Author: Phillip Zagotti

On August 10, 2026, the California Supreme Court decided Tesoro Refining & Marketing Co. LLC v. City of Carson, No. S289952 (Cal. Aug. 10, 2026). A refinery brought the case, but the rule reaches any business paying a city gross receipts tax in Los Angeles or San Francisco, or a license tax nearer home: a city may not force a taxpayer through its own refund process before a Government Claims Act claim and a lawsuit.

The catch is that the statewide rules are strict. When a client in Riverside or Elk Grove brings me a city tax problem, I start with the calendar, because a missed claim date usually ends the case.

What did the Supreme Court decide in Tesoro v. City of Carson?

Carson voters approved an Oil Industry Business License Tax in 2017, charging refinery and petroleum storage operators one quarter of one percent of gross receipts from business conducted in the city (Carson Mun. Code § 63505). Refunds required a request to the finance director within one year of payment, then a further appeal to Carson’s city manager. After an audit covering December 2017 through June 2018, Tesoro paid the deficiency under protest, then presented a claim to the city clerk on Carson’s own form, disputing the timing and the in-city share. Carson won a demurrer because Tesoro had skipped its internal steps.

In a unanimous opinion by Chief Justice Guerrero, the Court reversed. In its view, the Government Claims Act occupies the whole field of how money claims are presented to local agencies, and a refund request is such a claim. Carson’s process was “simply a way to present a claim,” so Municipal Code sections 63515 and 63523 are preempted. Footnote 3 carves out refund procedures set by state statute; footnote 4 limits the holding to mandatory post-payment procedures.

The Court’s minutes through September 11, 2026 show no rehearing or modification order, and under Cal. R. Ct. 8.532(b) the opinion became final 30 days after filing. No official reporter cite has been assigned yet.

How does a Government Claims Act refund claim work for a city tax?

Cal. Gov. Code § 905 requires a claim before suit on money claims against local agencies, but subdivision (a) excepts claims under a statute that prescribes its own refund procedure. McWilliams v. City of Long Beach, 56 Cal. 4th 613 (2013), held that a city ordinance is not a “statute” for that purpose, so city tax refunds stay inside the Act. Ardon v. City of Los Angeles, 52 Cal. 4th 241 (2011), allowed class claims for refunds of Los Angeles’s telephone users tax.

The mechanics fit on one page. Section 910 sets the claim’s contents, and section 915 directs it to the clerk, secretary, auditor or governing body within one year of accrual under section 911.2. The city then has 45 days under section 912.4, extendable only in writing; silence counts as rejection. Section 945.4 bars suit until that point. After a written rejection, section 945.6 allows six months to sue, or two years from accrual if no notice goes out.

Why can’t a late city tax refund claim be rescued?

There is a late-claim procedure, but it does not fit tax refunds. Section 911.4(a) allows an application for leave to file late only for claims subject to the six-month deadline, such as personal injury claims. Refund claims carry the one-year deadline. The court petition in section 946.6 requires a denied section 911.4 application, so it is unavailable too.

The partial safety valve is accrual. Howard Jarvis Taxpayers Ass’n v. City of La Habra, 25 Cal. 4th 809 (2001), treated each collection of an unlawful tax as a new accrual. Read with section 901, each payment generally starts its own one-year clock, so older payments are lost while recent ones can still be claimed.

How do city tax refunds differ from state and property tax refunds?

State taxes follow a pay first, litigate later model. Cal. Const. art. XIII, § 32 bars court orders against “this State or any officer thereof” stopping collection, and permits a refund action after payment as the Legislature provides. Franchise Tax Board and CDTFA refunds follow their own statutes. Section 32 does not mention cities, though a city refund claim follows payment anyway.

Property tax is its own track. Cal. Rev. & Tax. Code § 5097 generally allows a verified claim within four years after payment, and section 5141 requires suit within six months after the board of supervisors or city council rejects it.

Where do city gross receipts overpayments usually come from?

