The California Superior Court recently rebuffed the attempt of the Franchise Tax Board to impose tax on a non-California corporation that the FTB claimed was doing business in California. In Swart Enterprises, Inc. v. California Franchise Tax Board, the taxpayer was an Iowa Corporation whose only activity in California was holding a small membership in a California limited liability company. Despite the fact that the taxpayer was not the manager or managing member of the limited liability company, the FTB determined that the mere ownership of the membership interest was sufficient to cause the Iowa corporation to be engaged in business in California.
The court’s reasoning in finding for the taxpayer was that as a member of a limited liability company it had no interest in any specific property within California owned by the limited liability company; it was not personally liable for the LLC’s obligations; and it played no role in the management of the limited liability company.
The economic effect of the taxpayer’s victory may be minimal. While it will not have to pay the $800 minimum franchise tax that is imposed each year on corporations doing business in California, it will still be required to pay California income tax on any income that is allocated to it from the limited liability company which had its source within California.