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Posted by Katie on June 10, 2006, 4:19 pm
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Gil Faver wrote:
> A taxpayer lives in Illinois. She owns shares in a
> California corporation. Are dividends paid by the
> California corporations California source income? What if
> it is a Subchapter S corporation? What if the corporation's
> income is primarily rental income?
>
> Why are the dividends of Hewlett Packard Company not
> California source income? (or are they?)
Income from intangibles such as stocks, bonds, bank
accounts, CDs, etc. has its source at the residence of the
owner, unless the intangible has acquired a business situs
somewhere else. Dividends and capital gains from stocks
held as an investment by an individual are sourced at the
individual's residence. See Calif. Rev. & Tax. Code Sec.
17952.
So HP's dividends are not California source income to a
nonresident; they have their source at the residence of the
stockholder, which in your example is Illinois. Owning
stock in General Motors will not make you a Michigan
taxpayer.
An intangible has a business situs if it is an asset of a
trade or business carried on in a particular location. For
example, interest from the bank accounts or accounts
receivable of a business, e.g. a sole proprietorship or
flowthrough entity, has its source at the business location.
An S corporation is different, because the income passes
through to the stockholder as if it had been earned by him
or her. The source of that income is the place where the S
corporation carries on its business. If the corporation does
business in more than one state, the portion attributed to
each state is determined by allocation and apportionment.
If an S corporation pays a dividend, i.e., distributes
earnings and profits that accumulated at a time when the
corporation was a C corporation, the dividend has its source
at the stockholder's residence. Distributions of S
corporation income that has already been taxed at the
stockholder level are not dividends and are not taxable.
Katie in San Diego
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