Usually apportionment, not rates. Los Angeles applies its business tax through City Clerk’s Rulings issued under LAMC § 21.15(h). Ruling No. 2 excludes a contractor’s receipts from jobs outside the city, so a contractor with no Los Angeles office owes tax only on Los Angeles jobs. Ruling No. 14 lets a seller with a Los Angeles location deduct capped percentages for selling steps done elsewhere, up to 20 percent for the shipping warehouse. Ruling No. 15 treats 20 percent of out-of-city receipts as taxable for many service and professional firms with a Los Angeles office unless they prove less.

San Francisco has its own allocation rules and its own refund provision, Business and Tax Regulations Code § 6.15-1. The Controller’s claim form allows one year from the later of payment, the return due date, or the Tax Collector’s denial of an amended return or refund request. That optional step can extend the window, consistent with Tesoro.

As a CPA, I want a job-site city field in job costing and a ship-to city on every invoice. The same discipline matters when Riverside or Sacramento measures its license tax by receipts.

What does the calendar look like for a Riverside contractor that overpaid Los Angeles?

Take an illustrative Riverside electrical contractor with no Los Angeles office, booking about $9.5 million a year, $1.5 million from Los Angeles jobs. It reported the full $9.5 million for 2023, 2024 and 2025, paying on February 27, 2024, February 28, 2025 and February 27, 2026. At the current contractor rate ($153 for the first $60,000 plus $1.01 per $1,000 above that), tax on $9.5 million is about $9,687 and tax on $1.5 million about $1,607. That is roughly $8,080 overpaid per year, or $24,240 in total.

The contractor spots the error on October 15, 2026. The windows for the February 2024 and February 2025 payments closed a year after each was made, and section 911.4 cannot reopen them; Los Angeles’s refund policy under LAMC § 21.07 likewise requires a claim within one year of payment. What remains is the February 27, 2026 payment, about $8,080, with a claim due by February 27, 2027. I would file in November 2026 with the City Clerk and the Office of Finance. A rejection mailed January 8, 2027 means suit by July 8, 2027. Silence means deemed rejection after 45 days and a two-year limit running to February 27, 2028.

The trap is the next renewal. A 2026 return filed next February the old way, while talks drag on, creates a new overpayment needing its own claim; the city’s form warns that a refund claim does not stop the lawsuit clock. Fix the return, and put any extension in writing under section 912.4(b).

What if the city audits you and sends an assessment instead?

Footnote 4 matters here: the Court declined to decide whether Tesoro had to appeal the deficiency notice before paying, because Carson had disclaimed that argument below. A Los Angeles assessment under LAMC § 21.16 can be appealed to an Assessment Review Officer within 45 days of service, then to the Board of Review within another 45 days.

Court review of a hearing decision normally comes by writ of administrative mandate under Cal. Civ. Proc. Code § 1094.5, confined to the administrative record, so the evidence must go in at the hearing. If the appeal window is open, I would use it. If it has closed, paying and presenting a claim under the Act, as Tesoro did, is the clearest route.

Frequently Asked Questions

Does Tesoro mean I can ignore my city’s tax refund form?

Not quite. A city can no longer make its own refund request or internal appeal a condition of a Government Claims Act claim or a lawsuit, but its process may still produce a faster refund. The safer practice is to file the city’s form and present a claim to the city clerk within one year of payment.

How long do I have to claim a refund of a California city business tax?

Generally one year from accrual under Government Code section 911.2, which usually means one year from each payment. After a written rejection you have six months to sue. If the city never sends written notice, the outer limit is two years from accrual.

Can I get relief if I missed the one-year claim deadline?

Usually not for that payment. The late-claim application in Government Code section 911.4 covers only claims with a six-month deadline, such as personal injury, and the court petition under section 946.6 depends on that application. Later payments may still be inside their own one-year windows, so a partial refund is often possible.

Does Tesoro apply to property tax or sales tax refunds?

