Franchise Tax Board Rulings
CALIFORNIA RESIDENT MANAGING MEMBERS
The FTB has stated that an LLC with a California resident managing member is doing business in California and must register, file tax returns, and pay tax to California. “Doing business” is defined as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” (R&TC §§17941, 23101) Regardless of where the trade or business of the LLC is primarily conducted, an LLC is considered to be doing business in California if any of its members, managers, or other agents conducts business in California on behalf of the LLC. (FTB Publication 3556)
NO PROPERTY IN CALIFORNIA
The Board ruled that an LLC with no property in California was subject to California’s LLC annual tax and fee because the managing members were California residents. (Appeal of Mockingbird Partners, LLC (May 17, 2006) Cal. St. Bd. of Equal., Case No. 306061)
NO CALIFORNIA-SOURCE INCOME
A Nevada LLC, which held only Nevada real estate, was doing business in California because the managing member managed the LLC from California. (Appeal of Destino Properties, LLC (February 1, 2007) Cal. St. Bd. of Equal., Case No. 339961) The LLC alleged that it was not required to pay the $800 annual tax or the total income fee to California because the entity was formed in Nevada, the only asset was a Nevada rental property, and all income came from Nevada.
The Board held that the LLC was doing business in California because the rents were received, checks were endorsed, deposits were mailed, and the books were managed all in California, and a California tax professional prepared the entity’s returns. The taxpayer presented no evidence that any of the managerial functions were conducted outside of California.
It was discussed that CA alleged that making one call a year to a property manager of a real estate holding outside CA was conducting business in CA.
In the meantime, the FTB has been sending filing enforcement notices to many foreign nonregistered LLCs with California resident managers who the FTB believes are doing business in California. The filing enforcement notices propose to assess the $800 annual tax, plus a new $2,000 penalty and interest, for each year the LLC failed to file a California return. (The 10% is an underpayment fee due by 6/15 – $800 FTB fee is due 4/15.)