Perspectives

Non-managing member of LLC held not doing business in California

Multistate tax alert | December 19, 2014

A California Superior Court recently issued a ruling in favor of the taxpayer in ‘Swart Enterprises, Inc. v. California Franchise Tax Board’ ("Swart").

Cal. Rev. & Tax. Code section 23151

A California Superior Court (trial court) recently issued a ruling in favor of the taxpayer in Swart Enterprises, Inc. v. California Franchise Tax Board (“Swart”).1 In its ruling the court concluded that an Iowa corporation, whose only connection to California was its passive membership in a manager-managed California limited liability company (“LLC”), was not “doing business” in California and was therefore not subject to the $800 minimum franchise tax under Cal. Rev. & Tax. Code section 23151.2 Although the Franchise Tax Board (“FTB”) has not appealed the court’s decision, the period for filing an appeal remains open and thus the case is not yet final.

In this Tax Alert we summarize the decision in Swart and provide some taxpayer considerations, including that corporate taxpayers paying more than the $800 minimum tax may not be impacted by this case because they may still be subject to the corporate income tax on California sourced income under Cal. Rev. & Tax. Code section 23501 instead of the corporate franchise tax.

1 Swart Enterprises, Inc. v. California Franchise Tax Board, Case No. 13CECG02171 (Cal. Super. Ct. hearing Nov. 13, 2014; Summary Judgment entered Nov. 20, 2014; Notice of entry of judgment filed on Nov. 25, 2014).

2 See also, CAL. REV. & TAX. CODE § 23153(d).

 

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