Possible Refund Claims for California LLC Fees Based on Unconstitutionality

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1 ALBANY AMSTERDAM ATLANTA BOCA RATON BOSTON CHICAGO DALLAS DELAWARE DENVER FORT LAUDERDALE HOUSTON LAS VEGAS LOS ANGELES MIAMI NEW JERSEY NEW YORK ORANGE COUNTY ORLANDO PHILADELPHIA PHOENIX SACRAMENTO SILICON VALLEY TALLAHASSEE TOKYO TYSONS CORNER WASHINGTON, D.C. WEST PALM BEACH ZURICH Strategic Alliances with Independent Law Firms* Possible Refund Claims for California LLC Fees Based on Unconstitutionality April 2006 BRUSSELS LONDON MILAN ROME TOKYO GREENBERG TRAURIG, LLP ATTORNEYS AT LAW

2 A recent tentative decision by a San Francisco trial court should cause many LLCs doing business in California to file refund claims for the fees they have paid to the state. Limited liability companies (LLCs) have become a very popular form for conducting many businesses, as they possess several federal and state tax and business law advantages over other business entities, such as C corporations, S corporations, and limited partnerships. These LLCs have historically contended with one disadvantage to this form of doing business in California--the imposition of a so-called fee based on the LLC s total gross receipts (with a few exceptions). The annual fee ranges from zero for LLCs with total gross receipts under $250,000 to $11,790 for those with gross receipts of $5 million and more. LLCs organized in California, those registered as foreign LLCs with the Secretary of State, and those that actually do business in the state without registering, are subject to the fees. Unlike the corporate franchise tax, the LLC annual fee is not apportioned, so that an LLC pays the fee based on its total gross receipts even though only a small fraction (or perhaps none) of its gross or net income derives from activities in California. In a very recent decision involving an LLC organized in Washington that had qualified to do business in California (but never actually did any business in the state), a trial court in San Francisco has rendered a notice of intended decision to the effect that the failure to apportion the fee based on multi-state activities renders it unconstitutional under the commerce and due process clauses of the United States Constitution. Northwest Energetics Services LLC v. FTB, SF Super. Ct. # CGC ). The California Attorney-General, on behalf of the State, has filed objections to this intended decision, and the taxpayer has filed a response, both of which the trial court will be considering over the coming days or weeks, before making its decision final. Of course, even if the trial court adheres to its proposed decision, the State will have an opportunity to appeal, which it will surely exercise, and it may be many years before we have a final, precedential ruling--perhaps from the California Supreme Court or the Supreme Court of the United States--on the issues raised by the case. One important issue could be whether LLCs that do business only in California, i.e., have no operations outside the state, are entitled to take advantage of any favorable ruling. In the meantime, the California Franchise Tax Board has, perhaps surprisingly, released a suggested form of notice that can be used to file protective claims for refund of LLC fees. The Board states that only years not yet barred by the 4-year statute of limitations on refund claims, generally those commencing in 2001 and thereafter, can be the subject of these claims. but there is an argument that even earlier years might be affected, if the unconstitutionality ruling is upheld. The point is that refund claims should be filed to protect against the statute of limitations running while this case is pending appeal. A version of this form suitable for filing with the Franchise Tax Board is attached as Exhibit A. Please note that the form follows the FTB ruling that only the fees paid for years 2001 and forward can be refundable if the outcome of the litigation is favorable to taxpayers. The Board has indicated that it prefers to receive the form by fax; but it can also be mailed as indicated. April 2006 GT Alert Possible Refund Claims for California LLC Fees Based on Unconstitutionality - 2 -

3 The FTB has stated that the form must be signed by the LLC s managing member, or a representative under a duly executed power of attorney. Although many LLC agreements designate a managing member, not all do; if your documents don t provide for a managing member, please contact GT for advice on properly signing the protective claim. If desired, any GT lawyer can assist you with filing the claim. If you provide, or have provided, him or her with a power of attorney to represent you before the FTB on this matter, we can file the claim on your behalf. We can you a power of attorney form immediately upon receiving your request and assist you in completing it. Since there is very little cost involved to filing these protective claims for refund, regardless of the outcome of the issue, and since the statute of limitations on refund claims for the year 2001 will expire for many LLCs on April 15, prompt action is recommended to protect your interest in possible refunds. April 2006 GT Alert Possible Refund Claims for California LLC Fees Based on Unconstitutionality - 3 -

4 Franchise Tax Board PO Box Sacramento CA VIA FACSIMILE TO EXHIBIT A--Form of Protective Claim for Refund. Re: Protective Refund Claim for LLC Annual Fees Ladies and Gentlemen: This is a protective refund claim for LLC annual fees paid for all years from to, inclusive. Name of LLC: Mailing Address: Telephone No.: Fax No.: Secretary of State Identification Number: with Secretary of State use FTB Identification No.: [if not registered Tax Years Involved and Amounts: Year: Amount of Claim (Annual Fee Paid) Description of Claim: The LLC Fee is unconstitutional Contact Information: Name of Representative: Firm Address: Telephone No.: Fax No.: Very truly yours, [Name of LLC] By Managing Member April 2006 GT Alert Possible Refund Claims for California LLC Fees Based on Unconstitutionality - 4 -

5 This alert was written by Norman H. Lane in the Los Angeles office. Please feel free to contact Norman Lane, Carol Perrin, Michael Starler, Jason H. Farber, or Grace Chung in the Los Angeles office; Jeff Joy, Gordon Schaller, or Scott Harshman in the Orange County office; Michelle Ferreira or Fred Adam in the Silicon Valley office; Marvin Kirsner in the Boca Raton office; David Bunning in the New York office; or your Greenberg Traurig liaison, for advice regarding any of the matters described above. Albany Amsterdam Atlanta Boca Raton Boston Chicago Dallas Delaware Denver Fort Lauderdale Houston Las Vegas Los Angeles Miami New Jersey New York Orange County Orlando Philadelphia Phoenix Sacramento Silicon Valley Tallahassee Tokyo Tysons Corner Washington, D.C West Palm Beach Zurich This Greenberg Traurig ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. The hiring of a lawyer is an important decision. Before you decide, ask for written information about the lawyer s legal qualifications and experience. Greenberg Traurig is a trade name of Greenberg Traurig, LLP and Greenberg Traurig, P.A Greenberg Traurig, LLP. All rights reserved. *Greenberg Traurig has entered into Strategic Alliances with the following independent law firms, where Greenberg Traurig attorneys are available for consultation by appointment only: Olswang in London and Brussels, Studio Santa Maria in Milan and Rome, and the Hayabusa Kokusai Law Offices in Tokyo. Greenberg Traurig is not responsible for any legal or other services rendered by attorneys employed by the Strategic Alliance firms. April 2006 GT Alert Possible Refund Claims for California LLC Fees Based on Unconstitutionality - 5 -