Garcia-Rojas v. FTB: Why the Unitary-Business Theory Failed at Summary Judgment

When the Franchise Tax Board moves for summary judgment on a novel theory, it must show that theory is legally sound and that no disputed fact could alter the outcome. In Garcia-Rojas v. Franchise Tax Board, No. A172054 (Cal. Ct. App. May 1, 2026), the First Appellate District reversed a trial court ruling that had accepted FTB's unitary-business framework as the basis for taxing a Texas radiologist's income derived from reading medical images for a single California corporation. The appellate court found that the doctrine FTB invoked was built for a different factual world — one involving multiple commonly owned or integrated entities — and that the record before the court described, at most, one sole proprietor, one line of activity, and one corporate client. That mismatch was fatal to summary judgment. The case now returns to the trial court with the central tax question still unresolved, and with a different taxing theory expressly left open.

Procedural Posture and How the Case Reached the Court of Appeal

The taxpayer, Xavier Garcia-Rojas, a radiologist licensed in Texas and several other states who filed jointly with his spouse Sana Garcia-Rojas as co-appellants, performed remote image-reading services for a California medical corporation. He used the corporation's software, equipment, and support infrastructure, and he read images that originated both inside and outside California. He reported the income on Schedule C as sole-proprietorship income. After paying California income tax on amounts FTB attributed to him, he filed refund claims. When the Franchise Tax Board did not respond to those claims, he brought suit in superior court. FTB moved for summary judgment, arguing that regulation 17951-4(c) — which addresses apportionment for nonresident sole proprietors carrying on a business, trade, or profession — applied through a unitary-business lens that required treating the radiologist's activity and the California corporation as a single integrated enterprise. The trial court agreed and entered judgment for FTB. The radiologist appealed.

What Regulation 17951-4(c) Actually Addresses

California Code of Regulations, title 18, section 17951-4(c) governs how a nonresident's income from a business, trade, or profession is sourced when that activity extends across state lines. The regulation contemplates apportionment — a method of dividing income among states based on factors such as payroll, property, and sales — rather than simple source-based allocation. FTB's theory was that the radiologist's sole proprietorship itself constituted a unitary business — one carrying on a single trade or profession within and without California — which would justify applying apportionment rules under regulation 17951-4(c) that could pull more of his income into California's tax base. The trial court accepted that framing, reasoning that he used StatRad's resources in the same manner regardless of which state's images he read. The Court of Appeal examined that theory carefully and found it did not fit the regulation's structure or the case law FTB cited in support.

The Unitary-Business Doctrine and Its Structural Requirements

The unitary-business principle has a well-developed history in state corporate income taxation. It allows a state to look past formal entity boundaries when commonly owned or functionally integrated businesses operate as a single economic enterprise, ensuring that income is not artificially shifted among affiliates to minimize state tax. The authorities FTB relied upon — including cases and administrative decisions addressing corporate groups and related-party arrangements — shared a common feature: they involved two or more entities under common ownership or with deep operational integration. The Court of Appeal observed that those precedents were not designed to collapse a sole proprietor's independent activity into a unitary enterprise with a corporation that was merely his client. The structural predicate the doctrine requires was absent from this record.

Why the Record Could Not Support the Theory

At summary judgment, the moving party must demonstrate that there is no triable issue of material fact and that it is entitled to judgment as a matter of law. FTB's burden was therefore to show that the unitary-business framework applied as a legal matter given the undisputed facts. The court found that the record described a sole proprietor performing a single category of professional services for one corporate client, using that client's tools and infrastructure. There was no evidence of common ownership between the radiologist's sole proprietorship and the California corporation, no shared management, and no integration of the kind that unitary-business doctrine is designed to address. Regulation 25120, which defines terms used in the apportionment context, also speaks in terms of two or more businesses — further undercutting FTB's attempt to treat a single-activity sole proprietorship as a unitary enterprise with its client.

The OTA Bindley Reasoning and Why the Court Declined to Follow It

FTB pointed to reasoning from the Office of Tax Appeals in a prior administrative decision sometimes called Bindley as support for its position. The Court of Appeal acknowledged that administrative interpretations can carry persuasive weight but noted that OTA decisions are not binding on California courts. More importantly, it found Bindley unpersuasive because that decision applied tests for determining whether two businesses are unitary while ignoring the threshold requirement that separate business activities must exist to be united—a prerequisite absent from a single-activity sole proprietorship. The court's refusal to follow the OTA reasoning here reflects the broader principle that doctrines developed for multi-entity corporate structures cannot be mechanically extended to sole proprietors without a careful examination of whether the underlying rationale applies.

What the Court Left Open on Remand

Reversal of summary judgment does not mean the taxpayer wins. The Court of Appeal was explicit that it expressed no opinion on whether a different taxing theory might support California's assertion of tax over some or all of the radiologist's income. The court expressly declined to identify or endorse an alternative taxing theory, leaving open only whether another theory might exist. No refund entitlement was finally adjudicated. The case returns to the superior court, where FTB retains the opportunity to advance a legally adequate theory supported by the record. Practitioners should read the opinion as a ruling about the limits of one specific argument at summary judgment — not as a determination that California lacks any valid basis to tax nonresident contractors who perform services using California-based infrastructure and clients.

Practical Implications for Nonresident Sole Proprietors with California Clients

This decision matters most to nonresident professionals — physicians, consultants, engineers, and others — who perform services remotely for California entities and report that income on Schedule C. Several practical points emerge from the court's analysis. First, FTB's ability to invoke unitary-business apportionment against a sole proprietor is not unlimited; the doctrine has structural prerequisites that a single-activity, single-client arrangement may not satisfy. Second, the use of a California client's software, equipment, or support infrastructure does not automatically transform an independent contractor relationship into a unitary enterprise. Third, because the court left a different taxing theory open, nonresident sole proprietors should not treat this decision as a safe harbor. The sourcing of income from remote professional services to California clients remains an active and unsettled area, and the outcome on remand could produce new guidance. Individuals in similar situations should consult qualified tax counsel before drawing conclusions about their own filing obligations. Our tax services team works with nonresident professionals navigating California source-income questions, and additional analysis of related decisions is available in our case library.

Questions about Garcia-Rojas and Nonresident Contractor Taxation in California

Does the Court of Appeal's decision mean the radiologist is entitled to a refund?

No. The court reversed the trial court's grant of summary judgment in FTB's favor, but it did not adjudicate whether the taxpayer is owed a refund. The case was remanded to the superior court, where the litigation continues. FTB may pursue a different legal theory, and the ultimate tax liability — if any — has not been determined.

Can FTB ever apply apportionment to a nonresident sole proprietor's income from California sources?

The court's opinion does not foreclose apportionment as a concept for nonresident sole proprietors. Regulation 17951-4(c) expressly addresses apportionment in that context. What the court rejected was FTB's specific argument that the unitary-business doctrine, as developed in multi-entity corporate cases, could be applied to treat a sole proprietor and a single corporate client as a unified enterprise without the structural features that doctrine requires.

What should nonresident professionals who work remotely for California companies do in light of this decision?

This decision does not establish a safe harbor, and it should not be read as legal advice for any individual situation. The sourcing rules for nonresident sole proprietors performing services for California clients remain complex and fact-specific. Nonresident professionals with California-source income should work with a qualified tax attorney to evaluate their filing positions, particularly given that the remand in this case may produce additional guidance on alternative taxing theories.