California Code of Regulations › Title 18 - Public Revenues › Division 3 - Franchise Tax Board › Chapter 3.5 - Bank and Corporation Tax › Subchapter 17 - Allocation of Income › Article 2.5 - Uniform Division of Income for Tax Purposes Act › Section 25137-1 - Apportionment and Allocation of Partnership Income

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a) In General. When a taxpayer has an
					 interest in a partnership as defined in Section
					 17008,
					 Revenue and Taxation Code, the division of its distributive share of
					 partnership items shall be determined in accordance with Chapter 10 of Part 10
					 of Division 2 of the Revenue and Taxation Code. The determination of the
					 portion of such distributive share (constituting business and nonbusiness
					 income) which has its source in this state or which is includible in the
					 taxpayer's business income subject to apportionment, shall be made in
					 accordance with these regulations provided that the taxpayer, or the
					 partnership, or both, have income from sources within and without this state.
					 The taxpayer in computing net income for its taxable year shall include its
					 distributive share of partnership items referred to above for any partnership
					 year ending within or with the taxpayer's taxable year. The same principle
					 applies when a taxpayer has an interest in a partnership that itself owns an
					 interest, directly or indirectly, in one or more other partnerships.
The first step is to determine which portion of the
						taxpayer's income and its distributive share of the partnership items
						constitute "business income" and "nonbusiness income" under Section
						25120,
						Revenue and Taxation Code, and the regulations thereunder. The various items of
						nonbusiness income are then directly allocated to specific states pursuant to
						the provision of Section
						25124
						to
						25127,
						Revenue and Taxation Code. The taxpayer's distributive share of partnership
						business income is apportioned by the formula set forth in subsections (f) or
						(g), whichever is applicable. Even in the partnership's business and the
						taxpayer's business are not unitary, such that subsection (g) applies, the
						distributive share of income allocated to the taxpayer is from a separate trade
						or business of the taxpayer, not nonbusiness income of the taxpayer. The
						determination of whether an item of income is apportionable business income or
						allocable nonbusiness income is made at the partnership level based on the
						trade or business of the partnership. Revenue and Taxation Code section
						23040
						is not applicable. The sum of (1) the items of nonbusiness income directly
						allocated to this state, plus (2) the amount of business income attributed to
						this state is the portion of the taxpayer's entire net income which is subject
						to tax.
Income arising from transactions and activity in the
						regular course of the partnership's trade or business constitutes business
						income. Thus, a corporate-partner's distributive share of partnership business
						income constitutes business income to the corporate-partner, but the
						determination of whether the partnership's activities and the activities of the
						corporate-partner constitutes a single trade or business or more than one trade
						or business turns on the facts in each case. If the partnership's activities
						and the taxpayer's activities constitute a unitary business under established
						standards, disregarding ownership requirements, the taxpayer's share of the
						partnership's trade or business shall be combined with the taxpayer's trade or
						business as constituting a single trade or business.
EXAMPLE 1:
Corporation A's distributive share of income in
						partnership P is 20%. Corporation A manufactures toys which are sold in the
						seven western states by partnership P. Corporation A's business income for the
						year was $1,000,000 and partnership P's business income for the same year was
						$800,000. The business income of Corporation A is $1,160,000 ($1,000,000 plus
						20% of $800,000).
EXAMPLE 2:
Corporation A's distributive share of income in
						partnership P is 90%. Partnership P manufactures toys of which approximately
						30% are sold by Corporation A in the seven western states. The remainder is
						sold to outsiders by partnership P. In addition, Corporation A also sells other
						lines of toys not manufactured by partnership P. Corporation A handles all
						financing, management, accounting, advertising, and purchasing functions for
						partnership P as well as for itself. Corporation A incurred a loss of $500,000
						for the year but partnership P's income was $1,000,000. The business income of
						Corporation A is $400,000 (90% of $1,000,000 = $900,000 less the loss of
						$500,000).
When the activities of the partnership and the taxpayer
						do not constitute a unitary business under established standards, disregarding
						ownership requirements, the taxpayer's share of the partnership's trade or
						business shall be treated as a separate trade or business of the taxpayer. In
						such a case the taxpayer is engaged in two trades or businesses.
EXAMPLE:
Corporation A's distributive share of income in
						partnership P is 20%. Corporation A manufactures and sells toys in the seven
						western states. Partnership P operates farms within and without this state.
						Corporation A's income for the year is $1,000,000 and partnership P's income is
						$800,000 for the same year. Corporation A is engaged in two trades or
						businesses, and will be required to apportion its income of $1,000,000 from its
						own operations to this state on the basis of a three factor apportionment
						formula. Partnership P would attribute part of its business income of $800,000
						to this state on the basis of its own three factor apportionment formula.
