Swart Enterprises v. Franchise Tax Bd.Annotate this Case
Swart is a small family-owned corporation, incorporated in Iowa, with its place of business and headquarters in Iowa. At issue is whether the franchise tax applies to Swart, whose sole connection with California is a 0.2 percent ownership interest in a manager-managed California limited liability company investment fund (Cypress LLC). The court concluded that passively holding a 0.2 percent ownership interest, with no right of control over the business affairs of the LLC, does not constitute “doing business” in California within the meaning of section 23101. In this case, Swart was not doing business in California based solely on its minority ownership interest in Cypress LLC. The court explained that the Attorney General’s conclusion that a taxation election could transmute Swart into a general partner for purposes of the franchise tax, and that the business activities of Cypress can therefore be imputed to Swart, is not supported by citation to appropriate legal authority and defies a commonsense understanding of what it means to be “doing business.” Accordingly, the court affirmed the judgment.