Ask the Advocate
As you know, I get many questions from practitioners about how to handle their client specific issues. This month, I received an interesting question from a practitioner in the bay area relating to “doing business.” Does an out-of-state single member LLC that is disregarded for income tax purposes and whose only asset is a personal vacation home located out-of-state need to file a California LLC return and pay the annual tax if the single member/owner of the LLC is a California resident?
R&TC Section 17941 requires LLCs “doing business” in the State, as defined by Section 23101, to pay the annual tax. If the member of an LLC is “doing business” in California, the LLCs is “doing business” in California and subject to the annual tax. Likewise, if the LLC registers with the California Secretary of State, it must file and pay the $800 annual tax. So what is “doing business”? R&TC Section 23101 defines "doing business" as actively engaging in any transaction for the purpose of financial or pecuniary gain or profit. This is a facts and circumstances test.
The California residence of the sole member of a single member LLC, without more, does not mean that the LLC is “doing business” in California. But if that sole member, in his capacity as member of that LLC, has actively engaged in any transaction in California for the purpose of financial or pecuniary gain or profit, the LLC is “doing business” in California. Obviously, if the property was ever rented or even advertised for rent, then the basis for “doing business” may be there – depending on whether the single member actively engaged in a rent-related activity in California. But let’s assume that the only use of the residence is personal use by the owner of the LLC. Expenses associated with mere ownership of property, such as paying taxes, do not usually rise to the level of “doing business.”
So, which activities are enough to be considered “doing business”? This is where, sometimes, I must advise practitioners to weigh all of their client’s facts and circumstances and take a filing position. As stated in FTB Notice 2009-8, the answers to questions that depend principally on factual issues such as unity, residency, and doing business are no-ruling areas. We generally follow federal policy with respect to no-ruling areas and will ordinarily not issue Chief Counsel Rulings in certain areas because of the highly factual nature of the problems involved. In this case, it is up to the practitioner to interpret the law as it applies to the client’s circumstances.
Steve Sims, EA
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