In the liquidation of an S Corporation pursuant to IRC 336(e) election, the installment note is distributed to the shareholder for federal purposes and no gain is reported on the distribution of the note. California conforms to IRC 336(e) for taxation of corporate liquidations as well as 331 for the shareholder tax treatment (RTC 24451 and 24461).
If California conforms to the federal treatment then it would appear the distribution of the installment note does not trigger California corporate level tax of 1.5% on the distribution of the note. We cannot find direct support or cases that the gain on the distribution of the installment note on liquidation (453(b)(a)) is not subject to CA corporate tax.
From our Guide to Forming and Dissolving a Corporation
For purposes of California’s 1.5% tax on S corporations, the installment sale gain must be
accelerated into the S corporation’s final return when an S corporation liquidates. (R&TC §24672)
The shareholder will continue to report the gain as he or she receives payments.