Tuesday, June 21, 2011

Appeal of Destino Properties, LLC

Here is a June addition to our ongoing discussion of questionable state tax laws.

This one takes us to California.

Destino Properties LLC (“LLC”) was organized in Nevada. It had one asset: a single family home in Nevada. The LLC had four members, three of which lived in California. One of the California members received the rental checks and deposited them to a California bank account. The LLC argued that the majority of its management activities, to the extent there were any, took place outside California.

Let’s add one more fact. California charges an $800 annual fee for LLCs and disregarded entities doing business or registered in the state. The LLC was not registered in California.

Question: does Destino have to pay the $800 fee to California?

The Franchise Tax Board (FTB) contended that Destino was doing business in California because actions by members are attributable to the LLC. Therefore, if the member performed activities in California, those activities could be imputed as LLC activities.

Think about this for a second. The one activity of the LLC was to rent property. It did this in Nevada. The title was in Nevada. The insurance was in Nevada. The real estate taxes were in Nevada. Last time anyone looked, Nevada was not a county of California. Did the managerial activities of the LLC (three-fourths of which were in California) outweigh THE SOLE operational activity of the LLC (which was ALL in Nevada)? What if the LLC was a plastic fabricator with a workforce of 200 employees? Would it still be pulled in by California? At which point would the operational activities of the LLC outweigh the managerial activities of its members?

California reasoned that receiving rental checks, authorizing repairs and hiring a California tax preparer all constituted “doing business” in California. Here is tax planning: hire K&C as your CPAs. We are in Ohio, which is not California. We might recommend that the rental checks also come here, and we could deposit them on your behalf. You could choose an Ohio or a Kentucky bank, as Kentucky is just across the river. That would be two less activities for California to claim.

What is going on, of course, is that California was going find nexus, no matter what.

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