On January 12, 2017, the California Court of Appeal held in a published opinion that a taxpayer passively holding a 0.2 percent interest in a California-based limited liability company (CA LLC) was not “doing business” in the state for purposes of being subject to California’s franchise tax. The court reasoned as follows:

  • Under California Revenue Code Section 23101, “doing business” means “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit” (emphasis added) and the taxpayer did not “actively” engage in any transaction because it had held its investment in the CA LLC for several years prior to the tax year in issue and played no role in the CA LLC’s‎ operations.
  • The CA LLC’s election to be treated as a partnership for federal income tax purposes did not mean that the taxpayer should be treated as a general partner (which would impute the partnership’s activities to the taxpayer and cause the taxpayer to be doing business in California) because a tax election for one purpose does not necessarily control for all taxation purposes in all circumstances.
  • After resolving the case on statutory grounds, the court expressly declined to consider any constitutional issues.

View the full Legal Alert.