No. The Court said its decision does not affect refund procedures for property taxes, sales and use taxes, or other local taxes whose refund process a state statute prescribes. Property tax refund claims follow Revenue and Taxation Code sections 5097 and 5141, which set their own deadlines.

Can a refund of a city utility users tax be claimed for a whole class of customers?

Often, yes. Ardon v. City of Los Angeles allowed class claims for refunds of the city’s telephone users tax, and McWilliams v. City of Long Beach held that a city ordinance cannot take that option away. A class claim must still satisfy the Act’s content and timing rules.

How North Star Law Firm Can Help

North Star Law Firm works with businesses in the Inland Empire, the Sacramento area and statewide on city tax refund claims and on responses to city audits and assessments, as part of its tax law practice. That work often overlaps with tax defense before state agencies and with sales tax and payroll tax matters. Phillip Zagotti is a California attorney and a CPA, and he represents taxpayers before the IRS, the Franchise Tax Board, the Office of Tax Appeals and the U.S. Tax Court.

If your business may have overpaid a city tax or has received a city assessment, contact North Star Law Firm or schedule a consultation.

A Vancouver couple winters at their house in Temecula. A retired father from Pune stays more than half the year with his daughter in Ontario. Both usually know the IRS day count cold.

California does not use that count, and it does not honor the treaty that may have settled the federal answer. A foreign national can file with the IRS as a nonresident and still owe California tax on worldwide income at up to 13.3 percent, with no credit for tax paid at home.

How does the IRS decide whether a noncitizen is a U.S. resident?

Under 26 U.S.C. § 7701(b)(1)(A), an alien is a resident for the year if he or she held a green card at any time during it or meets the substantial presence test. That test, in section 7701(b)(3), needs 31 days this year and a weighted 183: current-year days count in full, last year’s at one third, the year before at one sixth.

Days as an exempt individual (certain students and teachers, for example) do not count, nor do days someone could not leave because of a medical condition that arose here. Section 7701(b)(2) generally starts residency on the first day of presence in the year the test is met.

The closer connection exception in section 7701(b)(3)(B) requires fewer than 183 days this year, a foreign tax home, and more significant contacts abroad under Treas. Reg. § 301.7701(b)-2(d), claimed on Form 8840. A late form forfeits it under Treas. Reg. § 301.7701(b)-8(d), and section 301.7701(b)-2(f) denies it once a relative files an I-130 for the person.

The other exit is a treaty tiebreaker under Treas. Reg. § 301.7701(b)-7: Form 1040-NR plus Form 8833, with a $1,000 penalty under 26 U.S.C. § 6712 for skipping the 8833. Form 8938 has a treaty carve-out in Treas. Reg. § 1.6038D-2(e), but the FBAR rule in 31 C.F.R. § 1010.350(b) has none, so our FBAR deadline post reaches this group.

How does California decide whether a foreign national is a resident?

Cal. Rev. & Tax. Code § 17014(a) makes a resident of every individual “in this state for other than a temporary or transitory purpose.” Visa type and the IRS count are irrelevant, and section 17024.5(b)(10) makes Internal Revenue Code references to nonresident aliens inapplicable. Section 17016 presumes residency after more than nine months in the year, rebuttable by proof of a temporary purpose.

Conversely, 18 Cal. Code Regs. § 17014(b) treats someone domiciled elsewhere, with a permanent abode there and no more than six months here, as temporary so long as he acts only as “a seasonal visitor, tourist or guest.” Owning a California house does not break that rule. Working from it can.

In between, the state of “closest connection during the taxable year is the state of his residence.” Appeal of Stephen D. Bragg, 2003-SBE-002 (May 28, 2003), lists the objective factors, from residences to phone records, citing Appeal of Berner, 2001-SBE-006-A (2002). Whittell v. Franchise Tax Board, 231 Cal.App.2d 278 (1964), taxed a couple who split each year between Woodside and Lake Tahoe’s Nevada shore, and Noble v. Franchise Tax Board, 118 Cal.App.4th 560 (2004), weighed physical presence above stated intent. Our post on residency audits of Californians who leave covers the mirror problem.

