Xavier Garcia-Rojas et al. v. Franchise Tax Board, A172054, California Court of Appeal, First Appellate District, Division Three, May 1, 2026

On May 1, 2026, the California Court of Appeal, First Appellate District, delivered a significant decision impacting nonresident taxpayers in Xavier Garcia-Rojas et al. v. Franchise Tax Board. The court evaluated whether a nonresident independent contractor operating as a sole proprietor constitutes a unitary business subject to California income apportionment.

Facts of the Case

Xavier Garcia-Rojas is a radiologist residing in Texas. In 2017, he entered into an independent contractor agreement with Stat Radiology Medical Corporation (StatRad). Under this agreement, StatRad routed imaging studies to Garcia-Rojas from medical facilities situated in California and other states. Working exclusively from his Texas residence, Garcia-Rojas analyzed the images and submitted his findings using StatRad’s proprietary software.

StatRad required Garcia-Rojas to hold medical licenses in 28 different states, including California. The corporation facilitated his practice by paying all of his licensing fees—excluding his Texas license—and securing his hospital privileges and credentialing in each state. Furthermore, StatRad supplied Garcia-Rojas with the hardware necessary to read the imaging studies, alongside a phone number, a California mailing address, an e-mail address, software training, and California malpractice insurance.

StatRad compensated Garcia-Rojas monthly on a per-image basis. According to IRS Form 1099s issued by StatRad, he earned $305,261.43 in 2018, $410,120.51 in 2019, and $382,122.62 in 2020. For federal tax purposes, he reported this income by filing a "Schedule C, Profit or Loss from Business (Sole Proprietorship)".

Taxpayer Request for Relief

In July 2019, the Franchise Tax Board (FTB) contacted Garcia-Rojas, demanding that he file a California tax return. He subsequently filed returns for the 2018, 2019, and 2020 tax years and paid the amounts assessed by the FTB. He immediately requested a refund for those payments, but the FTB never responded to his request.

In May 2023, Garcia-Rojas initiated a lawsuit seeking his tax refund. In September 2024, the trial court ruled in favor of the FTB, granting its motion for summary judgment. The trial court concluded that as "a matter of law," Garcia-Rojas "operated 'a sole proprietorship which carries on a unitary business' " and was appropriately subject to taxation under California Code of Regulations, title 18, section 17951-4, subdivision (c). The lower court reasoned that he "carried on as a unitary business" because his "conduct within and without California was not so separate and distinct to qualify as separate business" and he utilized StatRad's resources identically regardless of the state from which the imaging report originated.

The Court's Analysis of the Law

Upon review, the Court of Appeal outlined the statutory framework governing nonresident taxation. Under California's Personal Income Tax Law, the state taxes the gross income of nonresidents that is "derived from sources within this state" pursuant to Revenue and Taxation Code sections 17041, subdivision (i)(1)(B), and 17951. When computing the taxable income of a nonresident deriving gross income from sources both inside and outside the state, the income " 'shall be allocated and apportioned under rules and regulations prescribed by the Franchise Tax Board' " (Rev. & Tax. Code, § 17954).

Under this rulemaking authority, the FTB promulgated regulation section 17951-4 to dictate the treatment of nonresident income from a business, trade, or profession. Regulation 17951-4(c) dictates that if "a nonresident’s business, trade or profession is a sole proprietorship which carries on a unitary business, trade, or profession within and without the state," the net income derived from California sources must be apportioned in accordance with the Uniform Division of Income for Tax Purposes Act.

The central legal issue was the definition and scope of a "unitary business." The court noted that the term has a long "recognized meaning in California"—specifically defined as "two or more business entities that are commonly owned and integrated in a way that transfers value among the affiliated entities." (Bunzl Distribution USA, Inc. v. Franchise Tax Bd. (2018) 27 Cal.App.5th 986, 991; General Motors Corp. v. Franchise Tax Bd. (2006) 39 Cal.4th 773, 779, fn. 3).

Application of the Law to the Facts

Applying the established legal standard, the Court of Appeal determined that the FTB failed to prove Garcia-Rojas operated a unitary business. The court emphasized that "Garcia-Rojas is operating — at most — a sole proprietorship engaging in one business activity". The court noted that the FTB "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". The court extensively reviewed existing case law, pointing out that courts have only applied the unitary business theory to multinational enterprises or parent companies with multiple subsidiaries, and never to a single person engaging in a solitary business activity.

The FTB attempted to rely on an Office of Tax Appeals (OTA) decision, Appeal of Bindley (Cal. OTA, May 30, 2019, No. 18032402), which held an Arizona-based self-employed screenwriter operated a unitary business. The court forcefully rejected this argument, noting first that OTA decisions are not binding on the appellate court. More importantly, the court found the OTA's reasoning "unconvincing" because Bindley erroneously "focused on the tests to determine whether two different businesses are unitary" while ignoring the foundational requirement "that there must be separate business activities to unite".

The court similarly dismissed the FTB's reliance on California Code of Regulations, title 18, section 25120, subdivision (b). The court noted that the plain language of that regulation "states it applies only if there are 'two or more businesses of a single taxpayer' ".

Conclusions

The Court of Appeal decisively concluded that "the Board failed to show that Garcia-Rojas is a unitary business as a matter of law". Because the FTB could not demonstrate the existence of a unitary business, the trial court erred in concluding the FTB was entitled to judgment under regulation 17951-4(c).

Consequently, the appellate court reversed the trial court's judgment and its order granting summary judgment, remanding the matter for further proceedings. In closing, the court provided a vital caveat for tax practitioners to note, stating, "We express no opinion as to whether the Board can tax Garcia-Rojas under a different legal theory".

Prepared with assistance from NotebookLM.