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Valid check-the-box election: California resident entitled to a stepped-up basis


On August 31, 2022, the California Office of Tax Appeals (“OTA”), in the Matter of the Appeal of B. Housman and B. Pena, held that an Australian software company holder, Housman, and his wife are California residents and Housman is entitled to a stepped-up basis as a result of a valid check-the-box election to be classified as a partnership for federal and California income tax purposes.

Housman, an Australian citizen, formed an entity in Australia in 2000. In 2008, Housman and his wife moved to San Francisco, intending to stay for an indeterminate period of time. In 2009, Adobe Systems purchased Housman’s software-as-a-service company, a subsidiary of the entity, for $22.5 million. The California Franchise Tax Board (FTB) and the couple disagreed on how much tax was owed as a result of the sale.

The OTA denied the couple’s argument that they were entitled to a $4.7 million refund as they were California residents at the time the company was sold. The OTA found that, although the couple continued to own a house in Australia after moving to San Francisco in 2008 and contended that their presence in California was intended to be temporary, the couple remained in California for a relatively long or indefinite period of time and had significant connections in California which was not temporary or transitory in nature.

The OTA, however, did agree with Housman that he was entitled to a stepped-up basis from 2008 to offset the $1.4 million in capital gains resulting from the sale of the company to Adobe in 2009. The OTA determined that the company in question made a valid check-the-box election to be classified as a partnership for federal and state tax purposes that took effect on April 1, 2008. The OTA rejected the FTB’s argument that the partnership election did not qualify Housman for the stepped-up basis because the entity did not operate in the United States, stating that “the regulation does not address whether the entity itself is relevant, but whether the classification of the entity is relevant.” (emphasis added) The OTA further found that the appraisal, from which the basis was determined, is reasonable and consistent with revenue rulings.

As such, the OTA found that Housman is entitled to a stepped-up basis as result of a valid check-the-box and any additional penalties and interest were waived.

In re Housman, Cal. Office of Tax App., No. 18010200, 8/31/22


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