Court Opinion

ID: 4544976
Source: CourtListenerOpinion
Date Created: 2020-06-29 21:02:05.450014+00
Date Added: 2024-06-11T12:50:13.628795
License: Public Domain

Filed 6/29/20
                         CERTIFIED FOR PUBLICATION

        IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                           FIRST APPELLATE DISTRICT

                                 DIVISION THREE

 ALAN STEUER, as Trustee, etc.,
 et al.,
            Plaintiffs and Respondents,        A154691
 v.
 FRANCHISE TAX BOARD,                          (City & County of San Francisco
            Defendant and Appellant.           Super. Ct. No. CGC-16-556126)

        Franchise Tax Board (FTB) appeals from a summary judgment order
holding (1) a trust’s income, even if entirely derived from California sources,
is only taxable under residence-based taxation; and (2) the sole beneficiary of
the Paula Trust was a contingent beneficiary. The law is well settled that
individuals regardless of their residences are taxed on all income derived
from California sources. (Rev. & Tax. Code, § 17041, subd. (i)(1)(B).) 1 The
trial court found the Revenue and Taxation Code, however, only imposes
taxes on trust income that can be apportioned according to the number of
resident fiduciaries, rather than taxing all California source income.
(§ 17743.) Thus, Paula Trust was only required to pay tax on one-half of its

        1   Undesignated statutory references are to the Revenue and Taxation
Code.

                                          1
total California-source income, because out of its two trustees, only one was a
California resident.
      We reverse, in part, and affirm, in part. Based on our reading of the
statute’s provisions as a whole, we conclude the Revenue and Taxation Code
imposes taxes on the entire amount of trust income derived from California
sources, regardless of the residency of the trust’s fiduciaries. However, we
affirm the trial court’s ruling finding the sole beneficiary’s interest in the
trust income was contingent.
                                BACKGROUND
      Raymond J. Syufy established the Paula Trust for the sole benefit of his
daughter Paula Syufy Medeiros (Medeiros), a California resident. The Paula
Trust has two cotrustees—a California resident and a Maryland resident, the
fiduciaries.
      Paula Trust held a limited partnership interest in Syufy
Enterprises LP, which in 2007 sold stock to Century Theatres, Inc.; Century
Theatre Holdings, LLC; Cinemark USA, Inc.; and Cinemark Holdings, Inc.
Some of the capital gain income from the stock sale was allocated to Paula
Trust. Paula Trust’s 2007 tax return reported gross income in the amount of
$2,965,099—$2,831,336 of capital gain including the stock sale—and the
trust paid California income tax in the amount of $223,425.
      In 2012, however, the trustees filed an amended 2007 California
fiduciary income tax return, requesting a refund of $150,655 in allegedly
overpaid income taxes. At the time, Paula Trust claimed the capital gain was
incorrectly reported as California-source income. The trustees declared they
were “required to apportion the stock gain as California source and non-
California-source income . . . according to the number of trustees resident in
California” based on section 17743. (All caps omitted.) Section 17743

                                         2
provides: “Where the taxability of income under this chapter depends on the
residence of the fiduciary and there are two or more fiduciaries for the trust,
the income taxable . . . shall be apportioned according to the number of
fiduciaries resident in this state . . . .” (§ 17743.) According to the trustees,
only one-half of the capital gain apportioned to the California trustee was
taxable income, while the other half, apportioned to the Maryland trustee,
was not taxable. After an administrative appeal, the Board of Equalization
rejected the requested refund, and Paula Trust filed a tax refund suit in
2016.
        The trial court granted Paula Trust’s motion for summary judgment,
and summary adjudication in the alternative, holding both that Medeiros is a
contingent beneficiary and that “Paula Trust’s California taxable income is
determined by apportioning its income pursuant to Rev. & Tax. Code
§ 17743”—one-half to its California trustee and one-half to its Maryland
trustee. The trial court then entered judgment ordering a refund in the
amount of $150,655 of tax, plus interest of $68,955.70.
                                 DISCUSSION 2
        We review the trial court’s ruling on the summary judgment motion
and statutory construction de novo. (Regents of University of California v.
Superior Court (1999) 20 Cal. 4th 509, 531.) Applying a taxing statute to
uncontradicted facts is a question of law, and we are not bound to accept the

