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California FTB Tries to Collect Taxes from an Iowa LLC—and Loses

by Norris Law Group on December 16, 2014

Swart Enterprises, a corporation based in Iowa, received a tax bill from the State of California, although it did no business in California. The Franchise Tax Board (FTB) of California decided that because Swart Enterprises invested in $50,000 in Cypress Equipment Fund XII, a California LLC, Swart was liable for taxes and interest penalties totaling $1106.71, according to Forbes magazine.

The FTB claimed that Swart owed this tax because “being a member of an LLC is considered the same as being a general partner in a partnership for federal income tax purposes,” and therefore, status as a general partner is the same as “doing business” in the state of California.

Swart Enterprises chose to pay the tax, but they also sued for a refund on the grounds that they did not believe they ever owed the tax. A California court agreed with Swart, and ordered the FTB to refund the taxes and penalties. In their opinion, the Court found that the FTB had “no authority” to order Swart to pay this tax, and also that the FTB was misinterpreting the CA statute that outlines what constitutes a general partnership within the state.

Why should businesses in other states care about this outcome? Attorney Paul Hastings is quoted in Forbes:

“The FTB’s position would have turned all of these investors into California taxpayers. Investments such as this are frequently made through special purpose vehicles and multi-tier pass-through structures. Under the FTB’s aggressive interpretation, it is possible that one entity deemed to be “doing business” within California could trigger annual filing requirements for many parties, resulting in both tax costs and disclosure costs.”

Hastings also cautions investors in California entities that although Swart won in this case, the issue may arise again, as the FTB has 60 days to appeal the Court’s decision, which was rendered in early December 2014.

Attorney Graham Norris and his associates at the Norris Law Group serve the residents of Utah County, UT and throughout Utah, Wyoming, Idaho, and California. Contact them today at 801-932-1238 or online for a free consultation.

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