Could a corporate trust beneficiary use the trust's Personal Income Tax Law exclusions and capital-gain percentages on its California franchise-tax return?

Plain-English summary

California Legal Ruling 75 required a corporate trust beneficiary to include U.S. bond interest and the full amount of capital gains or losses received through a trust in its historical franchise-tax measure.

The trust's fiduciary correctly applied Personal Income Tax Law treatment on the trust return. But the corporate beneficiary was governed by the Bank and Corporation Tax Law and could not import the trust-level exclusions and percentage treatment onto its own return.

Facts addressed by the ruling

The taxpayer was a corporation operating a private cemetery.

It created a trust to ensure perpetual care of the cemetery property and was both the grantor and sole beneficiary.

A bank's trust department administered the trust and paid its investment income to the corporation. The trustee filed a personal income-tax return.

On that fiduciary return, the trustee:

• excluded interest from U.S. bonds; and
• included capital gains and losses only at the percentages provided by former section 18151.

The corporation reported only the amount shown as distributable on the fiduciary return.

The fiduciary return was not the problem

The ruling expressly accepted that the trustee correctly prepared the trust's return under the Personal Income Tax Law.

The issue arose on the beneficiary's separate franchise-tax return. The corporation attempted to carry over the trust's exclusion and percentage treatment even though it was taxed under a different law.

Why the corporation had to recompute the income

The ruling stated that interest on tax-exempt securities was included in the historical franchise-tax measure and that the Bank and Corporation Tax Law had no provision allowing capital gains and losses at less than their full amount.

Rules directing a trust beneficiary to report amounts the fiduciary deducted as paid, credited, or currently distributable applied under the Personal Income Tax Law.

Because the beneficiary was a corporation, those Personal Income Tax Law provisions did not govern its return. The corporation had to apply its own franchise-tax rules to the income it received.

Result

The corporation was required to report:

• the U.S. bond interest; and
• 100% of the trust's capital gains or losses.

The amount appearing as distributable income on the fiduciary return was not by itself the correct franchise-tax amount.

What this means for you

Corporate trust beneficiaries

Under the historical ruling, trust-level tax treatment did not automatically carry through to a corporate beneficiary governed by a different taxing statute.

Trustees

A correct fiduciary return could coexist with a different beneficiary-side inclusion. The trustee's computation did not determine the corporation's separate franchise-tax measure.

Accountants and tax professionals

Identify the beneficiary's entity type, the law governing its return, each distributed income item, trust-level exclusions, capital-gain adjustments, and any beneficiary-side modifications required under current law.

Common questions

Q: Was the fiduciary return incorrect?

A: No. The ruling accepted the trustee's treatment as correct under the Personal Income Tax Law.

Q: Why could the corporation not report the same amount?

A: It was subject to the Bank and Corporation Tax Law, not the Personal Income Tax Law provisions used by the trust.

Q: Did the corporation have to include U.S. bond interest?

A: Yes, under the historical ruling.

Q: How much of the capital gains and losses had to be reported?

A: The full amount.

Q: What kind of trust was involved?

A: A bank-administered trust established for perpetual care of a private cemetery.

Citations and references

• Former Cal. Rev. & Tax. Code § 18151

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 75

Original ruling text

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Legal Ruling 1958-75

California Franchise Tax Board
Legal Ruling No. 075

June 27, 1958

Gross Income: Income Received By a Corporate Beneficiary of a Trust Subject to the Personal Income Tax Law

Trust income reported by a corporate beneficiary must include U. S. bond interest and the full amount of capital gains or losses realized by the trust, even though such amounts are not taxable to the trust under the provisions of the Personal Income Tax Law.

Taxpayer, a corporation, operates a private cemetery. It is also the grantor and sole beneficiary of a trust set up to insure perpetual care of the cemetery property. The trust is administered by the trust department of a bank, and the investment income is paid over to the taxpayer. The trustee files a personal income tax return. In computing the trust net income, it excludes exempt interest of U.S. bonds and includes capital gains and losses only to the extent of the percentages set up by Section 18151. Taxpayer on its franchise tax returns only shows that amount which is shown on the fiduciary return to be distributable to the beneficiary. Thus, although taxpayer is subject to the Bank and Corporation Tax Law, it takes advantage of Personal Income Tax Law provisions regarding the exclusion of U.S. bond interest and percentage treatment of capital gains. Advice is requested whether taxpayer must report the U.S. bond interest and the full amount of capital gains and losses.

Interest on tax-exempt securities is includible in the measure of the franchise tax and there is no provision in the Bank and Corporation Tax Law for including capital gains and losses at other than their full amount. Therefore, it is only by reference to the Personal Income Tax Law that taxpayer can avoid inclusion of U.S. bond interest and the full amount of capital gains and losses in the measure of its franchise tax. It is conceded that the fiduciary made a correct return, giving proper treatment to both U.S. bond interest and capital gains and losses. But the provisions of the law and regulations which instruct a beneficiary of a trust to report on his return the amount of trust income which the fiduciary deducted as paid, credited or currently distributable to the beneficiary are not applicable to taxpayer because, being a corporation, it is not subject to the provisions of the Personal Income Tax Law for any purpose. Therefore, it cannot report its trust income by reference to that law. Consequently, when a corporate beneficiary receives from a fiduciary amounts representing U.S. bond interest or capital gains, it receives income which is includible in the measure of the franchise tax and which must be reported on its franchise tax return.

Last updated: 09/24/2025