Last month a California appellate court ruled that California’s Franchise Tax Board was wrong in trying to assess an Iowa corporation with a 0.2% ownership in an LLC that invested in California the California minimum Franchise Tax. It was announced today that the FTB will not appeal the decision. The court’s conclusion was,
We conclude Swart was not doing business in California based solely on its minority ownership interest in Cypress LLC. The Attorney General’s conclusion that a taxation election could transmute Swart into a general partner for purposes of the franchise tax, and that the business activities of Cypress can therefore be imputed to Swart, is not supported by citation to appropriate legal authority and, in our view, defies a commonsense understanding of what it means to be “doing business.”
This is good news for passive business entity investors who happen to be investing in California. It’s likely that other cases that are winding way through the courts will now be settled and that the FTB will adopt a common-sense approach on this issue. Chris Smith, the FTB’s Trade Media Liaison, sent an email noting that, “[The] FTB is working on providing information to taxpayers in light of the decision which it expects to release soon.” I will link to that information when it becomes available.