        During briefing in this case, FTB filed a request for judicial notice of
        2

an additional court record. We deferred ruling on the request until the
merits of the appeal. (See People v. Preslie (1977) 70 Cal. App. 3d 486, 493–
494.) We now exercise our discretion and deny the request. Appellate courts
are not required to take judicial notice of documents that were not presented
to the trial court. (McMahan v. City and County of San Francisco (2005) 127
Cal. App. 4th 1368, 1373, fn. 2.)

                                         3
trial court’s findings of fact. (Communications Satellite Corp. v. Franchise
Tax Bd. (1984) 156 Cal. App. 3d 726, 746.)
I. TAXABLE INCOME OF TRUSTS
      Paula Trust contends that under a plain reading of section 17743, the
taxable amount of the trust’s income depends on the number of trust
fiduciaries who are residents of California, regardless of whether the income
is derived from California sources. The trial court agreed, determining “Rev.
& Tax. Code § 17041(i) and Rev. & Tax. Code § 17951 et seq., which
collectively define taxable income of nonresidents”—and requires taxing all
California-source income—“do not apply to trusts because those statutes
apply only to nonresidents.” The court ruled “in light of the differences
between trust [sic] and individual taxpayers, it is not absurd or unreasonable
that the Legislature enacted different tax schemes for each.”
      We are not persuaded by this interpretation of the statute. Construing
a statute requires starting with the statutory language, giving words their
ordinary meaning, and applying the language if it is clear and unambiguous.
(Goldman v. Franchise Tax Bd. (2012) 202 Cal. App. 4th 1193, 1199.) We
resort to extrinsic sources, such as legislative history, the statute’s purpose,
and public policy, to determine legislative intent if the language is ambiguous
on its face or permits more than one reasonable interpretation. (Ibid.) After
engaging in that review here, we arrive at the opposite conclusion.
      A. Basis of Taxable Income
      Section 17041 articulates two bases for imposing personal income tax
in California. First, residents are generally taxed on all of their income,
regardless of its source. (§ 17041, subd. (a)(1) [“There shall be imposed for
each taxable year upon the entire taxable income of every resident of this
state”].) This provision “ensure[s] that individuals who are present in the

                                        4
state, and receiving the benefits and protections of its laws, contribute to it
by paying taxes on all income regardless of its source.” (Paine v. Franchise
Tax Bd. (2004) 118 Cal. App. 4th 63, 67.)
      Second, nonresident taxpayers are taxed on “gross income . . . derived
from sources within this state”—California-source income. (§ 17041, subd.
(i)(1)(B); see § 17951, subd. (a) [“For purposes of computing ‘taxable income of
a nonresident or part-year resident’ under . . . Section 17041, in the case of
nonresident taxpayers the gross income includes only the gross income from
sources within this state”].)
      Paula Trust contends the definition of “resident”—a term it argues is
defined only as “individuals” or “natural persons”—definitively establishes
these tax rules on California-source income do not apply to trusts which are
simply abstractions. (§§ 17005, 17014, 17015.) However, the statutory
definition for “resident” states that it “includes” individuals who are in or
domiciled in this state. (§ 17014, italics added.) It does not expressly limit
the definition of “resident” to “individuals” or “natural persons.” (Ibid.)
      More importantly, Paula Trust’s narrow reading of the term “resident”
fails to assess that term in context. When harmonized with the additional
provisions and statutory framework of the Revenue and Taxation Code, the
statute establishes that trusts are taxed on the same basis as individuals.
(See § 17002 [statutory definitions govern “[e]xcept where the context
otherwise requires” (italics added)]; see also Lungren v. Deukmejian (1988) 45
Cal. 3d 727, 735 [“the ‘plain meaning’ rule does not prohibit a court from
determining whether the literal meaning of a statute comports with its
purpose or whether such a construction of one provision is consistent with
other provisions of the statute”].)

