California modifies ruling on members of LLCs doing business

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October 2018


On October 19, the California Franchise Tax Board (FTB) issued Legal Ruling 2018-01, revising its prior Legal Ruling 2014-01, which had set forth the FTB’s analysis on when members of multiple-member LLCs classified as partnerships for tax purposes would be considered ‘doing business’ in California.

The FTB issued the new ruling to incorporate guidance related to subsequent judicial authority —  specifically, Swart Enterprises, Inc. v. Franchise Tax Board, 7 Cal.App.5th 497 (2017).  Click here for our summary of the Swart decision.

The takeaway

The new ruling suggests that the FTB interprets Swart narrowly and intends to follow that decision only in instances with ownership interests akin to the 0.2% interest at issue in that case.

There still may be refund opportunities for taxpayers that filed and paid California franchise tax when their only contact with the state was as a member of an LLC doing business in the state with similar lack of management and minority ownership interests as in Swart, but taxpayers should expect challenges from the state related to larger ownership interests.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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