Could California-resident beneficiaries claim credit for Minnesota income tax paid by a nonresident trust on income later distributed to them as an accumulated distribution?

Plain-English summary

California Legal Ruling 375 allowed California-resident beneficiaries a credit for Minnesota income tax paid by a nonresident trust on accumulated income later distributed to them.

The credit was not computed only in the year the cash arrived. Under the historical accumulated-distribution rule, the income was spread equally over the distribution year and the five preceding taxable years, or over the shorter period of accumulation for the beneficiaries.

FTB calculated the California tax and allowable credit for each of those years, then allowed the total credit in the distribution year, subject to the statutory limitation.

Facts addressed by the ruling

The taxpayers were contingent beneficiaries of a Minnesota trust created in 1946. They became California residents in 1963.

In 1972, the trust made an accumulated distribution taxable to them under former section 17745(d). The trust had not filed California returns during the 1963-1972 accumulation period.

The beneficiaries sought credit for Minnesota income tax the trust paid for 1963 through 1971.

Why the beneficiaries received a credit

Former section 18005 allowed a resident beneficiary taxed on trust income to claim credit for net income tax the trust paid to another state on the same income.

The credit was limited in two ways:

1. It covered only the proportion of the other state's trust tax attributable to income also taxable to the California beneficiary.
2. It could not exceed the corresponding proportion of the beneficiary's California tax.

The ruling also considered the reciprocal-credit restriction in former section 18001(b). FTB found no Minnesota provision allowing these taxpayers a credit against Minnesota tax for California tax, so that restriction did not bar the California credit.

Six-year accumulated-distribution computation

Former section 17745(d) computed tax as though the accumulated trust income had been included ratably in the beneficiary's income for:

• the distribution year and five prior years; or
• the shorter period during which the trust accumulated income for the contingent beneficiary.

For these taxpayers, the relevant accumulated income began when they became California residents and continued to the distribution date.

FTB directed that one-sixth of the applicable accumulated amount be added to income for 1972 and each of the five preceding years. The California tax attributable to the trust income and the related credit were computed year by year, and the total credit was allowed in 1972.

What this means for you

Trust beneficiaries

Under the historical ruling, a current distribution could require reconstructing prior-year California tax computations rather than applying one current-year credit percentage.

Trustees and fiduciaries

Maintain records of annual accumulated income, taxes paid by the trust to each state, beneficiary residency dates, and the income attributable to each beneficiary.

Accountants and estate-planning attorneys

Identify the exact accumulation period, test whether the same income was taxed by both states, apply both statutory credit caps, and check any reciprocal-credit restriction for the other state.

Common questions

Q: Did the beneficiaries receive any California credit for Minnesota tax?

A: Yes, subject to the former section 18005 limitations.

Q: Was all trust income since 1946 included?

A: No. The ruling based the credit on income accumulated from the time the taxpayers became California residents until the distribution.

Q: How many years were used in the computation?

A: The distribution year and five preceding years—six years total—because that was shorter than the relevant accumulation period.

Q: When was the total credit claimed?

A: In the distribution year after computing the credit separately for each of the six years.

Q: Did Minnesota's law matter?

A: Yes. The ruling checked whether Minnesota granted a reciprocal credit that would block the California credit and found no such provision.

Citations and references

• Former Cal. Rev. & Tax. Code §§ 17742, 17745(d), 18001(b), and 18005

The ruling's opening says the taxpayers claimed under section 18805, while its quoted beneficiary-credit provision and analysis use section 18005. Both source strings are preserved; this summary follows the operative quoted section 18005 analysis.

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 375

Original ruling text

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Legal ruling 375

STATE OF CALIFORNIA
Franchise Tax Board - Legal Division

June 11, 1974

Tax Credit for Accumulated Distributions Made by a Nonresident Trust to Resident Beneficiaries

The taxpayers herein were contingent beneficiaries of a Minnesota trust that was formed in 1946. They became California residents in 1963. In 1972 the trust made an accumulated distribution to the taxpayers which became taxable to them under section 17745(d): ". . . ratably in the year of distribution and five preceding taxable years." The trust did not file a California tax return under Section 17742 in any of the years of accumulation, 1963 to 1972.

The taxpayers are claiming a tax credit under Section 18805 for Minnesota income tax paid by the trust for 1963 to 1971, inclusive.

The following questions are presented:

(1) Are the taxpayers entitled to credit against California income taxes for taxes paid to Minnesota by a trust of which they are beneficiaries?

(2) To what extent is this credit allowable?

Decision

(1) Yes.

(2) That credit that would have been allowed if the trust income had been distributed to the taxpayers ratably (equally) in the year of distribution and the five preceding years.

Discussion:

(1) Section 18005 of the Revenue and Taxation Code provides:

A resident beneficiary of an estate or trust who is taxable on the income of the estate or trust under Chapter 9 of this part shall, subject to the following conditions, be allowed a credit against the taxes imposed by this part on such income for net income taxes paid by the estate or trust to another state on such income:

(a) Credit shall be allowed only for such proportion of the tax paid to the other state by the estate or trust as the income of the estate or trust which is taxable to the beneficiary under this part and also taxed to the estate or trust in the other state bears to the entire income of the estate or trust upon which the taxes paid to the other state were imposed.

(b) The credit shall not exceed such proportion of the tax payable under this part as the income of the estate or trust which is taxable to the beneficiary under this part and also taxed to the estate or trust in the other state bears to the beneficiary's entire income upon which the tax is imposed by this part.

Section 18001 of the Revenue and Taxation Code provides in part:

Subject to the following conditions, residents shall be allowed a credit against the taxes imposed by this part for net income taxes imposed by and paid to another state on income taxable under this part:

(b) The credit shall not be allowed if the other state allows residents of this state a credit against the taxes imposed by that state for taxes paid or payable under this part.

No provision has been found under Minnesota Income Tax Law which would allow the taxpayers a credit against taxes imposed by Minnesota for taxes payable to California. Therefore, the taxpayers should be allowed a credit against California income taxes for taxes paid to Minnesota by the trust.

(2) When, as in the instant determination, there has been an accumulated distribution of trust income, the applicable statute is Section 17745(d), which provides:

The tax attributable to the inclusion of such income in the gross income of such beneficiary for the year such income is distributed or distributable under subdivision (b) shall be the aggregate of the taxes which would have been attributable to such income had it been included in the gross income of such beneficiary ratably for the year of distribution and the five preceding taxable years, or for the period that the trust accumulated or acquired income for such contingent beneficiary, whichever period is the shorter.

Therefore, subject to the limitation set forth in Section 18005(b), the credit shall be based upon the tax on the income accumulated by the trust since the taxpayers became California residents until the date of distribution. One-sixth of that amount shall be added to the Taxpayers’ income for the year of distribution and for each of the five preceding years to determine the California tax attributable to the trust income. The credit shall be computed for each year and the total allowed in the year of distribution.

Last updated: 09/24/2025