Heller

Michael and Sylvia Heller appeal from the trial court’s grant of summary judgment in favor of the Franchise Tax Board. (Code Civ. Proc., § 437c.) Although this appeal involves the tax liability of the Hellers as individuals, its resolution turns on whether the accumulated adjustments account (AAA) of a California S corporation is increased for interest income earned on United States Treasury Bills, and this is the only issue presented on appeal. We reverse.

Factual and Procedural Background

The Franchise Tax Board (the Board) audited the Hellers and Tecon Corporation, a California S corporation, for the tax years 1987, 1988, and 1989. During those years, the Hellers were shareholders of Tecon, and owned more than 98 percent of Tecon’s stock.

During the years in question, Tecon owned United States Treasury Bills, from which it earned interest of $119,555 in 1987, $162,251 in 1988, and $262,308 in 1989. Tecon increased its AAA by the amount of this treasury bill interest income during each of the three years. In the course of its audit, the Board determined this increase to the AAA was improper.

The resulting adjustments increased the amount of Tecon’s taxable…