Does a tax treaty protect a foreign national from California tax?

No. Article II(2)(b) of the U.S.-Canada treaty covers “the Federal income taxes imposed by the Internal Revenue Code,” and the U.S.-India treaty reads almost identically. Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983), observed that U.S. treaties “do not generally cover the taxing activities of subnational governmental units such as States,” and FTB Publication 1031 says treaties limited to federal taxes “do not apply to California.”

Section 17041(a) then taxes a resident’s entire income at 2025 rates reaching 12.3 percent, and section 17043 adds 1 percent above $1 million. Section 17024.5(b)(6) and (b)(7) switch off the foreign tax credit and the foreign earned income exclusion. The credit in section 18001 covers tax paid to “another state,” which section 17018 stretches only to the District of Columbia and U.S. possessions. Tax paid in Ottawa buys nothing in Sacramento.

What if you are a federal resident but a California nonresident?

An L-1 manager from Monterrey sent to a Sacramento-area plant for a project with a fixed end date can pass the substantial presence test, file Form 1040, and still be a California nonresident. The regulation treats presence to “perform a particular contract” for a short period as temporary, a fact question every time.

He files Form 540NR and is taxed under section 17951(a) only on California-source income, including wages for days worked here under 18 Cal. Code Regs. § 17951-5, but generally not interest on intangibles under section 17952. If his wife stays in Monterrey, Publication 1031 lets his domicile decide whether his pay is community property.

The CPA’s point is on the rate line. Section 17041(b) sets a nonresident’s rate as if all worldwide income were Californian, so $40,000 of Temecula rent owned by a Vancouver executive is taxed at the average rate his full income would produce.

How does this play out for a Canadian couple in Temecula?

Assume the Vancouver couple own a distribution company there and were in California 170 days in each of 2024, 2025 and 2026, each drawing about $320,000 from the company. The figures are illustrative.

Federally, 170 plus 56.7 (one third) plus 28.3 (one sixth) is 255 weighted days, so they meet the test. At 170 days with tax homes in Vancouver, each can file Form 8840 by June 15, 2027. The Canada treaty’s Article IV(2) is the backstop, and there the Temecula house counts: with a permanent home in both countries, the question moves to the “centre of vital interests,” which is British Columbia.

California’s regulation treats them as seasonal visitors, much like its own example of a Minnesota couple who winter here, but only while they act like visitors. If one of them runs the company by laptop from Temecula, the FTB can say the stays are no longer a guest’s and the pay for those days is California-source anyway.

Using the 2025 schedules in the Form 540 booklet, as nonresidents with no California-source income they owe California nothing. Because 26 U.S.C. § 6013(a)(1) bars a joint federal return and section 18521(a)(1) follows federal status, as residents each would file separately and owe about $25,700 on roughly $314,000 after the $5,706 standard deduction. About $51,000 for the couple, with no credit for Canadian tax.

A variation: a retired father from India on a B-2 visa spends 200 days of 2026 with his daughter in Ontario, living on about $23,000 of Indian pension and interest. At 200 days Form 8840 is unavailable, so he claims India-treaty residence on Form 8833.

In California, 200 days is under the nine-month presumption but over the six-month rule, so connections decide it, and his home and pension are in India. Even if the FTB disagreed, $23,000 is under the 2025 filing threshold of $30,591 for a single filer 65 or older, indexed from section 18501.

What records decide a residency dispute, and what does the estate tax add?

The FTB’s Residency and Sourcing Technical Manual tells auditors to build presence calendars from card and bank statements and airline tickets. Pull your I-94 travel history and keep a calendar as the year happens. Section 19057 gives four years from filing to assess, but section 19087 allows assessment “at any time” when no return exists, so a Form 540NR disclosing the facts starts the clock.