                                        5
      Revenue and Taxation Code section 17731 incorporates the federal
Internal Revenue Code trust provisions, which compute a trust’s taxable
income “in the same manner as in the case of an individual . . . . The tax shall
be computed on such taxable income and shall be paid by the fiduciary.” (26
U.S.C. § 641(b), italics added; see Rev. & Tax. Code, § 17731 subd. (a)
[“Subchapter J of Chapter 1 of Subtitle A of the Internal Revenue Code,
relating to estates, trusts, beneficiaries, and decedents, shall apply, except as
otherwise provided”].) Revenue and Taxation Code section 17041,
subdivision (e) similarly mandates calculating a trust’s taxable income as if
the trust were an individual. (See Rev. & Tax. Code, § 17041, subd. (e)
[“There shall be imposed for each taxable year upon the taxable income of
every . . . trust . . . taxes equal to the amount computed under subdivision (a)
for an individual having the same amount of taxable income”].) Read
together, Revenue and Taxation Code section 17041, subdivision (i) directs
the taxable income of any nonresident to include income from a California
source, and trusts compute taxable income in the same manner as
individuals. As a result, trusts are taxed on all California-source income
without regard to the residence of fiduciaries.
      Even if we were to accept Paula Trust’s argument that section 17041,
subdivision (e) simply sets equal tax rates for trusts and individuals rather
than requires taxing a trust’s California-source income, the provision
nonetheless requires treating individuals and trusts similarly under the
Revenue and Taxation Code. (See Robinson v. Franchise Tax Board (1981)
120 Cal. App. 3d 72, 77, fn. 4 [“California generally taxes the income of a trust
as if it were an individual (§ 17731) under the Personal Income Tax Law”].)

                                        6
      B. Apportionment of Trust Income
      The plain language of section 17743 and its rules require taxing all of a
trust’s California-source income and then apportioning only income derived
outside of California according to the number of resident fiduciaries.
(§ 17743; Cal. Code Regs., tit. 18, § 17743.) They do not, as Paula Trust
argues, exclude trusts from the provisions taxing all California-source income
or make the amount of a trust’s income taxable dependent solely on the
number and residence of trust fiduciaries.
      The income of a trust is taxable to the estate or trust. (§ 17742,
subd. (a).) Section 17742 provides, in relevant part, the “tax applies . . . to
the entire taxable income of a trust, if the fiduciary or [noncontingent]
beneficiary . . . is a resident.” (§ 17742, subd. (a), italics added; see
McCulloch v. Franchise Tax Bd. (1964) 61 Cal. 2d 186, 195 [tax is appropriate
“since that state provides to the trustees the protection requisite to the
receipt and control of the disposition of trust income”].) This provision
assumes only one resident fiduciary or beneficiary. Recognizing that trusts
may have multiple fiduciaries who live outside of California, section 17743—
as its title “Trust; Taxability dependent on residence of fiduciary” indicates—
addresses the taxation of income received by a trust with multiple trustees
with different residences. (§§ 17743, 17744.)
      Section 17743 then applies in the limited circumstance “[w]here the
taxability of income under this chapter depends on the residence of the
fiduciary”—meaning the income is derived from non-California sources since
the only basis for taxing the income is residency—“and there are two or more
fiduciaries for the trust . . . .” (§ 17743, italics added.) In that situation, the
non-California-source income that is taxable under section 17742 “shall be

