On September 13, 2024, California’s Franchise Tax Board (“FTB”) released updated proposed regulations (“Draft Regulations”), which would amend the rules regarding market-based sourcing for sales other than sales of tangible personal property.  These proposed rules would have a significant effect on professional service providers, including asset managers. The Draft Regulations would apply to taxable years beginning on or after January 1, 2024.[1]

Proposed changes to these market-based sourcing rules have been formally under consideration by the FTB since 2017, and the Draft Regulations have been updated in each of 2018, 2019, 2020 and 2021 (the 2021 version is referred to herein as the “2021 Regulations”). 

The Draft Regulations build on the 2021 Regulations, which alter the existing language of section 25136-2 by implementing a look-through approach in how California assigns income to the applicable taxpayer. In particular, the Draft Regulations would continue to source revenues for asset management services to the location of the investor or beneficial owner.[2] This essentially requires a look through to the domicile of a fund’s investors or beneficial owners and then adds a “value of interest” component to source the asset management fees to the location of the investors or beneficial owners.[3]  For this purpose, (i) master funds, feeder funds and similar entities that pool investors’ assets are not considered beneficial owners, and (ii) “the domicile of an investor” is presumed to be the investor’s billing address on file with the taxpayer unless the taxpayer has actual knowledge that the investor’s principal place of business is different than the investor’s billing address.[4] 

Receipts from asset management services are assigned to California in proportion to the average value of the interest in the assets held by the assets’ investors domiciled in California. The average value of the interest is calculated by first adding the percentage of the value of the interest in the assets held by the investors or beneficial owners domiciled in the state at the beginning of the taxable year to such investors’ percentage of value at the end of the taxable year, and then dividing that sum by two.[5]

To the extent the total asset management fees attributable to California domiciled limited partners exceeds the California economic nexus threshold ($711,538 for 2023[6]), such asset manager would be deemed to have California income tax nexus and a related filing obligation, even if it has no physical presence in or connection to California.

In the FTB’s initial statement of reasons for the Draft Regulations, the FTB states that “creating specific rules for certain industries” drove the changes behind the amendment.  The Draft Regulations are based on additional written comments received subsequent to six interested parties meetings held from 2017-2021.

Per the notice of proposed rulemaking published on the FTB’s website on September 13, 2024, the FTB has not scheduled a public hearing on this topic but will hold one if it receives a written request for a public hearing from any interested person no later than October 16, 2024 (which is 15 days prior to the close of the written comment period).[7]  Such requests are expected.


[1] Amended Draft California Code of Regulations, Title 18, section 25136-2(j)(3).

[2] Amended Draft CCR section 25136-2(c).

[3] Id. The Draft Regulations provide a computation methodology and explanation with examples.

[4] Id.

[5] Id.

[6] California Franchise Tax Board, Doing Business in California, < https://www.ftb.ca.gov/file/business/doing-business-in-california.html>.

[7] Title 18. “Notice of Proposed Rulemaking”, California Franchise Tax Board, Sept. 13, 2024 <https://www.ftb.ca.gov/tax-pros/law/regulatory-activity/25136-2%20Notice-Proposed-Rulemaking.pdf>

Photo of Robert A. Friedman Robert A. Friedman

Robert Friedman is a partner in the Tax Department whose practice focuses on representing clients in all facets of corporate and partnership related tax matters. In particular, Robert provides tax advice on public and private mergers, acquisitions, joint ventures, divestitures, private equity fund…

Robert Friedman is a partner in the Tax Department whose practice focuses on representing clients in all facets of corporate and partnership related tax matters. In particular, Robert provides tax advice on public and private mergers, acquisitions, joint ventures, divestitures, private equity fund formation, financial products and electric and gas utility tax issues.

Photo of Amanda H. Nussbaum Amanda H. Nussbaum

Amanda H. Nussbaum is the chair of the Firm’s Tax Department as well as a member of the Private Funds Group. Her practice concentrates on planning for and the structuring of domestic and international private investment funds, including venture capital, buyout, real estate…

Amanda H. Nussbaum is the chair of the Firm’s Tax Department as well as a member of the Private Funds Group. Her practice concentrates on planning for and the structuring of domestic and international private investment funds, including venture capital, buyout, real estate and hedge funds, as well as advising those funds on investment activities and operational issues. She also represents many types of investors, including tax-exempt and non-U.S. investors, with their investments in private investment funds. Business partners through our clients’ biggest challenges, Amanda is a part of the Firm’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team helping to shape the guidance and next steps for clients impacted by the pandemic.