For estate tax, Treas. Reg. § 20.0-1(b)(1) asks about domicile. A Canadian domiciled in Vancouver who dies owning the Temecula house is taxed on U.S.-situs property under section 2103, with only the $13,000 credit in section 2102(b)(1), which shelters $60,000, unless the treaty’s prorated credit applies under section 2102(b)(3)(A). California has had no estate tax for deaths after January 1, 2005.

Frequently Asked Questions

Can I be a nonresident for the IRS and a resident for California?

Yes. The IRS uses a day count and green card status, subject to treaty tiebreakers. California asks whether you are here for other than a temporary or transitory purpose, judged by your closest connections. A Form 8840 or 8833 filed with the IRS does not bind the Franchise Tax Board.

Does the tax treaty with my home country protect me from California tax?

Usually not. Most U.S. income tax treaties, including those with Canada and India, cover only federal income taxes. The Supreme Court has noted that U.S. treaties generally do not reach state taxes, and FTB Publication 1031 says treaties limited to federal taxes do not apply to California.

How many days can I spend in California without becoming a resident?

There is no safe number. More than nine months creates a rebuttable presumption of residency. Six months or less is treated as temporary if you are domiciled elsewhere, keep a permanent home there and act only as a seasonal visitor. Anything in between turns on your closest connections.

Does California give a credit for income tax I pay in my home country?

No. California’s credit for taxes paid covers only other U.S. states, the District of Columbia and U.S. possessions, and California does not follow the federal foreign tax credit or foreign earned income exclusion. A California resident can pay full tax in both countries.

What happens if I never filed a California return?

When no return is filed, the Franchise Tax Board may estimate income and assess tax, interest and penalties at any time under Revenue and Taxation Code section 19087. The four-year assessment period starts only when a return is filed, so a nonresident return that discloses your facts is the safer course.

Does owning a house in California make me a California resident?

Not by itself. A seasonal visitor can own a home here without becoming a resident if the stay is six months or less, a permanent home is kept where the person is domiciled, and the conduct here is a visitor’s. Working from the house can change that.

How North Star Law Firm Can Help

North Star Law Firm advises foreign nationals and their U.S. families across the Inland Empire and the Sacramento area on FTB and IRS residency examinations, unfiled California returns and estate planning for California property. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Tax Court, who prepares the federal and California positions together.

If you or a family member spends long stretches in California without calling it home, contact North Star Law Firm or schedule a consultation.

Picture a Rancho Cucamonga S corporation with two lines of business. Its trucks haul California freight, and a separate operation distributes in Nevada. A buyer wants the Nevada line. Can California tax part of the gain on a business that never sold anything here?

It depends on whether the Nevada line is part of one unitary business with the trucking company. If it is, the gain is apportioned and California takes its percentage. If it is a separate trade or business, California may get nothing. A June 2026 Office of Tax Appeals opinion sided with a taxpayer on this question, and the winning evidence was mostly accounting evidence.

What did the Office of Tax Appeals decide in Western Distributing?

Appeals of Western Distributing Company, et al., 2026-OTA-467P (OTA Case No. 230914432 et al., issued June 18, 2026), involved a Denver-based S corporation with 14 divisions. The largest were a Colorado beer distributor and an interstate trucking business that picked up and delivered in California. On January 11, 2010, the company sold the beverage division’s assets, mostly distribution rights, and reported $68,180,087 of gain as Colorado income.

The Franchise Tax Board treated all 14 divisions as unitary. The panel reversed, upholding the FTB on unity of operation but finding no unity of use and no dependency or contribution. The label did not win it: the taxpayer conceded on appeal that the gain was business income, and the panel called its nonbusiness reporting erroneous. It won by proving a separate trade or business with no California activity.

Is gain on a division sale business income, and why does your home base matter?