                                          7
apportioned according to the number of fiduciaries resident in this state . . . .”
(§ 17743.)
      Even if we stop reviewing section 17743’s language there, the statute
demonstrates that only non-California-source income must be apportioned to
resident fiduciaries. (§ 17743.) The statute, however, goes further, noting
that apportionment must be “pursuant to rules and regulations prescribed by
the Franchise Tax Board”—rules that are expressly incorporated into the
statute and language which Paula Trust curiously ignores.
      The FTB regulations provide: “[T]he trust is taxable upon (a) all net
income . . . from business carried on within this State, from real or tangible
personal property located in this State, and from intangible personal property
having a business or taxable situs in this State . . . and; (b) that proportion of
the net income . . . from all other sources which the number of fiduciaries who
are residents of this State bears to the total number of fiduciaries.” (Cal.
Code Regs., tit. 18, § 17743, 1st par. (Regulation 17743).) The statute is
clear. The FTB promulgated rules for apportioning trust income when there
are multiple resident and nonresident fiduciaries. The statute requires
taxpayers to follow those rules. When we read the statute and the regulation
together, as required by the plain language of the statute, a trust is taxed on
all California-source income, regardless of whether the fiduciary is a
nonresident or not. Then, non-California-source income is apportioned
between California and non-California fiduciaries. (Cal. Code Regs., tit. 18,
§ 17743; see §§ 17041, subds. (e), (i)(1)(B), 17731, subd. (a), 17743.)
      We reject Paula Trust’s circular argument this regulation is invalid or
fails to comport with the plain terms of the statute. (See Gov. Code,
§ 11342.2 [regulations promulgated by state agencies must be “consistent and
not in conflict with the statute and reasonably necessary to effectuate the

                                        8
purpose of the statute”].) As noted above, the regulation properly follows the
statute and provides rules for apportioning only non-California-source income
to resident fiduciaries as required by section 17743.
      C. Legislative History
      “Although we need not go further because the statutory language is
unambiguous, we will ‘look to legislative history to confirm our plain-
meaning construction of [the] statutory language.’ ” (Becerra v. Superior
Court (2020) 44 Cal. App. 5th 897, 920, citing Hughes v. Pair (2009) 46 Cal. 4th
1035, 1046.)
             1. 1935 and 1937 Personal Income Tax Acts
      The Personal Income Tax Act of 1935 (1935 Code), modeled after the
federal tax structure, treats a trust as a separate economic entity.
(McCulloch v. Franchise Tax Bd., supra, 61 Cal.2d at p. 191.) The 1935 Code
imposed taxes upon “the entire net income of every resident of this State and
upon the net income of every nonresident which is derived from sources
within this State . . . .” (Stats. 1935, ch. 329, § 5(a), p. 1093.) Additionally, it
created the rule that the “taxes imposed by this act upon individuals shall
apply to, and be imposed upon, the income of . . . property held in trust” and
requires computing the trust’s tax “upon the net income of the estate or trust
. . . except” as otherwise provided. (Stats. 1935, ch. 329, § 12(a), (b), pp.
1103–1104; see § 17731.) These provisions parallel those in the Internal
Revenue Code, taxing foreign trusts on the amounts of “[g]ross income from
sources within the United States . . . .” (26 U.S.C. § 643(a)(6)(B).)
      Section 12(b) of the 1935 Code created a series of provisions applicable
to trusts. (Stats. 1935, ch. 329, § 12(b), pp. 1104–1105.) Among them were
rules identifying the taxable income of a trust as “(1) The income from real
property and tangible personal property located and from business

                                         9
transacted in this State. [¶] (2) The income from intangible property with a
situs in this State. [¶] (3) The income from real property and tangible
personal property located outside this State and the income from intangible
property with a situs outside this State” when one of the various
combinations of residences of beneficiaries, fiduciaries, or settlors identified
in an exhaustive list was present. 3 (Stats. 1935, ch. 329, § 12(b), p. 1104.)
      Section 12 of the 1935 Code also created language essentially similar to
current Revenue and Taxation Code section 17743: “Where the taxability of
income under this section depends on the residence of the fiduciary and there
are two or more fiduciaries for the estate or trust, the income taxable under
this section shall be apportioned according to the number of fiduciaries
resident in this State, such apportionment being determined according to
rules and regulations prescribed by the commissioner.” (Stats. 1935, ch. 329,
§ 12(b), p. 1104.)
      The parties primarily dispute the significance of the 1937 Personal
Income Tax Act amendments (1937 amendments), which largely eliminated
section 12(b), including subsections (1) and (2)—the rules for identifying
taxable California-source income of trusts. (See Stats. 1937, ch. 668, § 8, p.

