Out of State Taxpayer Sues California FTB on LLC Doing Business Issue

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Via Spidell Publishing

An out-of-state corporate taxpayer has filed suit against the California Franchise Tax Board (FTB) to recover taxes, penalties, and interest assessed by the FTB for being a passive member in a California LLC. (Swart Enterprises Inc. v. Franchise Tax Board, filed July 9, 2013, Case No. 13CECG02171)

This case makes public the FTB’s position that a taxpayer’s passive interest in a California LLC is sufficient to determine that the taxpayer is “doing business in California”, and trigger the minimum franchise tax under R&TC §23153.

In Swart, the corporation’s principal place of business is in Iowa. The corporation did no business in California but owned a 0.02% interest in a California LLC that acquired, held, leased, and disposed of capital equipment and interest in capital equipment in various states.

This case will be of great interest to our clients with out-of-state investors and with out-of-state investments.  Especially real estate development and investment partnerships.  We will continue to monitor this case.

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