Discussion:LLC holding investments - California LLC fee

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Discussion Forum Index --> Tax Questions --> LLC holding investments - California LLC fee


StefCPA (talk|edits) said:

4 September 2007
Hello All,

I would need authority on this, and links to it if posible:

is an llc holding investments, and investing in stocks, only taxed (gross receipt tax) on the int income, div income, and CAPITAL gain income? Is the capital gain income net of realized losses or just investment proceeds or only invesmtent income?

Thank you all

Stephane

TheTinCook (talk|edits) said:

4 September 2007
Is the LLC taxed as a partnership or as a corporation?

StefCPA (talk|edits) said:

4 September 2007
it's a regular llc taxed as a partnership.

Death&Taxes (talk|edits) said:

4 September 2007
Income flows out to the member partners in the same form it comes in, and you do net losses against gains.

TheTinCook (talk|edits) said:

4 September 2007
Okay, your mention of gross receipts tax leads me to think that you have state specific issues. The federal income tax is based on adjusted net, and the partners not the partnership are taxed on the FIT.

StefCPA (talk|edits) said:

4 September 2007
for purpose of computing the gross receipts fees,

let's say the llc sold stock worth $1,000,000 with cost basis of $500,000.

The gross receipt fees is on the sale proceeds of 1,000,000 or on 500,000 (1,000,000- 500,000)

please provide a link to any authority on this.

Thanks

StefCPA (talk|edits) said:

4 September 2007
it's for california purposes....

TheTinCook (talk|edits) said:

4 September 2007
You include only the cap gains and not the losses for the LLC fee. Don't net them.

i.e.

If I had two long term stock sales on my 568 SchD, The first with a gain of 500,000 and the second with a loss of (200,000), I would include only the 500,000 in income for determining the LLC fee.

You would only include the 500,000 gain in income to determing the LLC fee. There is a worksheet in the CA LLC 568 Booklet that should help you out.

FTF65 (talk|edits) said:

September 5, 2007
I agree with TheTinCook. In general, sec. 17942(b) of the Cal Rev & Tax Code provides that "total income" means gross income as defined in sec. 24271 plus cost of goods sold...

Sec. 24271(a) provides that gross income has the same meaning as IRC section 61. As you probably know, section 61 specifies that gross income includes gains from dealings in property. Losses from the sale or exchange of property enter the equation in IRC sec. 62(a)(3) which is the computation of adjusted gross income.

Here is the link to the Cal Rev & Tax Code:

http://www.leginfo.ca.gov/calaw.html

KatieJ (talk|edits) said:

8 September 2007
Remember, also, that the LLC fee has been held to be unconstitutional in three Superior Court decisions, all of which are on appeal to the District Court of Appeal. Instructions for filing a protective claim for refund of the fee are at http://www.ftb.ca.gov/aboutFTB/psb/results.asp?bulletinTitle=Public+Service+Bulletin+2007-07-13.

TheTinCook (talk|edits) said:

8 September 2007
Don't those rulings only apply to out-of-state LLC's with CA income?

Sandysea (talk|edits) said:

8 September 2007
Yeah Tin I think so..it is that stinking water's edge deal that CA has in place. They want to tax foreign corporations in that state no matter where they actually do business...it stinks!! I researched it quite a bit after I found out that Katie sure knows her stuff when it comes to CA taxes...if you live there...or have a business there...DON'T!!

FTF65 (talk|edits) said:

September 8, 2007
In the Ventas case (one of the three decisions), the court ruled that the LLC Fee statute (section 17942) could not be judicially reformed; so, if the law is held to be unconstitutional by the appellate court, it is possible that the LLC Fee regime could be completely scrapped for both in-state and out-of-state LLC's. Of course, if the appellate court upholds the decision, there will likely be a reincarnation of the law in some fashion (however, it is interesting to note that the CA Rev & Tax Committe's proposed legislation to modify the rules so that they only applied to CA-source income was vetoed by the “Governator” a year ago).