      3  Those combinations are: “(A) Where the beneficiary and the fiduciary
and the settlor are all residents of this State. [¶] (B) Where the beneficiary
and the fiduciary are residents of this State regardless of the residence of the
settlor. [¶] (C) Where the beneficiary and the settlor are residents of this
State regardless of the residence of the fiduciary. [¶] (D) Where the
beneficiary is a resident of this State regardless of the residence of the
fiduciary and the settlor. [¶] (E) Where the fiduciary is a resident of this
State regardless of the residence of the beneficiary and the settlor.
[¶] (F) Where the settlor is a resident of this State regardless of the residence
of the beneficiary and the fiduciary. [¶] (G) Where the fiduciary and the
settlor are residents of this State regardless of the residence of the
beneficiary.” (Stats. 1935, ch. 329, § 12(b)(3), p. 1104.)

                                       10
1844.) Paula Trust contends this demonstrates the Legislature’s intent to
entirely eliminate taxing trusts on income derived from California sources.
We disagree.
      The 1937 amendments did not alter the substantive provisions, first,
requiring taxing individuals on California-source income and, second,
requiring the “net income of the estate or trust shall be computed in the same
manner and on the same basis as the case of an individual.” (See Stats. 1937,
ch. 668 [not amending § 5], § 8, pp. 1844–1846 [amending § 12(c), (d)
computing income].) The Legislature retained section 12(c)’s language
apportioning taxable income to instances “[w]here the taxability . . . depends
on the residence”—tax income derived outside California when it could only
be reached by virtue of the fiduciaries’ residence. (See Stats. 1937, ch. 668,
§ 8, pp. 1844–1845 [amending § 12(c), (d) computing income].)
      If the Legislature eliminated California’s ability to tax a trust’s
California-source income, the phrase in current Revenue and Taxation Code
section 17743 “[w]here the taxability . . . depends on the residence” would
serve no purpose. (See People v. Hudson (2006) 38 Cal. 4th 1002, 1010
[interpretations that render statutory terms meaningless as surplusage
should be avoided].) Residency would be the only basis for taxing trust
income, so there would be no reason to identify circumstances under which
taxation depends on residence. However, because taxability of income
depends on two distinct bases—residence or California-source income—this
legislative history and the language that the 1937 amendments retained in
section 12 of the 1935 Code demonstrate that the Legislature intended trusts
would continue to be taxed on California-source income. (Davis v. Franchise
Tax Board (1977) 71 Cal. App. 3d 998, 1002.)

                                       11
      Relying on Gikas v. Zolin (1993) 6 Cal. 4th 841, Paula Trust nonetheless
argues the Legislature intended to eliminate tax on trust income from
“ ‘sources within this state’ ” because that language is present in sections
17734 and 17953—relating to determining the source of income and
taxability of a nonresident beneficiary’s income based on source—and absent
from sections 17742 and 17743—determining taxability of a trust’s income
based on residency. (See id. at pp. 851–852 [determining only acquittals in
criminal proceedings have a preclusive effect on subsequent administrative
proceedings]; §§ 17734, 17953.) This reliance is misplaced.
      The Gikas court noted the omission of language from one specific
section of a statute demonstrated the Legislature’s intent to limit the reach of
that specific section. Here, in contrast, Paula Trust argues the omission of
California-source language from two sections of a statute—sections 17734
and 17953—indicates the intention to eliminate it from another—sections
17743 and 17744. (§§ 17734, 17743, 17744, 17953.) Gikas does not support
that interpretation.
            2. Administrative Interpretations
      The contemporaneous comments to regulations interpreting these trust
provisions bolster our holding. (See Western Oil & Gas Assn. v. Air Resources
Board (1984) 37 Cal. 3d 502, 520 [as a “contemporaneous construction of a
statute by an administrative agency charged with its enforcement, the
[agency’s] view is entitled to great weight”].) Regulation 17743 was originally
promulgated in 1936 after the Legislature passed the 1935 Code. The 1936
regulation contained the bifurcated, two-step apportionment method that
appears in current regulation governing apportionment. (Cal. Code Regs., tit.
18, § 17743; cf. Cal. Franchise Tax Bd., Legal Ruling No. 238 (Oct. 27, 1959)
[“When the entire income of a trust is derived from sources outside of

