Swart Decision: How to File a Claim for a California Refund.

• Author: Bluth, Kelly
• Position: CATax

Taxpayers with minimal business ties to California may benefit from filing a claim for refund with the FTB if their situations arc similar to those in Swart Enterprises Inc. v. Franchise Tax Board.

On Jan. 12, 2017, the California 5th District Court of Appeal issued a published decision in Swart. In this case, the court held that Swart Enterprises--an Iowa corporation, and hence a foreign business entity--wasn't doing business in California. Accordingly, it wasn't subject to the $800 minimum franchise tax the FTB had assessed.

Notice 2017-01

In response, the FTB issued Notice 2017-01 on Feb. 28, 2017, explaining it wouldn't appeal the court's decision and would follow it for cases with the same fact pattern. The notice stated that taxpayers who believe their situation has the same facts as Swart should consider that when determining if they have a California tax-return filing obligation or if they need to file a claim for refund.

Notice 2017-01 also provided that in any refund claim, taxpayers should cite the holding in Swart and explain how their factual situation is the same.

Facts of the Case

In Swart, the foreign business entity's sole connection to California was a 0.2 percent membership interest in a manager-managed California LLC that did business in California. The foreign business entity acquired its membership interest in the LLC after the original members made the decision for the LLC to be manager managed--giving a sole manager full, exclusive and complete authority to manage and control the LLC.

Statute of Limitations on Filing a Refund Claim

To file valid refund claims, the statute of limitations must be open for the tax year and all tax, penalties and interest must have been paid in full. In general, the statute of limitations is the later of:

* Four years from the original tax return due date;

* Four years after the dale of a timely filed tax return; or

* One year from the date of overpayment.

The refund claim must be signed by an authorized representative and mailed with the enclosures to: Franchise Tax Board; PO BOX 942857; Sacramento, CA 94257-4040.

Substantiating the Claim

For these returns, each taxable year stands on its own, as the situation can vary from year to year. For example, a taxpayer's LLC membership interest percentage could change, or an LLC could switch from being manager managed to member managed. As such, taxpayers must substantiate their situation is the same as the facts in Swart.

Key Submission Items

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