Revenue and Taxation Code § 25120(a) treats income from property as business income when its “acquisition, management, and disposition” are integral parts of regular operations; subdivision (d) makes the rest nonbusiness income. Hoechst Celanese Corp. v. Franchise Tax Bd., 25 Cal.4th 508 (2001), reads subdivision (a) as two independent tests, transactional and functional. Jim Beam Brands Co. v. Franchise Tax Bd., 133 Cal.App.4th 514 (2005), applied the functional test to gain on stock of a unitary subsidiary.

Business income is apportioned, for most taxpayers since 2013 by the sales factor alone under section 25128.7, with service and intangible receipts assigned by market under section 25136 and Regulation 25136-2. Nonbusiness income is allocated under sections 25123 through 25127, and here lies a trap. Section 25125(c) allocates nonbusiness gain on intangibles, including goodwill and customer contracts, to California when the commercial domicile is here, as it is for a company run from Rancho Cucamonga.

What makes two lines of business one unitary business?

Two alternative tests apply. Butler Bros. v. McColgan, 17 Cal.2d 664 (1941), looks for unity of ownership, unity of operation “as evidenced by central purchasing, advertising, accounting and management divisions,” and unity of use in a centralized executive force. Edison California Stores v. McColgan, 30 Cal.2d 472 (1947), asks whether in-state operations depend on or contribute to those outside. Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425 (1980), and Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159 (1983), bar a state from apportioning income of a discrete business.

Regulation 25120(b) confirms one taxpayer can run several businesses; its example is a conglomerate with three independent divisions. Chase Brass & Copper Co. v. Franchise Tax Bd., 10 Cal.App.3d 496 (1970), found unity where a subsidiary bought most of its copper from affiliates. Tenneco West, Inc. v. Franchise Tax Bd., 234 Cal.App.3d 1510 (1991), found none among autonomous subsidiaries. Western Distributing landed near Tenneco: division managers ran operations while the controlling CEO raced professionally.

How does the unitary answer reach an S corporation’s owners?

The S corporation pays California tax at 1.5 percent under section 23802(b), and each shareholder reports a pro rata share. Residents are taxed on entire taxable income under section 17041(a), so for them the fight mostly changes the entity-level tax.

Nonresidents pay only on California-source income under section 17951. Regulation 17951-4(f) treats S corporation shareholders like partners, (d)(1) apportions business income at the entity level, and (b) makes only the in-state income California-source when two businesses are not unitary. The OTA sourced trust shareholders’ goodwill gain by the S corporation’s own apportionment in Appeal of The 2009 Metropoulos Family Trust, 2019-OTA-385P, and taxed a nonresident’s share of a holding company’s gain on selling a unitary operating business in Appeal of Smith, 2023-OTA-069P.

Nonresidents who skip filing add risk, since section 19087 lets the FTB assess at any time when no return was filed; the Western Distributing shareholders drew late filing penalties. If you have left California, see our post on FTB residency audits.

How much can the unitary question cost on a Rancho Cucamonga sale?

Take a Rancho Cucamonga S corporation with a California trucking line and a distribution line in Henderson, Nevada. In 2026 it sells the Nevada assets for a $12,000,000 gain: $10,000,000 for goodwill and customer contracts, $2,000,000 for equipment. Assume a 40 percent California sales factor for the combined business (all figures illustrative).

If unitary, $4,800,000 of gain lands in California and the entity tax is $72,000. A Nevada resident who owns 30 percent picks up $1,440,000 of California-source income; at an assumed 12 percent effective rate, about $172,800 in tax.

If separate, the Nevada line has no California customers, so its factor is zero and neither level pays California tax on the gain. The nonbusiness route would backfire: section 25125(c) sends the $10,000,000 of intangible gain to the California domicile, a $150,000 entity tax. Trucking companies should also model the special formula in Regulation 25137-11, which the FTB applied to all of Western Distributing and the OTA never reached.

What happens to deductions claimed while the company filed as one business?

