Is a federally disregarded limited partnership subject to California's $800 annual tax?
Edvin Givargis Published 12 minute read
The short answer
No, and the reasoning matters more than the answer. Legal Ruling 2019-02, issued by the Franchise Tax Board on November 20, 2019, held that a limited partnership disregarded for federal income tax purposes is also disregarded for California income and franchise tax purposes under Revenue and Taxation Code section 23038(b)(2)(B)(iii), which means it owes no annual tax under section 17935 and files no partnership return under section 18633. The ruling did not create an exception for these entities. It found that the general conformity rule, which turns off an eligible entity's separate existence for California tax purposes whenever the same thing has already happened federally, simply was never turned back on for limited partnerships the way the Legislature turned it back on for limited liability companies. That is a narrower and more durable kind of holding than an administrative accommodation would be, because it rests on what a statute does not say. Seven years later, nothing has said it. No amendment has touched section 18633 or section 23038 to add the carve-out the FTB itself once proposed to the Legislature, no later ruling has modified 2019-02, and it remains listed as current FTB guidance. The live question in 2026 is not whether the ruling still holds. It is which tax years, if any, remain open to claim back what was paid on the strength of the old, more cautious practice.
How an eligible entity with two names on the partnership agreement ends up with one owner
California's rule is borrowed, not homegrown. Section 23038(b)(2)(B)(iii) provides that "if the separate existence of an eligible business entity is disregarded for federal tax purposes, the separate existence of that business entity shall be disregarded" for California franchise and income tax purposes, with limited, expressly stated exceptions. The federal half of that sentence comes from the check-the-box entity classification regulations under Internal Revenue Code section 7701. Treasury Regulation section 301.7701-2(a) treats a business entity with a single owner as either a corporation or, by default, disregarded as an entity separate from its owner, its activities reported as though they belonged to a division or a sole proprietorship of that owner; section 301.7701-2(c)(2)(i) makes that the default outcome for a domestic eligible entity unless it affirmatively elects corporate treatment under the companion election regulation, section 301.7701-3.
A limited partnership qualifies as an eligible entity under that framework, which raises the mechanical question of how a partnership, an arrangement that by definition has at least two partners, can ever end up with only one owner for federal purposes. Legal Ruling 2019-02 answers with a fact pattern the FTB calls, in its own generic terms, a Taxpayer-Partner and one or more Disregarded Partners: an entity recognized for federal tax purposes holds one partnership interest directly, and every other partnership interest is held by an entity that is itself wholly owned by, and disregarded into, that same Taxpayer-Partner. The most common real-world version of this in California practice is a limited partnership with a 99 percent limited partner and a 1 percent general partner, where the general partner is a single-member LLC wholly owned by the same person or entity that holds the 99 percent limited partner interest. Formally there are two named partners. Federally there is one owner, because the general partner's SMLLC wrapper is itself disregarded into that owner under the same check-the-box rules. Once every partner other than the Taxpayer-Partner is disregarded into the Taxpayer-Partner, the limited partnership has, for federal tax purposes, a single owner, and the ruling cites IRS Revenue Ruling 2004-77 for the proposition that an entity in that position is itself disregarded unless it makes its own separate election to be taxed as an association. No election, no return, no entity, for federal purposes. Section 23038(b)(2)(B)(iii) then carries that federal non-status straight into the California income and franchise tax law.
The structure exists for reasons that have nothing to do with the outcome above. A single-member LLC general partner limits the exposure of whoever ultimately controls the partnership, a common design in real estate and fund vehicles where liability segregation, not tax minimization, drives the choice of wrapper. The disregarded result is a byproduct of a financing and liability decision made for other reasons, which is precisely why it shows up so often and why the FTB felt the need to rule on it at all.
What the ruling actually decided, and why the old caution existed
Before Legal Ruling 2019-02, the administrative practice for these entities was to file a blank Form 565 and pay the $800 charge, commonly called the LP's minimum tax by analogy to the corporate minimum franchise tax even though the statute itself labels it the annual tax on limited partnerships, every year the disregarded LP nominally existed. The caution behind that practice was reasonable enough on its own terms. Nothing in section 17935 or section 18633 says anything about disregarded entities one way or the other, those statutes just tax and require returns from limited partnerships. The disregarded-entity treatment lived entirely in section 23038, a general classification statute, and section 23038 does carve LLCs back out of disregard for exactly the annual tax, fee, and return purposes at issue. Absent a ruling saying otherwise, a reasonable filing position was that the same carve-out logic might implicitly extend to LPs, or that the FTB might simply expect the $800 regardless, the way it plainly does for a disregarded SMLLC. Paying a comparatively small annual amount to avoid a filing-enforcement notice, an entity-status dispute, or a penalty exposure was the conservative call, and it was a common one across firms handling real estate fund structures.
Legal Ruling 2019-02 resolved the ambiguity by reading the statute closely rather than by policy argument. Section 23038(b)(2)(B)(iii)'s general rule disregards an eligible entity's separate existence for California income and franchise tax purposes across the board. The same subdivision then lists specific, named exceptions, for the LLC annual tax and fee statutes and the LLC return filing statute, that keep a disregarded single-member LLC on the hook for its Form 568 and its $800 regardless of federal classification. What the subdivision does not list is any exception for the limited partnership annual tax under section 17935 or the partnership return requirement under section 18633. The ruling treats that omission as decisive: the Legislature knew how to carve LLCs back into taxability and did so explicitly, and it did not do the same thing for limited partnerships, so the general disregard rule controls them in full. A federal DLP, the ruling's own shorthand for a federally disregarded limited partnership, is therefore not subject to the annual limited partnership tax and files no partnership return.
