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From:  Mike
Date:  Fri, 20 Jul 2007

I live in California and recently made a 1031 exchange of a duplex to three different "TIC" properties in other states.

I have LLCs holding each of the properties. The "principal business office" for the LLCs is my California residence, and the "Registered Office and Agent" is in Delaware. I make no decisions concerning the management of the properties, but I do have voting rights over the management company and sale of the property.

Do these LLCs have to be registered in California and then pay the $800 yearly minimum tax plus fees? I was originally told that using the Delaware LLC and having the registered office in Delaware would avoid this.

Answer

Date:  Thu, 26 Jul 2007

Hello Mike,

The State Board of Equalization has upheld the Franchise Tax Board position that, since the managing member of the LLC is located in California, the LLC is subject to California tax.

The $800 fee isn’t currently in dispute, but a San Francisco District Court has ruled the California LLC "fee" based on gross income, without apportionment, is an unconstitutional tax. The current "party line" is to pay the fee to the Franchise Tax Board and file a protective claim for refund.

Good luck!
Mike Gray

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