It was one of those days where I remember exactly where I was and what I was doing. February 28, 2017 is etched forever in my mind as the day the California Franchise Tax Board (“FTB”) released FTB Notice 2017-01. My heart was warmed over (or maybe it was just that it was 58 degrees in New York at the end of February) by the fact that the FTB saw the light and decided to follow the law.
For the uninitiated, California is notorious for grabbing the $800 minimum franchise tax (plus interest and penalties) from unsuspecting “taxpayers” whose only contact with California is a deminimus interest in a partnership or LLC. I outlined the typical scenario in my March 6, 2017 blog (https://blogs.berdonllp.com/salt-talk-california-minimum-franchise-tax-refund-opportunity-may-the-swart-1-be-with-you) to commemorate the release of the Notice.
From the beginning of time, the FTB has insisted that the minimum franchise tax applies to virtually anyone. It was not until the 1997 taxpayer victory in Appeal of Amman & Schmid Finanz AG, which held that a limited partner is not considered doing business in California if this is the only California connection. The FTB refused to apply the same logic to LLC interests until they lost the decision in Swart Enterprises, Inc. v. Franchise Tax Board.
The directive seemed clear. The FTB Notice concluded:
The Franchise Tax Board will not appeal the Swart decision. The Franchise Tax Board will follow the Court of Appeal decision in Swart in situations with the same facts. To the extent taxpayers believe their situation has the same facts as in Swart, they should take that into consideration in determining if they have a return filing obligation and/or file 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 the same as the facts in Swart.
Now how would a reasonable person (or taxing authority) interpret “situations with the same facts?” I now know the answer. In September 2018, a client received a letter from the FTB stating that we will certainly consider your protest of the $800 franchise tax from 2015, but first please send us (amongst other things) “. . .the name(s) and identification number(s) of the LLC(s) doing business in California in which you own equal or less than 0.2 percent membership interest.”
I thought I was forever done with this issue. My heart has turned cold once again, despite the beautiful weather. The battle the FTB knows most taxpayers won’t fight, continues and 0.2 is now the loneliest number. If this issue raises questions, contact me at WBerkowitz@BerdonLLP.com or your Berdon advisor.
Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.