The California Franchise Tax Board (FTB) informed taxpayers that it will not appeal the California Court of Appeal’s decision in Swart Enterprises, Inc. v. FTB, 7 Cal. App. 5th 497 (2017), and that it will follow the Swart decision in situations with the same facts. In Swart, the court held that an Iowa corporation was not “doing business” in California and, therefore, was not subject to the $800 minimum franchise tax that the FTB had assessed. The Iowa corporation held a 0.2% membership interest in a manager-managed California limited liability company (LLC) that was doing business in California. The Iowa corporation acquired its membership interest in the California LLC after the original members made the decision for the California LLC to be manager-managed. The original members delegated to a sole manager full, exclusive, and complete authority to manage and control the California LLC. The Iowa corporation’s sole connection to California was its ownership interest in the California LLC.
According to the FTB, taxpayers should take into consideration the extent to which they believe their situation has the same facts as in Swart in determining if they have a return filing obligation and/or if they should file a claim for refund, as appropriate. In any claim for refund, taxpayers should cite the holding in Swart and explain how their factual situation is the same as the facts in Swart.