That the ruling reads as compelled by the statute's structure, rather than as a policy choice the FTB was free to revisit, is reinforced by what happened next. Weeks after the ruling issued, the FTB brought its own legislative proposal to the Board asking the Legislature to add a new filing subdivision to section 18633 requiring a disregarded LP to file a return verifying its liability under section 17935, together with a matching carve-out in section 23038 pulling the LP annual tax back out of the general disregard rule, the same treatment the statute already gives LLCs. That proposal traces its own reasoning back to the same asymmetry the ruling flagged. Whatever became of that specific proposal in the legislative process, current section 18633 still runs only through subdivision (f) with no disregarded-LP filing requirement, and section 23038(b)(2)(B)(iii)'s exceptions remain limited to the LLC statutes. The agency that issued the ruling apparently wanted the Legislature to change the outcome by statute, and the outcome has not been changed. That is about as strong a signal as an unlitigated ruling gets that it still reflects current law.
The refund window: what section 19306 actually opened, and what is left of it in 2026
The ruling's cleanup mechanism is FTB Notice 2019-06, issued the same day as the ruling itself, which lays out two ways a disregarded LP substantiates its status to the FTB: providing the certificate of limited partnership, the partnership agreement, an organizational chart, and the partners' federal returns for the years at issue, or submitting a declaration signed under penalty of perjury by the local-law general partner, or by the manager or authorized member if that general partner is itself an LLC, identifying the general partner and stating that the entity was disregarded for federal income tax purposes in the years covered. Either documentation package, faxed or mailed to the address the notice specifies, serves two distinct purposes: answering a filing enforcement notice generated when a longtime filer suddenly stops filing, and supporting a refund claim, whether one already pending when the notice issued or a new one filed afterward. The notice is explicit that a refund claim may only be filed for years still open under the applicable statute of limitations, which points back to Revenue and Taxation Code section 19306. That section bars any credit or refund unless a claim is filed before the later of four years from the date the return was actually filed, four years from the last day prescribed for filing the return, or one year from the date of the overpayment.
In November 2019, with years of $800 payments stretching back through a decade of blank 565s, that limitations rule opened a real refund opportunity: most of the payments made in the several years before the ruling were still within their four-year window. Reading that same opportunity accurately in 2026 requires doing the math again rather than repeating the 2019 framing. Seven years have passed. For a calendar-year filer that paid the tax on time each year and then stopped once it learned of the ruling, the four-year window on those older payments has long since run, and what remains open, if anything, is only the most recent year or two, computed from that specific entity's actual filing and payment dates rather than assumed. The practical effect is that the original wave of refund claims from 2019 and 2020 is largely history, closed either because it was claimed or because nobody filed in time.
What keeps this issue alive in 2026 is not the old payments. It is the entities that never stopped. A disregarded LP that a group failed to identify in 2019, or that kept filing a blank 565 and cutting an $800 check every year out of institutional habit long after the ruling issued, has been generating a fresh, narrow refund opportunity every single year it continued to pay, one that opens on the date of that year's payment and closes four years (or, measured from the payment date itself, one year) later on its own independent schedule. That is not a reason to keep paying deliberately in order to bank future refund claims; it is a description of an ongoing mistake that happens to remain partially correctable for as long as it continues, and it stops being correctable at all, year by year, the longer it runs. The correct sequence for an entity discovered today is to confirm the disregarded status under the Notice 2019-06 documentation standard, stop the prospective $800 payments and blank returns, and file a refund claim for whatever years, checked against that specific entity's filing and payment dates rather than assumed from the ruling's issue date, are still open under section 19306. An entity that has not paid since shortly after the ruling issued, by contrast, is simply done: nothing further to file, nothing further to claim, and the only remaining task is the documentation trail confirming why the filings stopped, since the position rests on an administrative ruling rather than a statute written for the specific fact pattern.
Practice notes
A disregarded-LP engagement starts with classification, not with the refund math. The test is federal: does every partner other than one recognized owner hold its interest through an entity that is itself wholly owned by, and disregarded into, that owner, and has the limited partnership made no election under the check-the-box regulations to be taxed as an association. A change in ownership during a tax year can flip an entity into or out of disregarded status mid-stream, which changes both the filing answer and the refund math for that specific year, so the classification question gets asked year by year, not once at formation. Second, the documentation: Notice 2019-06's two tracks, either the organizational and federal-return package or the general partner's penalty-of-perjury declaration, are what the FTB actually asks for, whether the entity is responding to a filing enforcement notice for having stopped filing or supporting a refund claim for years it should never have paid, and the file memo explaining the position should exist before an enforcement notice forces the issue, not after. Third, the limitations period gets calendared entity by entity against that entity's actual filing and payment dates under section 19306, because the answer to "is there still a refund" changes every year a still-paying entity's oldest open year rolls off the four-year clock, and a group with several of these entities is really running several independent, slowly closing windows rather than one. None of that classification, documentation, or limitations work substitutes for the separate question of what happens to the disregarded entity's California activities once its own existence stops being recognized; that question belongs to the owner's filing analysis, not to this one, and it is addressed on its own terms elsewhere in this library.
This article states the law as of September 19, 2026
Statutes, rates, thresholds, and agency practice change, and a different set of facts can change the answer. Before acting on anything discussed above, contact G&G State Tax Group to confirm what has changed since this was written and how the rules apply to a specific situation.
G&G State Tax Group, LLC is a state and local tax advisory firm. The firm provides state and local tax consulting and representation in state and local tax controversies. G&G does not prepare or file tax returns, perform attest services, or provide bookkeeping, and is not a CPA firm.