                                       12
California, and at least one of the trustees and at least one of the
beneficiaries are California residents, both Sections 17743 and 17744 of the
Personal Income Tax Law are applicable. Each section is applied after
deducting from total income that portion attributable to the other section”].)
      After the 1937 amendments, the Franchise Tax Commissioner
acknowledged new regulations were “necessitated by the amendments to the
act . . . .” However, the revised 1938 regulations left the rules for
apportioning trust income substantively the same. In the preface to the
revised 1938 regulations, the commissioner characterized the 1937
amendments to these Revenue and Taxation Code trust provisions as
“minor.” Indeed, the 1937 amendments also eliminated section 12(b)(3)
which previously identified trust income as including non-California-source
income and its listed beneficiary and fiduciary combinations for determining
when this income could be taxed. (See Stats. 1937, ch. 668, § 8, pp. 1838–
1839.) Rather than eliminating the ability to tax trusts based on their
California-source income, it appears, as relevant here, the amendments
primarily removed superfluous language.
      D. Effectuating Legislative Intent
      Our reading and interpretation of these tax statutes effectuates the
purpose of the statute and avoids results that are contrary to legislative
intent. (See Taiheiyo Cement U.S.A., Inc. v. Franchise Tax Bd. (2012) 204
Cal. App. 4th 254, 259–260; Microsoft Corp. v. Franchise Tax Bd. (2006) 39
Cal. 4th 750, 759 [preferring an interpretation in favor of a taxpayer only
when a tax statute’s language is ambiguous].) Our Supreme Court has noted
although “ ‘the complexity of the trust itself and of the relations of the parties
thereto complicates the problem of effective taxation, it should not obstruct
the claims of a state to tax trust income, so far as possible, as it would in the

                                        13
absence of a trust. . . . It should, therefore, be taxed so far as possible upon
the same basis as other taxpayers.’ ” (McCulloch v. Franchise Tax Board,
supra, 61 Cal.2d at p. 197, fn. 9.) The trial court’s decision upends this policy.
      Paula Trust readily admits the trial court’s ruling results in
California’s being unable to tax trust income if the trust does not have any
resident trustees or noncontingent beneficiaries. However, it asserts this
interpretation does not result in the trust’s avoiding taxes on California-
source income. Instead, Paula Trust argues the portion of the income that is
not taxed to the trust will be taxed under either section 17734 or section
17953 if distributions are made to nonresident beneficiaries, or section 17745
if a distribution is made to a resident beneficiary.
      This is unconvincing. First, trusts and individuals are taxed on their
income in the year in which it is received. (§§ 17041, subds. (a), (e);
McCulloch v. Franchise Tax Board, supra, 61 Cal.2d at pp. 189–190 [trusts
incurred tax liability on its income earned “during each of the five prior years
as it was earned”].) The trial court’s ruling effectively eliminates this rule
since a trust without resident trustees or beneficiaries will not be taxed on
any annual accumulated income.
      Second, section 17745 is only applicable “[i]f the trustee fails to pay the
tax for the trust annually as it earns the income . . . .” (McCulloch v.
Franchise Tax Board, supra, 61 Cal.2d at pp. 191, 192 & fn. 4 [interpreting
former § 18106, now current § 17745]; see § 17745, subd. (b) [“If no taxes
have been paid on the current or accumulated income of the trust because the
resident beneficiary’s interest in the trust was contingent such income shall
be taxable to the beneficiary when distributed or distributable to him or
her”].) Rather than excusing a trust from making tax payments on its annual

