On Nov. 20, 2019, the California Franchise Tax Board (FTB) issued Legal Ruling 2019-02, providing that limited partnerships disregarded for federal tax purposes are not required to pay California’s annual $800 minimum tax and are not required to file California partnership returns. Recall that prior to this ruling, the FTB had taken the position that disregarded limited partnerships doing business in California were subject to the minimum tax and the filing requirements.
Many criticized that prior position, believing it was of questionable legality since California law states that if the separate existence of an eligible business entity is disregarded for federal tax purposes, the separate existence of that business entity is disregarded. (See Cal. Rev. & Tax. Code section 23038).
Legal Ruling 2019-02 explains that limited partnerships disregarded for federal income tax purposes are no longer subject to the annual minimum tax under Cal. Rev. & Tax. Code Sec. 17935 or the filing requirement under section 18633. In FTB Notice 2019-06, the FTB states that limited partnerships that have received (or might receive) a Filing Enforcement Notice can submit the following information to avoid enforcement: certificate of limited partnership, partnership agreement, ownership organizational chart, and partners' federal returns for the tax year(s) in question or a signed declaration stating that the entity was disregarded for federal income tax purposes during the respective tax years.
Takeaways
Limited partnerships who have paid the minimum tax will be able to file claims for refund for open tax years. Note that the revised rules apply only to limited partnerships, and not to other entities that are disregarded for federal income tax purposes (e.g., limited liability companies). Limited partnerships doing business in California should consult with their tax advisors to determine the appropriate course of action.
