Jurisdiction

The California Office of Tax Appeals ruled for nonresident taxpayers in Appeals of Burch and Carden (2026-OTA-527P). Writing for a unanimous panel, Administrative Law Judge Kenneth Gast held that IRC §751(a) is an anti-abuse characterization rule that converts capital gain to ordinary income. It is not a sourcing provision. The ordinary-income portion of a partnership-interest sale therefore remains part of an intangible sale, and under R&TC §17952 the gain is sourced to the seller's state of domicile unless the partnership interest acquired a California business situs. The panel expressly declined to follow FTB Legal Ruling 2022-02, which had treated the hot-asset portion of the gain as a deemed sale of the partnership's underlying property, apportioned by the entity's California factors. The case arose from indirect gains realized by Tory Burch LLC co-founder J. Christopher Burch when an investment entity sold partnership interests in the fashion brand. The operating partnership did business in California.