                                        14
income, section 17745 is a mechanism to recover income if the trust fails to
pay the appropriate amount of taxes.
      Third, there is no requirement that the trust distribute all income to
the beneficiary. And a beneficiary is only taxed on the amount of trust
income that is distributed, not the total amount accumulated by the trust in a
particular year. (§§ 17041, subd. (a), 17734.) Thus, the beneficiary may be
subject to a different tax rate in the year of distribution than the trust would
have been in the year the California-source income was received. (§§ 17041,
subds. (a)(1) [identifying higher tax rates for larger amounts of annual
income received], (e).)
      Accordingly, we conclude Paula Trust has not shown section 17743
eliminates taxation on a trust’s California-source income. The trial court
erred in granting Paula Trust’s motion for summary judgment on that issue.
II. CONTINGENT BENEFICIARY
      Finally, FTB contends the trial court erred finding that Medeiros is a
contingent beneficiary as a matter of law. We do not agree.
      Under section 17742, trust income may also be taxed based on
residency, without regard to source, if there is a noncontingent California
beneficiary. (§ 17742.) Where a trustee has absolute discretion to allocate
net trust income to the beneficiary, the beneficiary has a contingent interest
in the distribution. (Estate of Canfield (1947) 80 Cal. App. 2d 443, 451–452;
Cal. Franchise Tax Bd., Technical Advice Mem. 2006-0002 (Feb. 17, 2006) p.
2 [“A resident beneficiary whose interest in a trust is subject to the sole and
absolute discretion of the trustee holds a contingent interest in the trust”].)
“The intention of the settlor as shown by the document creating the trust is
the most important single element in the determination of the rights of the
trustee.” (Estate of Miller (1964) 230 Cal. App. 2d 888, 908–909 (In re Miller).)

                                       15
Accordingly, we review the trust document to determine whether there are
any limitations on a trustee’s discretion to distribute income to a beneficiary.
(See Cal. Franchise Tax Bd., Technical Advice Mem. 2006-0002 (Feb. 17,
2006) pp. 3–4 [“[t]he extent of the interest of the beneficiary of a trust
depends upon the manifestation of intention of the settlor”].)
      Here, the Paula Trust document grants “sole absolute discretion” to the
cotrustees to make distributions of trust income and principal, but that
authority “shall not require the Trustee to make any distribution to any
person.” (Italics added.) Instead, the document simply authorized, rather
than mandated, the trustees to distribute as much net income or principal of
the trust as the trustee deemed to be in the beneficiary’s best interests, but
the determination of the amount to distribute was also in the trustee’s sole
absolute discretion.
      This “best interests” language does not, as FTB asserts and relying on
In re Miller, limit the trustee’s discretion. In that case, the settlor intended
the trust to support one of the beneficiaries, and the trustee owed a duty “to
make allowances for [the beneficiary’s] support and maintenance . . . .” (In re
Miller, supra, 230 Cal.App.2d at p. 909.) The court determined the trustee
abused his discretion by failing to make any distributions “sufficient to keep
[the beneficiary] alive, let alone to maintain her in the condition and
situation to which she was accustomed.” (Id. at pp. 909–910.)
      The trust’s provisions here are quite distinguishable. The trustees are
not required to make distributions to support Medeiros. Although the trust
included various examples of distributions that would be in the best interest
of the beneficiary—including permitting the beneficiary to travel for
education or pleasure, purchasing a residence or investing in business—the
trust expressly stated these examples were “intended solely as a precatory

