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Claiming California LLC Fee Refunds in Wake of Ventas Decision

Claiming California LLC Fee Refunds in Wake of Ventas Decision

Issue
The California Franchise Tax Board (FTB) issued a notice allowing certain limited liability companies (LLCs) doing business within and outside of California to claim refunds of LLC fees previously paid on worldwide gross receipts.

Taxpayers Potentially Affected
LLCs doing business within and outside of California that paid LLC fees based on unapportioned gross receipts for years that are still open.

Background
All LLCs engaged in business in California are subject to the annual California LLC fee, which is based on each LLC’s gross receipts. The fee, which ranges from $900 to a maximum of $11,790, is in addition to the California LLC tax, which is fixed at $800. Prior to 2007, the LLC fee was based on total unapportioned gross receipts, even if the LLC did little business in the state. Effective for years beginning in 2007, the LLC fee was revised by statute to be based on California gross receipts only.

Three recent court cases challenged the constitutionality of the LLC fee as it was in effect prior to 2007. Each case presented different fact patterns and prompted the filing of tens of thousands of protective claims for refunds by LLCs that could be affected by the outcome of the cases.

The most recently decided case, Ventas Finance I LLC v. Franchise Tax Board involves an LLC with income attributable to activities within and outside of California. The California Court of Appeal held that the LLC fee as applied to Ventas was unconstitutional because it did not provide a method for fair apportionment of the income used to determine the fee, thus violating the U.S. commerce clause. However, the court decision fell short of saying that the LLC fee was unconstitutional “on its face” and limited the remedy to the difference between the fees paid and the fees that would have been paid had the income been fairly apportioned.

In response, Ventas requested the U.S. Supreme Court to review the case to decide whether its rights to a “clear and certain remedy” under the due process clause of the U.S. Constitution were violated by denying it a full refund of the unconstitutional tax. The U.S. Supreme Court denied review of the case, making the Court of Appeal decision final with respect to the constitutionality issue.

As a result, the FTB issued Notice 2009-04 to inform LLCs with fact patterns similar to the Ventas case (those with income attributable to activities inside and outside of California) and that have open years under the statute of limitations (or that have filed protective claims for closed years) of the procedures necessary to claim refunds for any excess LLC fees paid.

How to Claim the Refund
The notice provides two methods for claiming the refund:

• Default Method
  For claims filed under the default method, a refund will be issued based on the California receipts indicated in an LLC’s Schedule R, “Apportionment and Allocation of Income,” which should be included with the refund claim. If a Schedule R is not filed with the refund claim, the LLC must submit a completed Schedule R for that year to the FTB along with the following required information: LLC name, secretary of state number, federal employer identification number, tax years involved, refund method being used, and a designated contact person.
• Alternative Method
  Under the alternative method, the refund claim must include a completed “Limited Liability Company Income Worksheet” with the respective information for each tax year that a refund claim is being filed. The LLC also must provide the required information listed above. Based on the information provided in the worksheet, the FTB will calculate the revised LLC fee and refund any excess amounts paid.

LLCs choosing the alternative method must provide the worksheet with their revised calculations no later than Aug. 20, 2009, or the FTB will use the default method.

Any refund claims or supplementary information should be sent via certified mail, return receipt requested, to:
     ABS 389 MS: F340
     Franchise Tax Board, c/o FTB Notice 2009-04,
     P.O. Box 942867
     Sacramento, CA 94267-8888

All LLCs with income attributable to businesses within and outside of California that have not already filed protective claims should review their filings for all open years (within four years of the extended due date of the tax return) to determine if they overpaid their LLC fees for those years and file their refund claim in accordance with this notice.

The FTB has not yet specified when it will begin processing the refunds.

Contact Information
For more information about FTB Notice 2009-04, please contact:

• Howard Wagner at 502.420.4567 or howard.wagner@crowehorwath.com.
• Shawn Kane at 630.586.5250 or shawn.kane@crowehorwath.com.
• Joseph Magid at 818.325.8480 or joe.magid@crowehorwath.com.

 

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Under U.S. Treasury rules issued in 2005, we must inform you that any advice in this communication to you was not intended or written to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer.