Tax Insight

California OTA—Nonresident’s partnership-interest ‘hot asset’ gain not California-source

Insight
5 minute read
October 14, 2026

What happened?

The California Office of Tax Appeals (OTA) recently published its July 24, 2026 opinion in Appeals of J. Burch, J. Carden, and K. Carden (2026-OTA-527P), currently designated pending precedential. The OTA held that Internal Revenue Code (IRC) Section 751(a) did not convert a sale of a partnership interest into a deemed sale of underlying assets and that the disputed ordinary gain was not California-source income to the nonresident taxpayers.

Why is it relevant?

The OTA declined to follow Franchise Tax Board (FTB) Legal Ruling 2022-02, which would have sourced the Section 751(a) gain using the underlying partnership’s California apportionment. The decision distinguishes a nonresident’s gain on the sale of a partnership interest from a partner’s distributive share of partnership business income. The Section 751(a) ordinary-income treatment does not, by itself, determine which California sourcing rule applies.

Actions to consider

Nonresident individuals who reported California-source gain attributable to Section 751(a) on a sale of a partnership interest may wish to evaluate whether the decision supports refund claims for open years, considering the facts and transaction structure. Taxpayers also should monitor the opinion’s precedential status, the FTB’s response, and any legislative developments.