Paine

The Franchise Tax Board (Board) appeals a judgment requiring it to refund the sum of $111,115 plus interest to Thomas H. Paine and Teresa A. Norton (plaintiffs) for the 1997, 1998, 1999, and 2000 income years. The refund is for taxes paid on amounts plaintiffs received after they retired or withdrew from Hewitt Associates, a business consulting partnership, and became California residents. The court granted the refund based upon its application of former Revenue and Taxation Code section 17554. We shall find that the court incorrectly applied former section 17554, and reverse the judgment.

FACTS

Thomas H. Paine was a partner in Hewitt Associates for 31 years. He retired on December 31, 1989. Teresa A. Norton was a partner in Hewitt Associates for approximately eight years before she withdrew from the partnership on December 31, 1985. Under the terms of the Hewitt Associates partnership agreement, both plaintiffs earned vested deferred compensation paid over a 10-year period beginning on retirement or withdrawal from the partnership.

The deferred compensation payable to Paine was based upon (1) partnership earnings in years prior to retirement, (2) his capital account…