On the federal level, if there is more than $1,000 of UBI (unrelated business income), the custodian of the IRA files a tax return and the IRA pays any taxes due. The UBI appears in box 20 of the K-1.
The earnings were made in CA and even though there is not an IRA distribution, it seems CA will find a way to get their share of taxes on earnings made from a CA partnership.
