The Franchise Tax Board Won’t Appeal Swart Decision—See if You Qualify to File a Refund Claim

In February 2017, the Franchise Tax Board (FTB) announced in FTB Notice 2017-01 that it wouldn’t appeal the Court of Appeal’s decision in Swart Enterprises, Inc. v. Franchise Tax Board.

The court ruled that the taxpayer, a corporation, wasn’t “doing business” in California by virtue of its membership interest in a manager-managed California LLC that did business in the state. Therefore, it wasn’t subject to the $800 minimum franchise tax.

To the extent taxpayers believe their situation is the same as in Swart, the FTB advises them to consider whether they had a return filing obligation. If taxpayers conclude that they didn’t, then they can consider filing 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 similar to the facts in Swart.

Background

Swart held a 0.2 percent membership interest in a manager-managed California LLC doing business in the state. The court characterized Swart as a quintessential passive investor— similar to that of a limited partner of a limited partnership—because it:

  • Had no authority to participate in the management and control of the LLC
  • Wasn’t liable for the debts and obligations of the LLC
  • Didn’t own an interest in specific property of the LLC
  • Couldn’t act on behalf of the LLC

The State Board of Equalization previously held in the Appeal of Amman & Schmid that a limited partner wasn’t considered “doing business” in the state by virtue of its interest in a limited partnership doing business in the state.

Swart involved tax year 2007. In 2011, California amended the definition of “doing business” in the state by adding an economic nexus test to the definition. Under the economic nexus test, if the taxpayer has a certain amount or percentage of payroll, property or sales in California, it will be considered “doing business” in the state. This makes it subject to at least the $800 minimum tax even if the taxpayer’s facts are similar to those in Swart, which means the Swart decision may have limited applicability for the 2011 tax year and later.

We're Here to Help

For more information about filing refund claims, contact your Moss Adams professional or email statetax@mossadams.com. You can also visit www.mossadams.com/statetax for more information.