Today’s post will try to put the Franchise Tax Board’s recent Legal Ruling 2014-01 in perspective by imagining the following inquisition by the Franchise Tax Board:
FTB: We suspect that you are doing business in California and have failed to file your tax returns and pay taxes and fees.
Corporation: Surely, you must be mistaken. We don’t do anything in California.
FTB: We’ll see about that. Let me ask you a few questions. Do you own real property in California?
FTB: Do you sell goods or services in California?
FTB: Do you have employees in California?
FTB: Are you incorporated in California?
FTB: Have you registered to do business in California as a foreign corporation?
Corporation: No. As you can see we have absolutely no sales, property, employees or legal presence in California. We are truly doing nothing in California!
FTB: Even those doing nothing can still be doing business. Tell me now, have you invested in a venture capital fund organized as a limited liability company that is doing business in California and classified as a partnership for tax purposes?
Corporation: Yes, we have a minority membership interest in a manager-managed LLC.
FTB: Gotcha! Under Legal Ruling 2014-01, the venture capital fund’s attribute of “doing business” in California is attributed to its members under general principles of partnership law. Therefore, you are doing business in California and must file a tax return and pay taxes and fees.
Corporation: California is truly a magical state, for it has contrived to make something out of nothing!