                                        16
guide to the Trustee and shall in no way be construed to alter, limit or
enlarge the discretions and powers conferred upon the Trustee by any other
provision hereof nor to require the Trustee to make any distribution to any
beneficiary.” If anything, the decision in In re Miller is only relevant here for
the limited and uncontroversial premise that “[e]ven where the trustee has
discretion . . . , the court will not permit him to abuse the discretion.” (In re
Miller, supra, 230 Cal.App.2d at p. 907.) Like the trial court, we find the trust
instrument’s plain and unambiguous terms provided the trustees with sole
and absolute discretion to make distributions to Medeiros.
      FTB further asserts aside from reviewing the trust instrument, there
must be a factual inquiry to determine the specific nature of a beneficiary. In
FTB’s opinion, the facts demonstrate Medeiros’s interest in the trust income
is noncontingent since the trustees notified her of future distributions, she
relied on those distributions in making certain financial choices, and she
directed how the trustees would pay the distributions. 4
      Those actions do not change that the distributions are conditioned upon
the trustee’s discretion to approve or make them. (See NC Dept of Rev v. Kim
Rice Kaestner 1992 Trust (2019) 588 U.S. ___ , ___ [139 S. Ct. 2213, 2223] [“by
reserving sole discretion to the trustee, the Trust agreement still deprived

      4 The unique circumstances presented in Flato v. Commissioner of
Internal Revenue (5th Cir. 1952) 195 F.2d 580—a trust in which two brothers
were both trustees and beneficiaries for themselves, and a third brother
beneficiary—do not help FTB’s argument. (Id. at p. 581.) The beneficiaries
in that case requested and received whatever amounts of trust income they
desired, and the Fifth Circuit determined the trial court properly reviewed
the “ ‘whole nexus of relations between the settlor, the trustee and the
beneficiary’ . . . .” (Id. at pp. 582–583.) However, the court limited the ruling
to that particular case, noting “the beneficiaries possessed such command
over the distribution of the income of the trusts, such income, whether
distributed or not, is taxable to them.” (Id. at p. 583 & fn. 3.)

                                        17
[beneficiaries] of any entitlement to demand distributions or to direct the use
of the Trust assets in their favor”].) As FTB’s own technical memorandum
notes, a contingent beneficiary “cannot compel the trustee to give him any
portion of the income where the trust gives the trustee absolute discretion as
to the amounts of income to distribute.” (Cal. Franchise Tax Bd., Technical
Advice Mem. 2006-0002 (Feb. 17, 2006) p. 3, fn. 3.) While Medeiros could
certainly request distributions or assign distributions once she received them
to other trusts or various financial arrangements, she “cannot be certain that
[s]he will ever enjoy any of [the] proceeds of the trust. Consequently, where
the extent of the interest of the beneficiary is dependent upon the exercise of
discretion by the trustee, that interest is contingent.” (Ibid.)
      The settlor intended the trustees to have absolute discretion, and we
affirm the trial court’s finding Medeiros is a contingent beneficiary.
                                DISPOSITION
      The summary judgment in favor of Paula Trust is reversed. On
remand the trial court shall enter an order of summary adjudication of
Medeiros being a contingent beneficiary.

                                       18
                                           _________________________
                                           Jackson, J.

WE CONCUR:

_________________________
Fujisaki, Acting P. J.

_________________________
Petrou, J.

A154691/Steuer v. Franchise Tax Bd.

                                      19
A154691/Steuer v. Franchise Tax Bd.

Trial Court:      Superior Court of the City and County of San Francisco

Trial Judge:      Harold E. Kahn, J.

Counsel:          Xavier Becerra, Attorney General, Diane Spencer Shaw,
                       Assistant Attorney General, Lucy F. Wang, Karen W.
                       Yiu, and Heather B. Hoesterey, Deputy Attorneys
                       General, for Defendant and Appellant.

                  Antolin Agarwal, Edwin P. Antolin, Monty Agarwal, and
                        Rachel L. Chanin for Plaintiffs and Respondents.

                                      20