The FTB’s fallback was the tax benefit rule: if the beverage division was separate, its $5,320,801 of damaged and dated beer expense for 2007 through 2010 should come back. Hillsboro National Bank v. Commissioner, 460 U.S. 370 (1983), requires income when a later event is “fundamentally inconsistent” with an earlier deduction, and IRC § 111 limits the inclusion to deductions that actually reduced tax.

Raising the theory first on appeal put the burden on the FTB, which lost on the numbers: the company had apportioned net losses to California, and for 2010 only $12,666 of the questioned deductions sat inside the $157,000 loss apportioned here.

Before switching a division to separate treatment, recompute every open year both ways. Where separate treatment lowers California tax, file refund claims within the section 19306 period, generally the later of four years from the due date or one year from payment. Where it raises tax, expect a tax benefit or duty of consistency argument.

What records should you build before a sale, and how long can a challenge run?

In Western Distributing, division managers made hiring and purchasing calls, and part of their pay tracked their own division. Intercompany hauling was billed at standard rates and was under one percent of the trucking division’s revenue. The weak spots (a shared primary insurance policy, centralized payroll and benefits) are why unity of operation went to the FTB.

Give each line its own ledger, bank accounts, and financing years before a sale, and bill intercompany work at market. A separate LLC alone will not do it; Edison looked past corporate form. Those division-level books drive the purchase price allocation under IRC § 1060 on Form 8594, or the asset-level numbers behind a section 338(h)(10) election, so one set of records serves both the IRS and the FTB.

Expect years: Western Distributing sold in 2010, the FTB proposed assessments in October 2016, and the OTA ruled in June 2026. A taxpayer has 30 days after a Notice of Action to appeal to the OTA under section 19045, and either side may seek rehearing under section 19048. Under OTA Regulation 30502(e), a pending precedential opinion draws public comment for 30 days, and its status is decided 35 to 60 days after posting in early September 2026.

Frequently Asked Questions

What is a unitary business for California tax purposes?

It is a group of operations connected closely enough that California apportions their combined income as one business. Courts apply the three unities test (ownership, operation, and use) or ask whether the activities rely on and add value to one another. Meeting either test is enough.

Can one S corporation have more than one trade or business in California?

Yes. California regulations recognize that one taxpayer can operate separate trades or businesses, each apportioned with its own factors. In Western Distributing, decided in 2026, a beverage division inside a single S corporation was held not unitary with the same company’s trucking division.

Is the Western Distributing opinion binding precedent?

Not yet. It was posted as pending precedential in September 2026. After a 30-day comment period, the Office of Tax Appeals decides within 35 to 60 days of posting whether it becomes precedential, which would let it be cited in later OTA appeals.

Does reporting the gain as nonbusiness income keep it out of California?

Often not. Under Revenue and Taxation Code section 25125, nonbusiness gain on intangibles such as goodwill is allocated to California whenever the company’s commercial domicile is here, meaning it is managed from California. The stronger position is usually that the division was a separate trade or business.

Do California resident shareholders benefit from winning a unitary dispute?

Less than nonresidents do. California taxes residents on all income, so a resident’s share of the gain is taxable here either way; the savings come through the 1.5 percent entity tax. Nonresidents pay only on California-source income, so a separate-business finding can remove the gain from their California returns.

How far ahead should we prepare before selling a division?

Ideally, start several years out. The unitary analysis looks at how the business actually ran, so separate books, bank accounts, financing, and management need a track record before the sale. The same division-level records support the purchase price allocation on Form 8594.

How North Star Law Firm Can Help

North Star Law Firm advises S corporation and LLC owners in the Inland Empire and the Sacramento area on business sale tax structuring and S corporation planning, and handles FTB protests and appeals before the Office of Tax Appeals. Phillip Zagotti is a California attorney and a CPA, admitted to the U.S. Tax Court.

If your company is weighing the sale of one line of business, or the FTB has proposed an assessment on a sale you already closed, contact North Star Law Firm or schedule a consultation.