Valentino

The sole issue presented by this appeal is whether California source income of an S corporation, passed through to a nonresident, is subject to California tax. Gene and Maureen Valentino (the Valentinos) appeal a judgment in favor of the State of California Franchise Tax Board (the Board) entered after the trial court denied the Valentinos’ motion for summary judgment on their complaint for refund of taxes and, on stipulated facts, found in favor of the Board. The Valentinos contend that the income the Board seeks to tax was derived from the ownership of stock, and under Revenue and Taxation Code section 17952, the income must be classified as an “intangible” which is taxed by the state of residence of the shareholder (Florida), rather than the state in which the corporation conducts business (California). The Board contends the Legislature intended to tax subchapter S corporations and their shareholders in the same manner as partnerships are taxed and thus it properly demanded payment of taxes from the Valentinos on income derived from their ownership of Cellular 2000 Telephone Company, Inc. (Cellular 2000) stock. As we shall explain, we conclude California source income…