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

• Author: Williams, Leonard W.
• Position: California tax

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...