Dr. Xavier Garcia-Rojas worked as an independent contractor for Stat Radiology Medical Corporation (StadRad) as a radiologist. StatRad provided the radiologist with equipment, which he used from his Texas home to submit reports. Some of the images he studied were from medical facilities in California. The FTB demanded a California tax return in July 2019. “He filed returns for 2018, 2019, and 2020, paid the amounts requested by the Board, and then requested a refund. The Board never responded,” over six years later.[1] Dr. Garcia-Rojas sued in May 2023, and the trial court sided with the FTB’s theory that Dr. Garcia-Rojas operated a unitary business as a sole proprietorship. The Court of Appeal reversed. “[T]he Board did not cite any authority supporting its contention that a sole proprietor that engages in one business activity and receives compensation from one corporation—even when that corporation’s clients are found both in and outside of California—is a unitary business.”[2] There simply has not been a case “apply[ing] the unitary business theory to a single person or sole proprietorship engaging in one business activity.”[3] The Court of Appeal did not start here in Garcia-Rojas v. Franchise Tax Board.
“Unitary business has a long recognized meaning in California—two or more business entities that are commonly owned and integrated in a way that transfers value among the affiliated entities.”[4] Here, the sole proprietorship is solitary and therefore cannot be a unitary business. The court disapproved of Appeal of Bindley, an Office of Tax Appeals (OTA) case.[5] In Bindley a screenplay writer residing in Arizona worked as an independent contractor for two California LLCs, performing all work in Arizona. The OTA held that this was a unitary business, which applies in equal force to sole proprietorships. In considering Appeal of Bindley, the Court of Appeal found that the OTA “ignored that there must be separate business activities to unite.”[6] The Court of Appeal did not mention that the self-employed taxpayer in Bindley worked for two companies.
The Board of Equalization held in 1982 that the taxpayer “bears the burden of proof, i.e., [the taxpayer] must establish by a preponderance of the evidence that the unitary connections present in the case are, in the aggregate, so trivial and insubstantial as to require a holding that a single unitary business did not exist.”[7] This is embedded in the FTB audit manual regarding the unitary business doctrine (at p. 22). Garcia-Rojas did not discuss this burden. Instead, it assumed that the FTB must prove its unitary business theory rather than forcing the taxpayer to disprove it.[8]
Tax treatment of nonresident taxpayers begins with the general rule that “in the case of nonresident taxpayers the gross income includes only the gross income from sources within this state.”[9] But the details are delegated to the FTB. Namely, such income “shall be allocated and apportioned under rules and regulations prescribed by the Franchise Tax Board.”[10] Section 17951-4 functions as a railroad track switch, directing circumstances to more specific statutes or regulations. Situations that are not directed to the Uniform Division of Income for Tax Purposes Act (RTC § 25120 et seq.) are implicitly left behind to be dealt with through the regulations for §§ 17951-17953. These tend to be more favorable to the taxpayer and are more influenced by physical presence. As applicable here, it appears that Dr. Garcia-Rojas would not be taxed by California at all because all of his services were performed outside of California.[11]
The full implications of Garcia-Rojas remain to be seen. Unfortunately, the court disclaimed in its 6-page opinion that “[w]e express no opinion as to whether the Board can tax Garcia-Rojas under a different legal theory.”[12] Nevertheless, the subsequent petition for review filed by the California Justice Department on behalf of the FTB gave some indication of potential changes: “The result could be that the Board would have to instead apply ‘separate’ accounting methods to determine taxable income for all such entities, throwing into question how to account for shared overhead expenses and making it harder to ensure that such taxpayers file tax returns and remit taxes to California.”[13] The filing did not elaborate. However, it appears that the FTB would require businesses within Garcia-Rojas’s scope to track the origin of each dollar they receive if they do not apportion their income.
Garcia-Rojas may be an exercise in Orwellian doublethink, but it simply takes the FTB legal landscape to its logical conclusion. The unitary business doctrine requires multiple businesses or business activities. A simple business performing a sole trade without subsidiary entities cannot be “unitary.” Although Garcia-Rojas regarded sole proprietorships, its reasoning is equally applicable to all entity types. If curious whether Garcia-Rojas can be used to save you from being taxed by California, please contact us at (916) 822-8700.
[1] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 349 (2026). The refund claims for 2018 and 2019 were filed on April 17, 2020.
[2] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 351 (2026).
[3] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 351 (2026).
[4] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 351 (2026)(omitting internal quotation marks).
[5] Appeal of Bindley, 2019 – OTA – 179P.
[6] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 352 (2026).
[7] Appeal of Saga Corporation, 82-SBE-102, June 29, 1982.
[8] However, the court commented that “[t]he party moving for summary judgment bears the burden of persuasion that there is no triable issue of material fact and that he is entitled to judgment as a matter of law,” and the matter before the court was a motion for summary judgment. Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 350 (2026)(omitting internal quotation marks). Yet, the dispute here was what the material facts meant for the case, rather than the material facts themselves.
[9] RTC § 17951(a).
[10] RTC § 17954.
[11] “Nonresident attorneys, physicians, accountants, engineers, etc., even though not regularly engaged in carrying on their professions in this State, must include in gross income as income from sources within this State the entire amount of fees or compensation for services performed in this State on behalf of their clients.” 18 CCR § 17951-5(a)(3).
[12] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 349 (2026).
[13] FTB Petition for Review at p. 16 (Not freely available online, but available on request).