The Utah Supreme Court ruled Friday that settlement proceeds from an S corporation can be subject to state tax.
According to the ruling, the justices found that a settlement for claim of profits in a civil suit is in lieu of actual profits and should be taxed.
Typically, S corporations do not pay any income taxes. Rather, the corporation's income or loss is divided and passed on to its shareholders. It is up to the shareholders to then report their share of the returns on their taxes.
The case involved a couple who sued the company they invested in after the company's assets were sold. The couple accepted a cash settlement, which the Utah State Tax Commission claimed was taxable because it was related to the sale of assets in an S corporation doing business in Utah.
The Utah Supreme Court unanimously agreed with the Tax Commission's position and said it has the authority to tax the proceeds.