FTB Loses in Out-of-State LLC "Doing Business" Tax Case

The recently created California Office of Tax Appeals (OTA) has issued a ruling in the Satview case against the Franchise Tax Board (FTB)'s position that a 25% member of a California limited liability company was "doing business" in California and subject to California's minimum annual corporate franchise tax. The OTA found that passive ownership, without management, did not subject the out-of-state corporate member to California tax (although the LLC that was conducting the business in the state, and that the out of state company had invested in, was of course subject to it).

With this and other decisions, the OTA has shown that it will not rubber stamp positions taken by the FTB or other California tax agencies, especially when they make little sense, like the FTB's position in this case. Nonetheless, the FTB is anticipated to continue to apply the prior Swart case narrowly, and continue to maintain that passive members of LLCs organized or doing business in California are themselves also doing business in the state.