Disregarded Limited Partnerships Not Subject to the California Annual Tax
Most legal entities, including those disregarded for federal purposes are liable for the $800 California minimum tax.
In Legal Ruling 2019-02, the California Franchise Tax Board (“FTB”) explained the fact situation under which a DLP would not be liable for the LLC Tax and Notice 2019-06 detailed the process by which an entity proves its DLP status. The ruling describes a structure where a DLP is owned directly by a taxpayer and other federal disregarded entities wholly owned by the same taxpayer.
For federal tax purposes, the DLP is disregarded. Pursuant to California Revenue and Tax Code § 23038(b)(2)(B)(iii), entities that are disregarded for federal tax purposes are similarly disregarded for California purposes. California Revenue and Tax Code § 23038(b)(2)(B)(iii) does not provide an exception for a federal DLP. Although California Revenue and Tax Code § 17935 and § 18633(a)(2) do not provide a filing exception for a DLP, the FTB conceded that DLPs are not required to pay the $800 tax or file a return due to the general conformity to federal DLP treatment codified in § 23038(b)(2)(B)(iii).
Subsequent to Legal Ruling 2019-02, Notice 2019-06 was released in which the FTB states a DLP must provide the following information to prove its DLP status:
- The certificate of limited partnership, partnership agreement, organizational chart of ownership, and federal income tax returns of the partners for the tax year or years in question; or
- A declaration signed under penalty of perjury by the general partner of the limited partnership. The declaration must clearly identify the general partner and must state that the limited partnership entity was disregarded for federal income tax purposes during the respective tax years. If the DLP’s general partner under local law is a limited liability company (LLC), then the manager (or, if there is no manager, the authorized member of the general partner LLC) must sign the declaration
Claims for refund are potentially available for all years still open under the statute of limitations. As a result, limited partnerships should analyze their filings for refund opportunities. However, relief may be short-lived as the FTB announced its intention to move forward with a legislative proposal that would require DLPs to pay the $800 tax and file a return for years beginning on or after January 1, 2020, similar to the current filing status of single-member LLCs.
Please contact your Mazars USA LLP professional for additional information.