California-Income of single member LLC included in member's apportionment

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October 2018


A California Court of Appeal ruled that the income of six single-member limited liability companies (LLCs) that did not elect to be taxed as corporations must be included in the numerator of the out-of-state unitary corporate members’ apportionment formula. The court further held that the out-of-state corporate members had substantial nexus with California because they were 100-percent owners of the unitary LLCs that conducted business in California. [Bunzl Distribution USA, Inc. v. Franchise Tax Board, A137887, 9/28/2018]

Update: On December 19, 2018, the California Supreme Court denied review.

Update: On October 24, 2018, the court made five modifications to the Bunzl decision. The modifications did not change the court’s September 28 judgment. The modifications clarify portions of the opinion relating to Bunzl’s contentions by changing references to 'income' from LLCs to 'property, payroll and sales factors' from the LLCs.

The takeaway

Under this decision, filing California Form 568 and not consenting to jurisdiction to tax will not relieve the LLC member from its filing obligation in California. Unlike the facts in Swart Enterprises, here the member is managing the business, which is treated as a division of its member. The nonconsenting member tax paid at the LLC level can be claimed by the member as tax paid.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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