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Tax Law

Swart Distinguished: Foreign LLC Doing Business in California by Virtue of its 50% Interest in Pass-through Entity

The California Office of Tax Appeals (OTA) found that a foreign single-member LLC domiciled in Georgia was “doing business” in California by reason of its 50 percent interest in a pass-through LLC operating in California (LLC) and thus, was subject to the state’s annual LLC tax. The OTA focused on California’s definition of “doing business” in Cal. Rev. & Tax Code § 23101(a), which provides that a person is doing business in the state if it “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” In ruling against the taxpayer, the OTA distinguished the taxpayer’s facts from Swart Enterprises, Inc. v. Franchise Tax Bd., 7 Cal. App. 5th 497 (Ct. App. 2017), which held that an out-of-state taxpayer was not “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit” – i.e., not “doing business” – in California by reason of its small (0.2%), non-managing member interest in a manager-managed LLC investment fund. The OTA reasoned that unlike in Swart (and because the taxpayer failed to provide requested supplemental briefing on the relevant issue), the doing business status of the LLC was attributable to the taxpayer because: (1) the taxpayer failed to show it was not a managing member of the LLC doing business in California; (2) the taxpayer would have significant authority over the activities of the LLC by virtue of its 50 percent interest; (3) although the taxpayer did not have a controlling interest, no other member of the LLC had a larger interest; and (4) the taxpayer presumably could have used its 50 percent interest to block the LLC from taking actions it disagreed with, if it was so inclined.

Appeal of Wright Capital Holdings LLC, Dkt. No. 2019-OTA-219P (Ca. Office of Tax App. Aug. 21, 2019).