Posted by: Robert Horwitz | October 14, 2019

The New California Office of Tax Appeals Demonstrates Its Independence from the FTB by Robert S. Horwitz

At one time, the FTB took the position that a foreign limited liability company (LLC) did business in California, and was thus required to pay the annual $800 LLC tax, if it was a member of a LLC that did business in California.  In 2017, a California Court of Appeal in Swart Enterprises, Inc. v. FTB, 7 Cal. App. 497, held that a foreign entity that was a minority member of a manager-managed LLC, and had no other connection to California, did not do business in California and thus was not liable for the tax.

The FTB accepted the Swart decision, but took the position that Swart created a bright-line test based on ownership: since Swart owned 0.2% of a California LLC, a foreign entity that owned more than 0.2% of a California LLC was doing business in California.  In Satview Broadband, Ltd., Case No. 18010756 (Sept. 25, 2018), the California Office of Tax Appeals (OTA) rejected the FTB’s position.   A link to the Satview opinion is was not a precedential decision and thus was not binding, so the FTB continued to adhere to its bright-line test.

Along comes Jali, LLC, OTA Case No. 18073414.  Jali is a foreign LLC that owned a minority membership interest in Bullseye LLC, which did business in California.  The FTB asserted Jali had a filing obligation, so Jali paid the tax for 2012 – 2016 and filed refund claims.  The FTB denied the claims since Jali ’s ownership percentage (1. 12 % to 4.75%) exceeded the 0.2 % bright line.  Jali filed an appeal.

The OTA was not having the FTB’s claim that Swart set a “bright line” based on owning 0.2% or less of a California LLC.  The OTA identified what the Court in Swart deemed the relevant factors: that “Swart had no interest in any specific property of Cypress LLC, it was not personally liable for the obligations of Cypress LLC, it had no right to act on behalf of or to bind Cypress LLC and, most importantly, it had no ability to participate in the management and control of Cypress LLC.”  Thus, it found that “Swart did not establish a bright-line 0.2 percent ownership threshold for purposes of making nexus determinations for out-of-state members holding interests in in-state LLCs classified as partnerships.”  Since the relevant facts concerning Jali were indistinguishable from those in Swart, the OTA held that it was entitled to a refund.  The OTA ended by noting:

“While ownership percentages may be a factor in nexus determinations, it is not necessarily dispositive, as one must still generally conduct a fact-intensive inquiry into the relationship between the out-of-state member and the in-state LLC.  This may include whether the in-state LLC is manager-managed, whether the out-of-state member holds a non-managing member interest, and whether the out-of-state member is involved in the business activities of the in-state LLC.”

A link to the Jali opinion is

Two important points we should take from this decision:  first, a foreign minority investor in a manager-managed California LLC will not be liable for the annual $800 LLC tax if it is not involved in managing the LLC’s business; second and perhaps more significant, is that the OTA is not going to be a rubber stamp for taxing agencies. Some in the tax community had expressed concern that the newly -formed OTA would not be sufficiently independent from the taxing authorities.  Jali suggests the OTA is exercising its independence and that is a good thing for tax administration.

Contact Robert S. Horwitz at or 310.281.3200   Mr. Horwitz is a principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at

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