Amanda has significant experience structuring taxable and tax-free mergers and acquisitions, real estate transactions and stock and debt offerings. She also counsels both sports teams and sports leagues with a broad range of tax issues.

In addition, Amanda advises not-for-profit clients on matters such as applying for and maintaining exemption from federal income tax, minimizing unrelated business taxable income, structuring joint ventures and partnerships with taxable entities and using exempt and for-profit subsidiaries.

Amanda has co-authored with Howard Lefkowitz and Steven Devaney the New York Limited Liability Company Forms and Practice Manual, which is published by Data Trace Publishing Co.

Photo of Muhyung (Aaron) Lee Muhyung (Aaron) Lee

Muhyung (Aaron) Lee is a partner in the Tax Department. Aaron works predominantly on U.S. federal corporate, partnership and international tax matters that include advising on mergers and acquisitions, fund formation, financial products and financing transactions.

Before joining Proskauer, Aaron was an associate…

Muhyung (Aaron) Lee is a partner in the Tax Department. Aaron works predominantly on U.S. federal corporate, partnership and international tax matters that include advising on mergers and acquisitions, fund formation, financial products and financing transactions.

Before joining Proskauer, Aaron was an associate at Davis Polk & Wardwell LLP in New York. Before attending law school he worked in finance at Société Générale and Bank of America Merrill Lynch.

Photo of Mitchell Gaswirth Mitchell Gaswirth

Mitchell M. Gaswirth is a partner in the Tax Department. His practice focuses primarily on income, gift and estate tax and related business planning. Mitchell counsels individuals, entrepreneurs and business entities in connection with the myriad income and other tax issues arising in…

Mitchell M. Gaswirth is a partner in the Tax Department. His practice focuses primarily on income, gift and estate tax and related business planning. Mitchell counsels individuals, entrepreneurs and business entities in connection with the myriad income and other tax issues arising in sophisticated business transactions.

Mitchell’s practice also encompasses a wide array of merger and acquisition, business formation and financing, debt restructuring, and real property acquisition, disposition and exchange transactions. His knowledge encompasses the complex and often arcane application of California’s property tax regime (“Proposition 13”) in a variety of business transactions directly or indirectly involving California real property.

In addition, he provides income, gift and estate tax and related business planning advice to individuals, families, and their business enterprises to help them achieve wealth preservation and tax minimization objectives. This planning includes tax minimization strategies involving grantor trusts, family limited partnerships, charitable and family “split interest” and other irrevocable trusts, and other sophisticated wealth transfer and business succession vehicles. Mitchell’s wealth transfer tax planning practice focuses particularly on counseling executives, professionals, investors, and others concerning the preservation, administration and disposition of their capital. He also counsels individuals and businesses in connection with planning to minimize California income tax burdens.

Mitchell also represents corporate and individual fiduciaries, and estate and trust beneficiaries, in a wide array of sophisticated personal planning and fiduciary administration matters, including representing U.S. Trust, JPMorgan Chase Bank and Wells Fargo Bank, in their administrations of complex trust arrangements for high net worth families. His fiduciary practice also encompasses substantial “Family Office” representation for multi-member families seeking to achieve complex and sophisticated income and wealth transfer tax objectives.

Mitchell’s tax practice also involves the administrative and judicial resolution of tax disputes with federal and state tax authorities. He represents taxpayers in income, estate and gift, sales and use, property, and employment tax disputes with the Internal Revenue Service, California Franchise Tax Board, and other tax authorities. Notably, Mitchell served as Lead Tax Counsel to the late Paul Newman, both at trial and in the California Court of Appeals, in the actor’s successful refund suit against the California Franchise Tax Board. The Newman case established the impropriety of the Franchise Tax Board’s formula for apportioning to California a non-resident entertainer’s income derived from both California and non-California sources.

Prior to joining Proskauer, Mitchell was a partner of the Los Angeles law firm Mitchell, Silberberg & Knupp.

Maggie Livingstone

Maggie Livingstone is an associate in the Tax Department and a member of the firm’s Corporate Tax and Employee Benefits & Executive Compensation practice groups. She earned her B.A. with Honors from Brown University and her J.D. from USC Gould School of Law.

Maggie Livingstone is an associate in the Tax Department and a member of the firm’s Corporate Tax and Employee Benefits & Executive Compensation practice groups. She earned her B.A. with Honors from Brown University and her J.D. from USC Gould School of Law. In law school, she was a Senior Editor of the Southern California Law Review and a legal writing fellow.