CA tax on gains

[ombskid]

Client has a single employee profit sharing plan. The plan invested in some houses in CA, and sold them at a profit.

Is that subject to UBT?

The escrow firm in the transaction made a mistake on the 1099 for the gain, and it triggered an audit. Now CA wants to tax them on the gain, and is not accepting that the gain is in a qualified plan.

Anybody ever heard of this?

[david rigby]

Isn't this a matter for how state tax law is structured? (ie, not related to federal tax law)

[Mike Preston]

Ask the auditor what state tax form would be used to report the gain. It will probably point to a form that includes reference to a Federal form. Use the instructions to both form to prove to the auditor that there is nothing taxable.

[ombskid]

I thought any gain inside a qualified plan trust was exempt from any state tax.

[ombskid]

Mike that sounds like a good idea. Instead of me trying to find a way to tell them it isn't taxable, it forces them to show it.. Thanks

[My 2 cents]

What is the auditor's position on capital gains realized when the plan sells stock worth much more than it cost? Surely when one enjoys a capital gain like that in a qualified plan trust it should be obvious that the state would be entitled to no tax revenue at all! Why should gains on real estate investments be treated any differently?

[Peter Gulia]

Mike Preston's practical suggestion for a way to illustrate a non-imposition of, or exclusion from, a State's tax is smart.

[mbozek]

CA has its own UBIT. In addition a tax exempt organization is supposed to register with the CA franchise board.

One possibility is that the plan filed the forms that were applicable to a taxable corp which is why the auditor is looking for taxes. All of the above is conjecture since I have no knowledge of the facts.

Isnt it the job of the CPA or tax preparer to deal with the CA Franchise tax board? Client needs to retain a tax advisor to figure out what was done wrong.