Many business and tax lawyers have long assumed that a partnership’s activities are imputed to all of its partners in determining whether the partners are engaged in business activities within the State of California. This reasoning carries over to members of an LLC when the LLC is taxable as a partnership.
Interesting Ruling from a Fresno Superior Court
In a recent unpublished order, a Superior Court in Fresno reached a contrary result. See Swart Enterprises, Inc. v. California Franchise Tax Board, Fresno Superior Court, No. 13CECG02171, Order on Cross-Motions for Summary Judgment, November 14, 2014. The taxpayer was an Iowa corporation that owned a 0.2 percent interest in a California LLC taxable as a partnership. The California Franchise Tax Board argued that the LLC investment caused the Iowa corporation to be engaged in California business activities for purposes of imposing the $800 annual minimum franchise tax. The court held for the taxpayer, indicating that a mere passive investment in an LLC doing business in California was not sufficient to render the Iowa corporation taxable in California.
It’s unclear whether this ruling will stand, despite its logical appeal. But keep this ruling in mind if you are representing a non-California investor who holds passive investments in California business entities.
This article originally appeared in the February 2015 edition of the ACBA Business Law Section Newsletter.