On January 12, 2017, the Court of Appeal issued a published decision in Swart Enterprises, Inc. v. Franchise Tax Board (Cal. App. 5th Dist. 2017) 7 Cal. App. 5th 497 (“Swart”). In this case, the Court of Appeal held that Swart Enterprises, Inc., an Iowa corporation ("Foreign Business Entity"), was not doing business in California and therefore was not subject to the $800 minimum franchise tax the Franchise Tax Board (“FTB”) had assessed.
In response to the Swart Court of Appeal decision, on February 28, 2017, FTB issued Notice 2017-01. In this Notice, FTB explained that it would not appeal the Swart Court of Appeal decision and would follow it in situations with the same facts. Notice 2017-01 also provided that to the extent taxpayers believe their situation has the same facts as in Swart, they should take that into consideration in determining if they have a California tax return filing obligation and/or whether to file a claim for refund, as appropriate. Finally, Notice 2017-01 provided that in any claim for refund, taxpayers should cite the holding in Swart and explain how their factual situation is the same as the facts in Swart.
In Swart, the Foreign Business Entity held a 0.2 percent membership interest in a manager-managed California limited liability company (LLC) that was doing business in California. The Foreign Business Entity acquired its 0.2 percent membership interest in the LLC after the original members made the decision for the LLC to be manager-managed. The original members delegated to a sole manager full, exclusive and complete authority to manage and control the LLC. The Foreign Business Entity’s sole connection to California was its 0.2 percent membership interest in the LLC.
Filing a Swart Refund Claim
In order to file valid claims for refund, the statute of limitations must be open for the tax year(s) and all tax, penalties, and interest must have been paid in full.
In general, the statute of limitations to file a claim for refund is the later of:
- Four years from the original tax return due date,
- Four years after the date of a timely filed tax return; or
- One year from the date of overpayment.
The refund claim must be signed by an authorized representative. Mail the refund claim and enclosures to:
Franchise Tax Board
PO BOX 942857
Sacramento, CA 94257-4040
It is well-established that each taxable year stands on its own as the factual situation can potentially vary from year to year (e.g., the taxpayer's membership interest percentage in the LLC could change; or the LLC could switch from being manager-managed to member-managed, or vice-versa). Therefore, taxpayers must substantiate their factual situation is the same as the facts in Swart for each taxable year at issue.
When filing a Swart refund claim with FTB, include the following:
- A citation to the Swart Court of Appeal decision.
- Taxpayer's name and identification number.
- Taxable year(s) involved.
- Name of person to contact, phone number, and fax number.
- Name and identification number of the LLC in which the taxpayer held its membership interest.
- For each applicable taxable year,
- Explain why the taxpayer has the same facts as in the Swart Court of Appeal decision (i.e., sole connection to California is a 0.2 percent membership interest, or less; in a manager-managed LLC; and the original members of the LLC delegated to a sole manager full, exclusive, and complete authority to manage and control the LLC).
- State the amount of the refund claim.
- Enclose with the refund claim copies of Federal Schedule K-1 (Form 1065) and California Schedule K-1 (Form 568) that the taxpayer received from the LLC.
- Provide any other documents substantiating the taxpayer's membership interest percentage in the LLC for each taxable year at issue.
In terms of taxpayers substantiating the LLC was manager-managed during the taxable year(s) at issue, taxpayers should be prepared to provide the following upon request:
- Copies of the articles of organization and all amendments of the LLC.
- Copies of the operating agreement and all amendments of the LLC.
- The date the LLC became manager-managed.
- The date the taxpayer acquired its membership interest in the LLC.
- Any other documents substantiating the date the LLC became manager-managed and the date the taxpayer acquired its membership interest in the LLC during the taxable year(s) at issue.
Swart Refund Claim Processing
We are currently processing Swart refund claims. If additional information is needed in order for us to make a determination whether to grant a taxpayer's refund claim, we will request additional information from the taxpayer.
If the claim is allowed, it will generally take 30-45 days from the date of that determination for the taxpayer to receive their refund. If additional information is needed, or the claim is denied, processing times will depend on the specific case. If the claim is denied, the taxpayer will receive applicable appeal rights.