By Stephen Burroughs and Pilar Mata

The California Franchise Tax Board (FTB) issued a legal ruling determining that it will attribute the business activities of a multiple-member limited liability company classified as a partnership for tax purposes (LLC) to its members when determining whether such members are “doing business” in California. As a result, out-of-state business entities that own a membership interest in an LLC doing business in California will be subject to tax themselves. In reaching this determination, the FTB acknowledged that LLCs share characteristics with both partnerships and corporations but determined that LLCs that do not “check the box” for federal tax purposes are considered partnerships under California tax law. Because “the activities of [a] partnership are attributed to each partner,” the FTB concluded that “if an LLC…is ‘doing business’ in California [then] the members of the LLC are themselves ‘doing business’ in California.” The FTB declined to extend the exception provided to limited partnerships in Amman & Schmid Finanz AG, et al., 96-SBE-008, April 11, 1996, to LLCs on the ground that, unlike limited partners, LLC members have the statutory right to manage or control the decision-making process of the entity. The legal ruling includes six examples. The first two examples find that an LLC merely registering to do business or organizing in California is not actively engaging in a transaction for the purpose of financial gain or profit attributable to its members, and therefore will not create a filing requirement for its members. The other examples demonstrate that the FTB will consider a member of an LLC to be doing business in California if the LLC is commercially domiciled in California or has activities or factor presence in California sufficient to constitute “doing business” within the meaning of Cal. Rev. & Tax. Code § 23101. The ruling has come under criticism from practitioners not only disagreeing with the ruling’s substantive conclusions but also its timing, as the FTB is actively litigating related issues in the California courts. California FTB Legal Ruling 2014-01 (July 22, 2014).