Is a federally disregarded limited partnership subject to California's $800 annual tax?

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 unless the entity 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 question of how a partnership, which by definition has at least two partners, ends up with 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. The ruling's Taxpayer-Partner pattern is one route to that result, not the only one. Legal Ruling 2019-02 itself observes that a federal DLP can exist in various factual situations, and the operative condition under Treasury Regulation section 301.7701-2(a) and (c)(2)(i) is single ownership for federal tax purposes, however the interests come to be held; a limited partnership whose two named partners are both disregarded entities of the same owner qualifies on the same reasoning. 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 tax outcome. A single-member LLC general partner limits the exposure of whoever controls the partnership, a common design in real estate and fund vehicles, and the disregarded result is a byproduct of that liability decision, which is why the pattern shows up often enough that the FTB ruled on it.

One consequence of that same structure does not disappear with the limited partnership. Where the general partner is a single-member LLC organized in California or registered with the Secretary of State, the limited partnership's disregarded status does not carry over to the general partner. Section 23038(b)(2)(B)(iii) preserves the LLC annual tax, fee, and return provisions, sections 17941, 17942, and 18633.5, for a disregarded LLC, so the LLC general partner remains subject to its own $800 annual tax under section 17941 and its own Form 568 filing requirement, and section 17941(b)(1) keeps that obligation running until a certificate of cancellation is filed with the Secretary of State. The FTB's guidance on disregarded LLCs says the same: they are subject to the $800 annual tax, and an LLC organized or registered in California owes it even if it conducts no business in the state (FTB Publication 3556 (rev. 09/2021)). The disregarded limited partnership analysis removes one $800 obligation from the structure; it does not remove the general partner's.

What the ruling 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 annual tax 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; those statutes 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 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 expect the $800 regardless. Paying a small annual amount to avoid an enforcement notice, an entity-status dispute, or penalty exposure was the conservative call.

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, along with two credit provisions not relevant here, 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 its three-member 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. Whatever became of that 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 tax, fee, and return statutes and two credit provisions. 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 administrative ruling gets that it still reflects current law. In a nonprecedential opinion, the Office of Tax Appeals described Legal Ruling 2019-02's holding and sustained the denial of a limited partnership's refund claim for its 2018 annual tax because the record did not establish that the partnership's partners were disregarded entities; the partnership also did not respond to the Franchise Tax Board's information document requests on appeal (Appeal of More Than We Deserve, L.P., 2023-OTA-359). An opinion not designated as precedential may not be relied on as precedent in any other appeal before the Office (Cal. Code Regs., tit. 18, section 30502(b)), so the opinion settles nothing about the ruling itself; what it shows is that these disputes turn on factual proof of federal disregarded status.

The refund window: what section 19306 opened, and what is left of it in 2026

The ruling's cleanup mechanism is Franchise Tax Board Notice 2019-06, issued December 23, 2019, 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 serves two distinct purposes: answering a filing enforcement notice, which the notice contemplates these limited partnerships receive or have received, 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 filed, a prong available only where the return was filed within the time prescribed by section 18567 or section 18604, four years from the last day prescribed for filing the return determined without regard to any extension, or one year from the date of the overpayment. The condition on the first prong matters in this fact pattern: where the blank returns went in late, the four-year measure runs from the unextended due date rather than from the day the return arrived, and the window is correspondingly shorter than a reading off the filing date suggests.

In November 2019, 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 in 2026 requires doing the math again rather than repeating the 2019 framing. For a calendar-year filer that paid the tax with each timely return and stopped once it learned of the ruling, the last payment went in with the 2018 return in early 2019, and the four-year window on it closed in 2023, or a few months later where that return was filed on extension. Nothing from that era remains open in 2026, and the original wave of refund claims is 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 kept filing a blank 565 and paying $800 every year after the ruling issued, whether never identified or out of institutional habit, has been generating a fresh, narrow refund opportunity every year it continued to pay, one that opens when that year's return and payment are filed and closes four years later under section 19306, unless the return went in late, in which case the four years run from the unextended due date. A 2021 return filed March 15, 2022, for example, closed in March 2026, while a 2022 return filed March 15, 2023 stays open until March 15, 2027. That is not a reason to keep paying in order to bank future refund claims; it is an ongoing mistake that remains partially correctable, and the correctable portion shrinks year by year. 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. A limited partnership that has not paid since shortly after the ruling issued is, as to the partnership itself, done: the partnership has nothing further to file and nothing further to claim, and the only remaining task at the partnership level 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. The single-member LLC general partner's own annual tax and Form 568 obligations, discussed above, continue on their own track for as long as that LLC is organized or registered in California.

What the limited partnerships that do owe the tax now pay

One recent change reaches the limited partnerships on the other side of this line, and it is worth stating carefully because it is often described as a limited partnership wrinkle when it is not one. Senate Bill 122 (Stats. 2026, ch. 23) added subdivision (f)(2) to section 17935, setting an ordinary filing limited partnership's annual tax at $400 rather than $800 for its first taxable year, for taxable years beginning on or after January 1, 2027 and before January 1, 2030. The same legislation made parallel amendments to section 17941 for limited liability companies and to section 17948 for limited liability partnerships, each carrying the same $400 first-year figure and the same three-year window, so the reduced first-year annual tax is a general first-year relief measure across the pass-through entity forms rather than something peculiar to limited partnerships. None of it changes the analysis above. A limited partnership disregarded for federal income tax purposes owes neither the $800 nor the $400, because the annual tax under section 17935 does not reach it at all, and a first-year rate reduction to a tax that is not imposed leaves the entity where the ruling left it.

Practice notes

The analysis of a disregarded LP starts with classification, not with the refund math. The test is federal: are all of the limited partnership's interests owned, for federal tax purposes, by a single owner, however that ownership is reached, and has the partnership made no election under the check-the-box regulations to be taxed as an association (Treas. Reg. section 301.7701-2(a), (c)(2)(i); Rev. Rul. 2004-77). The pattern in Legal Ruling 2019-02, one recognized Taxpayer-Partner with every other interest held through an entity disregarded into it, is the common version, but the ruling itself notes that a federal DLP can exist in various factual situations, and single ownership reached another way qualifies on the same reasoning. 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 asks for, both in answering a filing enforcement notice and in supporting a refund claim, and the 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. None of that classification, documentation, or limitations work substitutes for the separate question of what happens to the disregarded entity's California activities; that question belongs to the owner's filing analysis and is addressed in this library's article on whether owning a disregarded LLC that operates in California gives the owner nexus. The classification question also runs entity by entity within the structure: a single-member LLC general partner organized or registered in California keeps its own section 17941 annual tax and Form 568 obligation even while the limited partnership it serves is disregarded, so the structure's California filing calendar rarely goes to zero. The one Office of Tax Appeals opinion on the subject, which is nonprecedential under Cal. Code Regs., tit. 18, section 30502(b), described Legal Ruling 2019-02's holding and sustained the denial of a refund where the limited partnership did not establish that its partners were disregarded entities and did not respond to the Franchise Tax Board's information document requests on appeal (Appeal of More Than We Deserve, L.P., 2023-OTA-359); the burden of proving federal disregarded status sits with the entity, and the Notice 2019-06 documentation is the case. G&G State Tax Group provides entity classification analysis and Franchise Tax Board refund claim representation alongside its state and local tax practice.