California Can Tax Century Theatres Trust Beneficiaries’ Income

June 29, 2020, 9:56 PM

Beneficiaries of a trust tied to the family that founded Century Theatres Inc. must pay income tax on all California income regardless of whether one of the beneficiaries lives out of state, a state appellate court said Monday.

The 20-page ruling overturned the trial court and rejected arguments that the Franchise Tax Board said during a 2016 administrative appeal would upend 80 years of state taxation of trusts and mean billions of dollars in lost revenue.

“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,” a three-judge panel of the Court of Appeal for the First Appellate District said.

Attorneys for the trust used “circular” arguments to say state law and the tax board’s 1938 regulation allow California-source income for nonresident fiduciaries of a trust to be assigned to other states and not be taxed in California, the court ruled.

Raymond J. Syufy, founder of Century Theatres Inc., established the trust for his daughter, a California resident. One of the trust’s co-trustees lives in California and the other lives in Maryland.

The trust held a limited partnership in Syufy Enterprises LP, which sold stock to Century Theatres Inc., and Cinemark USA Inc. in 2007. The trust argued only half of the income from that sale was taxable in California because one of the trustees lives in another state.

A spokesman for the FTB declined to comment on the ruling. Edwin P. Antolin, attorney with Antolin Agarwal LLP, representing the trust, said his client is disappointed in the ruling but hasn’t decided whether to appeal to the California Supreme Court.

Associate Justice Teri L. Jackson wrote the opinion, with acting Presiding Justice Carin T. Fujisaki and Associate Justice Ioana Petrou concurring.

Steuer v. Franchise Tax Board, Cal. Ct. App., 1st Dist., A154691, 6/29/20

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif. at lmahoney@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Yuri Nagano at ynagano@bloombergtax.com

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