~~Back in 2013, we had posted on an aggressive effort by the State of California Franchise Tax Board (FTB) to assess their minimum franchise tax of $800 on a passive investment in an investment by Swart Enterprises, Inc. which was a very small family farm corporation from Iowa. The corporation owned and operated a small 60-acre farm in Kansas and occasionally fed cattle for beef sales to Nebraska feedlots.
In 2007, Swart invested $50,000 in Cypress Equipment Fund XII, LLC (Cypress) which amounted to a 0.2 percent ownership interest. This was Swart's sole connection with California. Cypress was formed under California law in 2005 and elected to be taxed as a partnership. The FTB tracked down the Swart's investment in Cypress and assessed the $800 Franchise tax for "doing business" in California. This case has been winding its way through the California court system and yesterday, the California Court of Appeals ruled in Swart's favor.
The FTB's primary argument was that since the LLC elected to be taxed as a partnership and the Swart's were a member of the LLC, therefore, they are doing business in California. Without going into all of the details, the Court of Appeals did not find the FTB arguments to be very persuasive. As a matter of fact, the Court seemed to find some pleasure in tweaking the FTB for not following several of their other rulings on similar facts.
All-in-all, this is a very good victory for all taxpayers who have invested in these "limited partnerships or LLCs". Without this ruling, any investment in a passive investment that has any operations in California could require you to file an income tax return in the State of California and pay the minimum $800 franchise tax and pay someone like us to prepare the return (which may cost more than $800 since I can tell you the California tax returns are almost more complex than federal returns).