Notwithstanding the three Superior Court decisions, the current LLC Fee rules apply pending the appellate court's decision so Katie's advice to seek protective refund claims prior to the expiration of the statute of limitations is good advice (note: in California, the statute of limitations is generally four years).

KatieJ (talk|edits) said:

9 September 2007
All three of the court cases involve foreign LLCs (organized in other states) registered in California. Northwest Energies did NO business in CA; Ventas did business within and without; and Bakersfield Mall did business only within CA. In each case the fee was struck down. These are all Superior Court decisions and have no precedential value; however, the FTB is willing to hold protective claims for refund (i.e., not act on them) pending resolution of the cases.

As FTF65 notes, it is possible that the fee will be struck down for all taxpayers. Therefore, we recommend that ALL LLCs, wherever organized, file protective claims.

The only thing I know for sure is that an LLC that did not file a timely claim will not get a refund. Of course, I don't know that one that DID file a timely claim WILL get a refund. But there is really nothing to lose.

Riley2 (talk|edits) said:

4 June 2008
As far as I know, Bakersfield Mall is still in the pre-trial stage in Superior Court. Does it make sense to file a protective claim based on a pending Superior Court decision which cannot be cited as precedent?

KatieJ (talk|edits) said:

5 June 2008
Alas, I saw Ed Antolin this morning and forgot to ask him about this. (He's one of the attorneys for the plaintiff.) According to the FTB's April 30 litigation roster, Bakersfield Mall is at the First District Court of Appeal; however, I can't find anything on the trial court decision. Of course, California trial court decisions are not precedential and most of them are not reproduced anywhere, but one would expect this one would be published (not in the technical sense, but available) for information purposes. So I don't know who won or lost at the Superior Court level.

As you may recall, last year the Legislature amended the statute to define "total income" as gross receipts calculated in accordance with the rules for determining the sales factor numerator (CRTC Secs. 25135-25137), other than those provisions that exclude receipts from the factor, effective for years beginning on or after January 1, 2007. The law also provides that if the prior law is finally adjudicated to be unconstitutional, refunds for prior years (for which timely claims for refund are filed) will be limited to the excess of the fee paid over the amount that would have been paid if the new rules had applied in prior years.

So, under the statute as she is now writ, a taxpayer in the Bakersfield Mall situation (100% of its business in California) would not be entitled to any refund even if the prior law is found to be unconstitutional. Of course, the constitutionality of this retroactive law change will no doubt be challenged in due course.

The First District Court of Appeal has held in favor of the taxpayer in the Northwest Energetic Services case (NO business in California in the claim years), and the FTB is now paying claims for refund based on those facts. Instructions for perfecting previously filed claims are available at http://ftb.ca.gov/professionals/taxnews/2008/May/article_1.shtml.

The FTB is still holding (not acting on) claims based on the facts in Ventas Finance I LLC (an LLC with business in and out of California) and Bakersfield Mall. Those cases are still pending at the Court of Appeal. Presumably the refund will be limited in accordance with the revised statute, but you never know how these things will turn out.

Riley2 (talk|edits) said:

5 June 2008
I believe that the Bakersfield Mall case is still at the pre-trial stage. However, the FTB filed a petition for writ of mandate/pro for class action certification, which was denied without prejudice by the First District Court of Appeals in December of 2007.

At the case management conference on April 22, 2008, the San Francisco Superior Court (trial court) continued the trial until July.

If the FTB filed a writ of mandate/pro for class action certification, this would tend to suggest that the FTB considers this case to be a slam dunk, and it would probably be premature to file a protective claim based on Bakersfield Mall at this time.

KatieJ (talk|edits) said:

6 June 2008
Thanks, Riley. All I saw was the Court of Appeal case number in the FTB's litigation roster, which confused me. That had to do with the class action request.

If the statute is about to go, it's never too soon to file a claim <G>. But otherwise I would agree, wait and see on the 100% Callifornia LLC. I doubt that they will ever get refunds. But ... I've been wrong before. And those who do not file timely claims CERTAINLY will not get refunds, no matter what happens.

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