						Accordingly, Corporation A would report 20% of the partnership income
						apportioned to this state plus a portion of its income from its toy
						manufacturing business.
(b)
					 Distributive Items of Nonbusiness Income. Partnership income from interest,
					 dividends, rents, royalties or capital gains is nonbusiness income when such
					 income does not constitute business income. The taxpayer's distributive share
					 of such nonbusiness income shall be reported in the same manner as other
					 nonbusiness income derived from other activities of the taxpayer (see Sections
					 25123 to
					 25127, inclusive).
(c) Business and Nonbusiness Income;
					 Application of Definitions. The classification of income by the labels
					 customarily given such as interest, dividends, rents, royalties, capital gains,
					 etc., is of no aid in determining whether partnership income is business or
					 nonbusiness income. The gain or loss recognized on the sale of property, for
					 example, may be business income or nonbusiness income depending upon the
					 relation to the partnership's trade or business. Rules and examples for
					 determining whether these types of income constitute business or nonbusiness
					 income are set forth in Regulation 25120(c) and are applicable to partnerships
					 under this regulation.
(d)
					 Proration of Deductions. In most cases an allowable deduction of a partnership
					 will be applicable only to the business income arising from a particular trade
					 or business or to a particular item of nonbusiness income. In some cases an
					 allowable deduction may be applicable to the business incomes of more than one
					 trade or business and/or to several items of nonbusiness income. In such cases
					 the deduction shall be prorated among such trades or businesses and such items
					 of nonbusiness income in a manner which fairly distributes the deduction among
					 the classes of income to which it is applicable.
(e) Distributive Items of Expense. Any items
					 of expense allocated to the taxpayer in accordance with Chapter 10 of Part 10
					 of Division 2 of the Revenue and Taxation Code, shall be taken into account in
					 computing the taxpayer's business and nonbusiness income, to the extent
					 allowable under the law and in accordance with these regulations as to
					 determining their applicability to the taxpayer's business or nonbusiness
					 income.
(f) Apportionment of
					 Business Income--Single Trade or Business. If the partnership's activities and
					 the taxpayer's activities constitute a unitary business under established
					 standards, disregarding ownership requirements, the business income of such
					 single trade or business attributable to this state shall be determined by an
					 apportionment formula, pursuant to either Section
					 25128, Section
					 25128.5 or Section
					 25128.7,
					 Revenue and Taxation Code, whichever is applicable, of the taxpayer and its
					 share of the partnership's factors for any partnership taxable year ending
					 within or with the taxpayer's taxable year. The apportionment factors related
					 to the taxpayer's interest in the partnership shall be determined as follows:
(1) Property Factor. In general the numerator
					 and denominator of the property factor shall be determined as set forth in
					 Regulations
					 25129
					 to 25131, inclusive, and
					 25137(b).
					 However, the following special rules shall apply:
(A) A portion of the partnership's real and
					 tangible personal property, both owned or rented and used during the taxable
					 year in the regular course of such trade or business, to the extent of the
					 taxpayer's interest in the partnership, shall be included in the denominator of
					 the taxpayer's property factor. The value of such property located in this
					 state shall also be included in the numerator of the property factor.
(B) The value of property which is rented or
					 leased by the taxpayer to the partnership or vice versa shall, with respect to
					 the taxpayer, be excluded from the property factor of the partnership or
					 eliminated to the extent of the taxpayer's interest in the partnership,
					 whatever the case may be, in order to avoid duplication.
EXAMPLE 1:
Corporation A's interest in partnership P is 20%.
						Corporation A's distributive share of partnership P's income is included in
						business income of Corporation A to be apportioned by formula. Corporation A
						owns a building (original cost of $100,000) which is rented to partnership P
						for $12,000 per year. Corporation A must include the original cost of $100,000
						for the building in its property factor. Therefore, no portion of the value of
						the rented property will be reflected in the property factor of Corporation
						A.
EXAMPLE 2:
Same facts as in Example 1 except partnership P owns the
						building and rents it to Corporation A. Corporation A will include $20,000 (20%
						of $100,000) in its property factor because of its interest in partnership P.
						In addition, Corporation A will take into account $9,600 ($12,000 less 20%
						thereof) of rental expense into its property factor in order to give weight in
						the property factor to the rented building used in Corporation A's operation.
						Thus, the value of the building to be used in the property factor of
						Corporation A is $96,800 ($20,000 plus 8 x $9,600).