within the meaning of Family Code Sec. 852 (In re Marriage of Starkman, filed 5/18/05, 2nd District, Div. 6. Cite as 2005 SOS 2352).

Trusts and Title Form Matters

Every year, many people have revocable living trusts drafted, but never properly funded. This has been a problem for years: A living trust has been formed, but the title forms have not been changed to the trust, leaving the trust virtually ineffective.

Several TaxTalk participants have commented that they've been able to develop this into a practice area, with great benefits to their clients.

Sales Taxes and Online Sales

A bookseller with California store locations accepted returns of, and made exchanges for, merchandise purchased from an online retailer owned by the same parent corporation, under a policy initiated by the online retailer.

The online operation was held to be engaged in business in California, and therefore liable to collect and remit California use tax on its sales to California residents (Borders Online, LLC v. State Board of Equalization--filed May 31, 2005, First District, Div. 4. Cite as 2005 SOS 2628).

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Thanks to the following TaxTalk CPAs and JDs for their participation: John Anderson, Jim Counts II, Michael P.Melland, Elaine Raitt, Harriet Reiter, Johanna Sweany Salt and H. Jacob Lager.

By Leonard W. Williams, CPA 

Leonard W. Williams, CPA is a Sunnyvale-based sole practitioner. A member of CalCPA's Committee on Taxation, the AICPA Tax Division and a former Peninsula Chapter president, you can reach him at [e-mail].