California has amended regulations to clarify that the allocation and apportionment rules for partnership income also apply to partnership interests held indirectly by taxpayers. Previously, the rules applied only to partnership interests held directly by taxpayers.
Corporate Interests in Partnerships
The amendments clarify that the rules for computing net income apply to:
- partnership interests held directly by taxpayers; and
- lower-tier partnership interests.
Additionally, whether the distributive share of income from a nonunitary partnership is apportionable business income or allocable nonbusiness income depends on the partnership’s activities. It does not depend on the operation of California law on the sourcing of income from intangible property.
Further, the regulation now specifies that, when determining apportionment factors, a partnership interest is determined by the taxpayer’s “interest in the partnership”. The “interest in the partnership” is determined based on the taxpayer’s interest in profits of the partnership.
Sales between a unitary partnership and other members of the taxpayer’s combined reporting group should not be reflected in the combined reporting group’s sales factor.
Individual Interests in Partnerships
The amendments clarify the sourcing of partnership business income. If a partnership and the activity of a nonresident partner are part of one unitary business, then the apportionment rules for business income of a unitary partnership and corporate partner apply. The apportionment of the partnership business income takes place at the partner level for the unitary partner or partners.
Regs. 25137-1 and 17951-4, California Franchise Tax Board, effective January 1, 2019