FTB Loses against an Out-of-State Nevada Corporation Owned by California Resident

In February, the Franchise Tax Board (FTB) lost a case, DANIEL V INC. v. Franchise Tax Board, in a Los Angeles Superior Court where it had asserted that a Nevada Company was commercially domiciled in California because it was owned by a California resident, Ron Lane. The FTB assessed taxes, interest and penalties in excess of $2.27 million for the 1997 and 1998 tax years. The Company appealed through the FTB appeals process and then the Board of Equalization, losing in both instances. The Company then paid the taxes, and sued the FTB for a refund.

California Revenue and Taxation Code Section 25120(b) defines a corporation's "commercial domicile" as "the principal place from which the trade or business of the taxpayer is directed or managed."

In this case, the Company's only contact with California was that the Company's sole owner and a member of the board of directors, Mr. Lane, was a California resident. There was, however, no evidence that the Mr. Lane managed, in any way, the operations of the Company; that was done by the Nevada officer.

The Company submitted uncontroverted evidence to prove that its commercial domicile was in Nevada. The Company maintained its corporate office in Nevada. The Company's bank accounts were held at the Bank of America branch in Las Vegas, Nevada, and its brokerage accounts were maintained with the Merrill Lynch office in Las Vegas, Nevada. Board of Directors meetings were held at the Company's office in Nevada. The Company's original books and records were also maintained in Nevada. The FTB submitted no direct evidence to support its contention that the Company was directed or managed by Mr. Lane.

Superior Court Judge Mark V. Mooney noted that even though the Company was owned by a California resident, there was no evidence that the Company was managed by the California resident. To the contrary, all the evidence demonstrated that the Company was managed by its Nevada officer. Therefore, Nevada was the Company's commercial domicile, and not California.

Judge Mooney ordered the FTB to refund the $2.27 million, plus interest, costs and attorney fees. Judge Mooney held that the business did not have any commercial connection to California, essentially meaning that no operational or managerial direction came from California.

So it appears that a California resident can be the sole owner of an out-state-company without subjecting the corporation to California taxes; however, don't expect the FTB to agree with you without a fight. On February 22, 2013, the FTB filed an Objection to the Proposed Judgment. We'll keep you posted on where the case goes from here.

No link to the Court's decision is currently available, however, you can click here to read the BOE's decision which was ultimately overturned. We'll post a link to the case as soon as its available.

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