Tax Alert: Update on the California LLC Filing Fee Refund Claims
6/22/2009
As an update to our previous tax alerts, the California Franchise Tax Board (FTB) has announced (via Notice 2009-04) that it will begin issuing partial refunds of its Limited Liability Company (LLC) filing fee to LLCs that had generated revenue from both within and outside the State pursuant to the Ventas court ruling.
Background
Prior to January 1, 2007, the FTB had imposed an annual filing fee upon LLCs based on total income derived from all sources. Therefore, an LLC doing business in multiple jurisdictions was required to pay the LLC fee based on its worldwide income, regardless of the fact that a portion of its income was attributable outside California.
Because the filing fee lacked an apportionment mechanism, taxpayers had filed three separate lawsuits against the FTB challenging the constitutionality of its filing fee:
- Bakersfield Mall — an LLC operating wholly within California.
- Northwest Energetic Services — an LLC registered with the California Secretary of State, but did no business in California.
- Ventas Finance — an LLC with income from both within and outside California.
The litigation in Bakersfield is still pending. Accordingly, the State will not yet refund fees if an LLC derives income wholly within California. Protective refund claims may be filed for such taxpayers.
The Northwest case is final and LLCs who did no business in California are eligible for refunds of the fee paid if the statute of limitations is still open. Contact your J. H. Cohn service professional if you would like a copy of the earlier tax alert that provided instructions for claiming refunds based on Northwest.
The Ventas Case is Finalized
The Ventas case is final and LLCs who derived income from both within and outside California are entitled to partial refunds of the fee based on where its revenues are sourced as defined by California (essentially the corporate sales factor sourcing provisions are used for this purpose). Refunds will be issued to those LLCs that have previously filed protective refund claims and are available to new claimants for those tax years of which the statute of limitations remain open.
Pursuant to FBT Notice 2009-04, taxpayers need to do the following.
For Refund Claims Previously Filed
If an LLC with the same factual circumstance as Ventas filed a protective refund claim, the FTB will compute the refund amount via two methods: the "Default Method" or the "Alternative Method."
The "Default Method" calculates the refund amount based on the Sales Section of Schedule R (Apportionment and Allocation of Income) filed with the original LLC return. And, if Schedule R was filed with the original return, no additional information is necessary. If Schedule R was not filed with the original return, the LLC may submit a completed Schedule R for each year a refund is sought to the FTB no later than August 20, 2009.
The LLC may elect the "Alternative Method" by submitting a completed LLC Income Worksheet from the 2008 Form 568 Tax Booklet for each year the LLC is eligible for the refund by August 20, 2009.
If an LLC does not elect the "Alternative Method" by the August 20, 2009, deadline, the FTB will compute the refund using the "Default Method." Note, regardless of the method used, the sourcing of the revenue is performed in the same manner.
To elect the "Alternative Method" or to provide a completed Schedule R for the "Default Method," the LLC must provide the following information with the forms:
1. The LLC's name and address, together with the name and phone number of the managing member or designated contact person.
2. The LLC's Secretary of State file number or FTB temporary LLC number (for unregistered entities), and Federal Employer Identification Number.
3. The tax year(s) involved.
4. Indicate that the LLC is submitting a completed Schedule R for the "Default Method" or a completed 2008 LLC Income Worksheet for the "Alternative Method."
The FTB recommends faxing the information, as opposed to mailing the information. The appropriate FTB fax number is: (916) 845-9796
New Claims for Refund
If an LLC wants to file a claim for refund based on this Notice, the LLC or its representative must fax a letter to the FTB stating, "This letter constitutes a claim for refund for (LLC's name) - Income Earned Within and Outside of California." The letter must include the information listed in items 1 through 4 above.
The letter must be signed by the LLC's managing member or a representative with power of attorney and should be faxed to (916) 845-9796. Please note, claims may only be filed for those tax years for which the statute of limitations remains open.
For more information on this or other tax matters, please contact your J.H. Cohn professional at 877-704-3500.
Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing or recommending to another party any tax related matters.