United States

California: FTB Issues Guidance on Swart Decision

Mar 06, 2017
From KPMG TaxWatch

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In a recent decision, Swart Enterprises, Inc. v. Franchise Tax Board, a California Court of Appeal held that a corporate taxpayer was not “doing business” in California merely by virtue of passively holding a 0.2 percent ownership interest in a manager-managed California LLC. Significantly, the corporate taxpayer had no right to act on behalf of or to bind the LLC and had no ability to participate in the management and control of the LLC. For the tax years at issue, “doing business” was defined as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” In other words, the decision addressed tax years before the state’s doing business standard was revised to include a factor presence test.

The FTB recently announced that it will not appeal the Swart decision. Per Notice 2017-01, the FTB will follow Swart “in situations with the same facts.” To the extent taxpayers believe their situation has the same facts as in Swart, the Notice states that taxpayers should take these facts into consideration when determining if they have a return filing obligation and/or should file a claim for refund. If a claim for refund is filed, the holding in Swart should be cited and the taxpayer must explain how their factual situation is the same as the facts in Swart. It is not clear from the Notice what exactly the FTB means by “the same facts.” Arguably, this could mean that any taxpayer with an ownership interest greater than 0.2 percent does not have the “same facts” as in Swart and must pay the minimum tax, even if the nature of the investment is the same. Please contact Scot Grierson at 949-885-5643 with questions on Notice-2017-01.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.