GChilcote, CPA wrote:

- quote -

A corporation that is "doing business" in CA is subject to
the $800 minimum franchise tax. "Doing business" is broadly
defined as "actively engaging in any transaction for the
purpose of financial or pecuniary gain or profit" (Cal.
Rev. & Tax. Code Sec. 23101). The purchase of goods or
services for the corporation would constitute "doing
business" by this definition (since such purchases
presumably would have been for the purpose of earning a
profit from the operations of the business). That's why the
FTB says signing checks is doing business.

"Doing business" is a year by year determination. For
example, the California Supreme Court has held that the
occasional purchase or sale of securities, even a single
transaction in one year, constitutes doing business (Carson
Estate Co. v. McColgan (1943) 21 Cal.2d 516, 517). The State
Board of Equalization, in an unpublished decision, recently
held that a Nevada single-member LLC owned by a California
resident was doing business in California (and therefore
subject to the $800 minimum tax) based on the performance of
managerial functions and the purchase of investments in
California (Appeal of International Health Institute, LLC,
Cal. St. Bd. of Equal., 3/7/06).

You might argue that this is de minimis, or even that the
client's recollection, on investigation, proved to be
erroneous, and that no checks were signed in CA, or that
none were signed in some years.

Katie in San Diego

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I have a client who is a California resident and is the sole
shareholder of an S-Corp formed in 5/98 in Nevada. The
Nevada S-Corp conducted no business until 2003, which is
when the client came to me to prepare his taxes. The
business in 2003 sold items by mail-order and from the
internet (e-Bay, Google ads...etc.) - with all the order
taking, handling and shipping taking place in Utah. The
proceeds of the sales were deposited into a checking account
with a Nevada bank over which the sole shareholder was the
sole signer. The sales were not as great as planned and the
business was discontinued in mid-2003. The initial return
for the S Corp was filed for TY 2003 with a loss of about
$10,000. No business has been conducted since the first
half of 2003. 2003, 2004 and 2005 Federal tax returns were
timely filed.

The client owned a second home in Nevada from 1998 through
2002 and now owns a home in Utah from 2002 to present.

My question is: My client passed on to me a questionnaire
sent to him by the California Franchise Tax Board regarding
TY 2004 asking why the corporation was filing a federal
return with a California address (my client's home address)
and wasn't filing a California S Corp return. We answered no
to all of the questions except were checks signed in
California to which we answered "yes" (to the recollection
of the client - checks were signed in California and Nevada
and Utah). Although we are talking about 10 checks total or
less.

I received a call a few days ago from the California FTB
stating that because checks were signed in California that
there was a requirement for a state return. I didn't argue
- assuming that this was just an information return as I am
not acquainted with California S Corp law. Now in preparing
the return I see that the S Corp may be subject to a minimum
$800 franchise tax for each year it's doing business in
California. Except for the check signing - no business was
conducted in California.

Finally, the question: Is there a way or are there
exemptions for foreign corporations to avoid the franchise
tax on an S Corp in California?

Thank you in advance for your help with this matter!

Greg Chilcote, CPA (UT & NV)

<< ================================================== ===== > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >