FTB Seeks an LLC’s Tax From You Personally: Read the Transferee Theory and Trace the Payment

If FTB seeks your LLC’s unpaid tax from you personally as a transferee, start with the exact theory in the notice and the payment it identifies. Membership alone does not create personal liability for an LLC’s debts under California Corporations Code section 17703.04. A personal guarantee and receipt of a transfer without reasonably equivalent value present different possible grounds for liability. The evidence needed to answer one may leave the other unresolved.

In Appeal of P. Fahey, OTA reversed a transferee assessment because FTB failed to prove that an owner’s consulting payment lacked reasonably equivalent value. The nonprecedential decision illustrates why the exchange itself matters.

Identify what the notice is trying to collect

Keep the proposed assessment, protest decision and any collection correspondence together. Identify the entity, tax year, amount, asserted transfer and legal basis for personal liability. Check whether FTB is asserting that you assumed a debt, received an improper transfer or owe tax directly.

A corporate tax election can also matter to the underlying tax account. In Fahey, the single-member LLC had elected corporate treatment. The appeal concerned collection of that entity’s obligations from its owner, rather than simply treating every dollar as the owner’s personal tax.

Have the applicable response deadline reviewed from the actual notice. Gathering transaction records should proceed alongside that review, not postpone it.

Trace the payment and the value received by the LLC

Locate the bank transfer, ledger entry, invoice or agreement. Then identify what the LLC received in return. If payment was for services, describe the actual work, the period, who performed it and how the amount was determined.

Supporting records may include work product, sales records, correspondence, schedules or contemporaneous business documents. A payment labeled “consulting” needs an explanation beyond the label. Conversely, the fact that the recipient was the owner does not by itself establish that the entity received nothing of value.

For example, an owner who performs the business’s production and sales work may have records connecting those services to a fee. An unexplained withdrawal with no identified exchange presents a different question. These examples illustrate the evidence to examine; the reasonableness of a particular amount requires its own facts.

Compare the business and individual reporting

Read the entity’s return and accounting treatment beside the recipient’s return. Explain inconsistencies instead of assuming that the records say the same thing. Keep the original return versions and any amendments.

In Fahey, the business reported the consulting payment and the owner reported corresponding income and self-employment tax. OTA considered that consistency alongside credible declarations about actual cultivation, processing, packaging and sales work. The opinion also flagged a difference in classification: Fahey described himself as an employee but reported consulting income, while the LLC deducted the fee as a cost of goods sold rather than officer compensation. FTB had not proposed to disallow that deduction. Document both sides’ actual treatment and explain any mismatch; reporting consistency is only one part of the analysis.

Reporting a payment is evidence of how it was treated. It does not independently resolve whether the amount represented reasonably equivalent value or whether some other tax rule applies.

Place the payment on the tax and financial timeline

Record when the transfer occurred, when the underlying tax accrued and the financial position of the business around the transfer. Preserve balance sheets, asset records, relevant liabilities and the collection history.

These records serve different purposes. A bank statement may show a payment but say little about value exchanged. A balance sheet may bear on insolvency but need supporting detail. Collection correspondence may show what FTB attempted against the entity before pursuing the recipient.

The Fahey opinion identified three additional failures of proof. The payment occurred in 2017, before the corporate tax accrued on April 15, 2018. FTB had not established insolvency, and the balance sheets showed assets exceeding current liabilities. FTB also supplied no evidence of collection attempts against the LLC. Which elements matter depends on the substantive theory actually asserted.

Keep the personal assessment separate from the entity’s debt

Successfully contesting transferee liability addresses why the government can collect from the recipient. It does not necessarily dispose of the entity’s tax obligation. Likewise, this review does not decide a separate guarantee, direct personal tax liability or another asserted basis for collection.

The Fahey opinion explains the burden and the particular consulting payment. For your own response, assemble a transaction-specific account: What moved, what the business received, when it happened and why the notice says that makes you liable.