ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – DOING BUSINESS IN CALIFORNIA – WHAT DOES “COMMERCIALLY DOMICILED” MEAN?
By Robert S. Schriebman
What does “doing business” in California mean for purposes of assessing FTB minimum franchise taxes? If you are doing business in California as a corporation or LLC, you are required to pay an annual minimum franchise tax of $800 (R&TC § 23101). If you fail to pay this tax in a timely fashion, you will be assessed not only the tax but penalties, fees, and interest. Why? Because an annual minimum franchise tax must be paid when a business is “commercially domiciled” in California.
On March 9, 2021, the Office of Tax Appeals (OTA) issued a decision requiring an Arizona-based LLC, that only owned only vacant land, and had no income, to pay back franchise taxes including penalties and a fee that could not be abated under the law. This article will discuss the case of DPMG Juniper LLC (Mar. 9, 2021), and what constitutes being “commercially domiciled” in California for purposes of being taxed.
The Case of DPMG Juniper LLC (DPMG)
The DPMG case is a questionable example of how the OTA stretches the law and requires the taxpayer to prove a negative. Here’s the story.
DPMG is an Arizona LLC. It was created in Arizona and its only asset is a parcel of undeveloped land located in Chandler, AZ. The LLC generates no income. It is basically inactive. Its officers and shareholders, Robert and Gilbert, reside in California. The company has no other officers or employees. DPMG filed only a federal income tax return in 2017 showing the California address of its two owners. It did not file a California return. It has no California address.
The FTB sent DPMG a demand for a 2017 return and a demand for a minimum franchise tax of $800. When this was not paid in a timely fashion, the FTB imposed a $200 demand penalty and an $85 filing enforcement fee together with interest. DPMG paid the assessment and filed a claim for refund.
The central issue in the case was whether or not DPMG is “doing business” in California. If so, it must pay a minimum franchise tax. Todd v. McColgan (1949) 89 CA 2nd 509 (R&TC 23101). Doing business means actively engaging in any transaction for the purpose of financial or pecuniary gain or profit (R&TC § 23101(a)).
An enterprise is also doing business, within the meaning of the statute, if it is “commercially domiciled” in California. What does this mean? Normally, the word domicile means, a physical location where one tends to remain indefinitely. We know from the facts that DPMG never set foot in California. Its only asset is physically located in Arizona. It made no income in California. So, how can it be commercially domiciled here?
The OTA asked Robert and Gilbert to prove a negative – that they didn’t do business in California. They promptly responded that the business situs is in Arizona. Robert and Gilbert reside in California, but how does this fact impact DPMG?
The OTA responded by stretching the facts so they could “bootstrap” an assessment and create it out of whole cloth. The OTA said that commercially domiciled means the location where the corporate management functions – the place where real control exists. (Appeal of Norton Simon, Inc. (72-SBE-008) 1972 WL 2642). The OTA found that the FTB was justified in demanding a tax return and franchise taxes because Robert and Gilbert controlled the LLC and they resided in California. Gilbert and Robert argued, without success, that they perform no managerial functions at all due to the fact that there is nothing for them to manage. They own an inactive LLC that owns unproductive land and generates absolutely no income. The OTA on the other hand, ruled that Gilbert and Robert had the power and the potential to perform managerial functions; and that was enough to establish a commercial domicile in California.
Abatement of Penalties
The FTB assessed a $200 demand penalty and an $85 filing enforcement fee. Gilbert and Robert requested that these assessments be abated due to reasonable cause. They asked the OTA to issue a refund. Nothing doing, said the OTA. There was no reasonable cause shown for removal of the demand penalty and the filing enforcement fee could not be abated under the law. R&TC § 19254(a).
After reading this case, it became clear to me that “commercially domicile” is a fiction that allows the FTB to stretch out its hand and grab money that it is questionably entitled to.
The late Robert K. Castetter, Dean of California Western School of Law, often said, “There is not enough justice to go around.” The OTA proves the Dean’s wisdom. This is a forced conclusion similar to trying to put a square peg in a round hole. The more I read these OTA decisions, the more I am convinced that this is not a forum I would recommend to a client.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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