For over 50 years, Bloomberg Tax’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...
California tax officials won’t appeal an appellate court ruling that an out-of-state corporation with a small interest in a California investment fund doesn’t owe the state’s $800 minimum franchise tax.
The Franchise Tax Board’s decision to let a lower court ruling stand on the matter means the board may owe millions of dollars in refunds to limited liability companies that have been waiting for a final outcome in the case ( Swart Enters., Inc. v. Cal. Franchise Tax Bd. , Cal. Ct. App., No. F070992, 1/12/17 ).
The tax board will provide information to taxpayers soon in light of the decision, FTB spokesman Chris Smith told Bloomberg BNA Feb. 22.
Although the tax at issue in the case is only $800 plus interest and penalties, the FTB has been issuing notices to taxpayers in similar situations saying they owe $2,000 to $3,000 while the case has been pending, according to an attorney for Swart Enterprises Inc., the plaintiff. Many of those taxpayers have filed refund claims.
“It’s been a long road,” Amy Silverstein, with Silverstein & Pomerantz LLP in San Francisco, told Bloomberg BNA.
The FTB’s decision not to appeal to the California Supreme Court signals that it is dropping its argument that the Iowa-based corporation with a 0.2 percent ownership interest in a California fund owed the minimum franchise tax.
A three-judge panel for the California Court of Appeal ruled in favor of Swart in January, saying the company has no physical presence and isn’t doing business in the state. The trial court also ruled in favor of the company, which operates a 60-acre farm in Kansas.
Swart invested $50,000 in 2007 in a California investment fund that later elected to be taxed as a partnership for state and federal income tax purposes. The FTB has so far unsuccessfully argued in court that because the fund elected to be treated as a partnership, it was doing business in California and so was Swart.
Now that it isn’t continuing to litigate the case, the FTB must address a legal ruling that it issued while the case was pending in its forthcoming information to taxpayers, Steve Wlodychak, a principal at Ernst & Young LLP who focuses on state, local and federal tax issues, told Bloomberg BNA.
In FTB Legal Ruling 2014-01 issued July 22, 2014, the tax agency addressed facts similar to those in the Swart case, saying tax liabilities and filing obligations for LLCs aren’t dependent on whether they have delegated management authority to another party. The FTB ruling isn’t consistent with the court ruling that members of managed LLCs in which investors have no say don’t owe California tax, Wlodychak said.
The FTB said in the notice the tax liability for LLCs depends on whether they elect to be treated as corporations or partnerships and whether they are doing business in the state.
To contact the reporter on this story: Laura Mahoney in Sacramento, Calif., at LMahoney@bna.com
To contact the editor responsible for this story: Ryan C. Tuck at firstname.lastname@example.org
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)