FTB says filing requirement for non-resident performing services outside CA

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Message Board FTB says filing requirement for non-resident performing services outside CA

This topic contains 4 replies, has 3 voices, and was last updated by Lynn Freer 1 week, 3 days ago.

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  • #123319
    Jenny Jia
    Participant

    Hello,

    The client is organized as an LLC in CA (3 of the partners are based in CA) but all the business happens in Indiana – they own 2 buildings there that are locally managed. The LLC files a composite tax return for Indiana.

    A 1099 for the property manager was erroneously sent to the FTB so the FTB sent a Notice of Proposed Assessment to the manager.

    We protested with an explanation that this was income earned by a nonresident of CA and the purchaser of their service (the LLC) received the benefits outside of CA so it’s not taxable to CA. We also issued corrected 1099s that showed $0 in box 7 on the state form.

    The FTB responded with a letter from the Filing Enforcement Section that references FTB Pub 1031. I called the practitioner hotline and the agent said the law changed so a CA tax return is required since the LLC is organized in CA. I’m having trouble finding anything that backs this position up. The manager is not a partner in the LLC, the real property is not in CA, and the income should not be sourced to CA.

    We prefer not to file a CA tax return – the manager is not our client. I’m plan to respond to the letter but also am thinking we should bring in the tax advocate. Does anybody have advice for this situation?

  • #123420
    Lynn Freer
    Participant

    The LLC must file a return. This is nothing new. If they are registered in CA they must file. If the managing members are in CA they must file

    Every partnership (including LLPs and REMICs classified as partnerships) must file Form 565, Partnership Return of Income, and every LLC not classified as a corporation must file Form 568, LLC Return of Income, if the entity:

    Is doing business in California;
    Is registered in California;
    Is registered in another state or foreign country, but registered with the SOS; or
    Has income from California sources.
    (R&TC §§18633, 18633.5)

  • #123455
    Jenny Jia
    Participant

    Thanks Lynn. To clarify, the LLC did file a return.

    The issue is the property manager (who is not our client) who the FTB says needs to file a CA return even though they are a nonresident and the income is wholly sourced out of state.

  • #124490
    Tony Alvarez
    Participant

    Hello Jenny–

    Why was the property manager 1099 in the first place? Was this for actual services? Reimbursements or lodging? This may be helpful to argue the erroneously 1099.

    Tony

  • #124594
    Lynn Freer
    Participant

    I’m sorry I misunderstood. No, the property manager shouldn’t have a filing requirement if he/she is not in CA and the property isn’t in CA. You might want to contact the Taxpayer Advocate’s office to get a resolution.