Did a California LLC electing corporate tax treatment owe the minimum franchise tax for a 12-day formation year or its first full taxable year?

Plain-English summary

California Chief Counsel Ruling 2001-1231 held that an LLC electing corporate tax treatment owed no minimum franchise tax for either its 12-day formation year in 2000 or its first full taxable year in 2001.

The LLC's legal existence began when its articles of organization were filed on December 19, 2000, even though the Secretary of State issued a later registration in January 2001.

The 2000 short-year exception applied because the LLC conducted no California business and the tax year was 15 days or less. A separate first-year exception applied in 2001, although tax measured by net income still applied.

The formation facts

The LLC filed its articles of organization on December 19, 2000.

It conducted no business in California during the remaining 12 days of that calendar year.

It elected to be taxed as a corporation and to use the calendar year for tax accounting.

The taxpayer argued that it did not exist until the Secretary of State issued a registration on January 17, 2001. FTB rejected that starting point because California corporate law began an LLC's existence when its articles were filed.

The 12-day 2000 tax year

An LLC classified as an association was treated as a corporation for California tax purposes under section 23038.

Section 23114 relieved a corporation from taxes and fees when it did no California business during a taxable year of 15 days or less.

Because the LLC's first calendar tax year ran only from December 19 through December 31 and it conducted no business, no minimum franchise tax was due for that short year.

The first full year in 2001

Section 23153 generally imposed the $800 minimum franchise tax on an LLC electing corporate treatment unless an exception applied.

The ruling applied section 23153(f)(1) because the LLC came into existence after January 1, 2000 and 2001 was its first full taxable year of operation.

No minimum franchise tax was due for 2001 under that exception.

The exception did not eliminate tax measured by net income under section 23151. The LLC remained subject to that tax for 2001.

Holding

FTB concluded that:

• The LLC began legal existence on December 19, 2000, when its articles were filed.
• Its no-business 12-day 2000 year qualified under section 23114.
• Its first full 2001 year qualified for the section 23153(f)(1) minimum-tax exception.
• Net-income-based tax under section 23151 still applied for 2001.

What this means for you

LLC founders

Formation date can create a short taxable year before operations begin. The articles-filing date, not a later confirmation document, controlled in this ruling.

Startup tax teams

Minimum-tax relief and net-income tax are separate. An exception from the minimum does not necessarily eliminate all California tax.

Tax preparers

Keep the filed articles, proof of the filing date, business-activity records for the short year, federal and California classification elections, tax-year election, and first-year income records.

Common questions

Q: When did the LLC legally come into existence?

A: December 19, 2000, when its articles of organization were filed.

Q: Why was no minimum tax due for 2000?

A: The taxable year was 12 days and the LLC conducted no California business.

Q: Why was no minimum tax due for 2001?

A: It was the first full taxable year for an entity formed after January 1, 2000 and electing corporate treatment under the cited exception.

Q: Was the LLC entirely tax-free in 2001?

A: No. FTB stated that tax measured by net income under section 23151 still applied.

Q: Did the January 2001 registration issuance control the start date?

A: No. The articles-filing date controlled.

Citations and references

• Cal. Corp. Code § 17050
• Cal. Rev. & Tax. Code §§ 23038, 23114, 23151, and 23153(d)(1), (f)(1)

Source

• Landing page: Chief Counsel Ruling index
• Official ruling: Chief Counsel Ruling 2001-1231

Original ruling text

STATE OF CALIFORNIA
KATHLEEN CONNELL
FRANCHISE TAX BOARD
Chair
Legal Branch
CLAUDE PARRISH
PO Box 1720
Member
Rancho Cordova, CA 95741-1720
(916) 845-5316 Fax (916) 845-3648
B. TIMOTHY GAGE
Member

December 5, 2001
Chief Counsel Ruling
[410:DJH:CR-2001-1231]

Re: ****

Dear ****:

This is in response to your letter dated ***, in which you requested a chief counsel ruling on behalf of *****, regarding whether
* is subject to the minimum franchise tax for the ***. Your request makes the following factual representations, upon which the conclusions expressed in this ruling specifically rely:

A. The articles of organization were filed with the Secretary of State on ** .
B. * transacted no business in California during the calendar *. C. * elected to be taxed as a corporation. D. * elected to use the calendar year for tax accounting purposes.

In your letter, you suggest that * is not subject to tax for the ** because the Secretary of State registration was not issued until January 17, 2001. You assert that **** is entitled to be taxed as a corporation, and so is not subject to the minimum franchise tax in its initial year of operation in California.

As explained below, we agree that * is not subject to the minimum franchise tax for **, because that taxable year was less than 15 days. We also agree that since **** elected to be taxed as a corporation, it is not subject to the minimum franchise tax in its initial year of operation which is 2001 (it however is still subject to the tax measured by net income under Rev. & Tax. Code § 23151).

The existence of an L.L.C. begins upon the filing of the articles of organization with the Secretary of State. (Corp. Code § 17050.) Therefore, **** came into existence on December 19, 2000, the date on which the articles of organization were filed with the Secretary of State.

Page 2

CR-2001-1231
December 3, 2001
Page 2

An L.L.C. classified as an association for California tax purposes is defined as a corporation for the purpose of exercising its franchise within the state. (Rev. & Tax. Code § 23038.) A corporation is not liable for taxes and fees if the company does no business in California during the taxable year and the tax year was 15 days or less. (Rev. & Tax. Code § 23114.) If * transacted no business in California during the calendar **, and elected to be taxed as a corporation on a calendar year basis, then no minimum franchise tax is due for the calendar and ***.

An L.L.C. electing to be taxed as a corporation is required to pay the minimum franchise tax of $800 unless it qualifies under an exception to the general rule. (Rev. & Tax. Code
§ 23153, subd. (d)(1).) There are exceptions to the requirement of paying the minimum franchise tax for corporations under Rev. & Tax. Code section 23153. Under subd.(f)(1), since **** elected to be taxed as a corporation and came into existence after January 1, 2000, it is not subject to the minimum franchise tax for its first taxable year, which was 2001. It however is still subject to the tax measured by net income under Rev. & Tax. Code section 23151 for 2001.

Please be advised that the tax consequences expressed in this Chief Counsel Ruling are applicable only to the named taxpayer and are based upon and limited to the facts you have submitted. In the event of a change in relevant statutory, judicial or administrative case law, a change in federal interpretation of federal law in cases where our opinion is based upon such an interpretation, or a change in the material facts or circumstances relating to your request upon which this opinion is based, this opinion may no longer be applicable. It is your responsibility to be aware of these changes, should they occur.

This letter is a legal ruling by the Franchise Tax Board Chief Counsel within the meaning of Revenue and Taxation Code section 21012, subd. (a)(1). Please attach a copy of this letter and your request to the back of the appropriate return(s) (if any) when filed or in response to any notices or inquiries that might be issued.

Dennis J. Haase
Tax Counsel