Archive for the ‘California’ Category

The Check Is in the Mail, Really!

Sunday, July 14th, 2019

One of the more interesting aspects of being a tax professional is the reliance on the mail, the Post Office. When you timely mail a tax return, it’s considered filed on the date of mailing. There are, as always, some caveats: You should mail the return (or payment) using certified mail. That means going to the Post Office, waiting in line, and using one of those green certified mail receipts. But if you do that your return will be considered timely filed even if it takes a while to get to its destination. It also helps resolve issues if your return gets lost in the mail (that’s happened a couple times to my clients), or if the mail truck makes a right turn while on a bridge over San Francisco Bay (there’s a reason there’s a bridge), or the mail truck goes up in flames.

This morning I received a notice from California’s Franchise Tax Board (the state’s income tax agency):

Due to a significant delay at the Post Office, some June payments arrived via mail up to a month late at the Franchise Tax Board.

However, these payments will be posted with a timely date of June 15, 2019. No action is needed by taxpayers or their representatives.

On Tuesday July 9, FTB received approximately 115,000 estimate and other payments with dates mostly between June 5 and June 20.

If a taxpayer or representative contacts FTB regarding a payment sent in June that has not yet posted, FTB customer service representatives will use all available resources to locate the payment.

FTB is asking taxpayers and representatives to allow some additional time to process and post their payment. It is not necessary to stop payment on a check that was delayed. MyFTB users may log in to their MyFTB account to verify payment.

Kudos to the FTB for being proactive on this issue and letting the public (and the tax professional community) know of the problem, and for taking the appropriate steps to resolve the issue. If you are one of the impacted taxpayers, give the FTB one month to resolve this. Unfortunately, this is clearly something that’s going to be a manual fix, and there are 115,000 fixes to be done.

If your payment posts and isn’t corrected to the June 15th date, then it will be time for you (or your tax professional) to contact the FTB.

Arizona v. California Update

Monday, June 24th, 2019

The State of Arizona has asked the US Supreme Court to stop California’s illegal (in Arizona’s view) scheme of requiring indirect passive owners of LLCs who happen to own other LLCs that invest in California from paying California’s minimum $800 franchise tax. Because this is a dispute between the states, the proper venue for Arizona to challenge this is an original action at the Supreme Court.

Today, the Supreme Court had a one-line order on the case:

The Solicitor General is invited to file a brief in this case expressing the views of the United States.

This can be expected in the next few months. Once that brief is filed, the Supreme Court will again consider whether to hear the case; it’s probable that decision will be late this year. If the case is heard, it would likely be sometime next Spring.

IRS To New York, New Jersey, and California: We Weren’t Kidding

Tuesday, June 11th, 2019

Today the IRS issued rules and guidance on charitable contributions as a workaround to the new limits on state and local taxes. Unsurprisingly, the IRS said exactly what I thought they would: both substance over form and quid pro quo apply.

There’s a fundamental rule in tax: The substance of a transaction determines how it’s taxed, not what it’s labeled. Suppose I pay you to perform services for me, but I send you a Form 1099-INT (for interest income). What I pay you is service income, not interest income, no matter how it’s labeled. Consider state taxes. Suppose a state (say, New York) offers you the ability to contribute to the “Support New York Fund” instead of state taxes. Well, the substance is that you’re paying state taxes by contributing to that fund.

Another issue is “quid pro quo;” that’s Latin for ‘something for something.’ And if you get something for a charitable contribution, that portion isn’t charity. Consider a donation to some foundation for $50 and you receive a blanket worth $10; your charitable contribution (that you can take) is $40. This rule has been around for some time. It applies to these workarounds, too.

Put bluntly, the IRS isn’t amused with the workarounds. The Tax Code is law; until Congress changes it, federal deductions for state and local taxes are limited.

Arizona vs. California Franchise Tax Board

Monday, June 10th, 2019

Legal authorities in the Grand Canyon State are not amused by California’s view that indirect interests in California LLCs mean that the entities are doing business in California. And they’re mad enough to take action, asking leave to sue California in the United States Supreme Court.

The issue involved is not new. California’s Franchise Tax Board believes that indirect ownership of an entity doing business in California, or even indirect ownership of an entity that indirectly owns another entity that does business in California, is enough to make all such entities be considered to do business in California. Arizona calls this an “illegal scheme” and wants it to end. The only way is to ask the Supreme Court for permission to take the case; Arizona filed the request in February. California objects to the characterization and states that impacted business owners have ways of fighting the $800 charge.

The problem is that the charge is $800, and the cost to fight is in the thousands of dollars, so few do. There are cases (such as Swart) where business owners fight back, but they take years, are expensive, and require extraordinary deep pockets. Arizona estimates the damage to Arizona business at $10.6 million a year.

Disputes between the states are subject to judicial review by the Supreme Court; however, the Supreme Court must agree to take the case. The Supreme Court is scheduled to decide whether or not to review this in the coming weeks. If the Supreme Court takes the case, it would likely be heard next winter.

Derailed

Friday, May 17th, 2019

California’s “Train to Nowhere,” the alleged high-speed rail that would link San Francisco and Los Angeles (originally), and, now, the thriving metropolises of Shafter (just north of Bakersfield) and Merced is in deep trouble. Well, it has been in deep trouble since day one of the project but the trouble is now far worse: The US Department of Transportation canceled funding of nearly $929 million. That cancellation stops $929 million of funds from heading to California. Making matters worse, the US is considering asking for $2.5 billion to be returned.

Based on CHSRA’s repeated failure to submit critical required deliverables and its failure to make sufficient progress to complete the Project (as defined in Attachment 2, Section 1 h, of the FY 10 Agreement) hy the close of the performance period, and after careful consideration of the information presented by CHSRA in its March 4, 2019, letters to me and to Ms. Jamie Rennert (CHSRA Response) (included as Ex. C and Ex. D, respectively), FRA has determined that CHSRA has violated the terms of the FY 10 Agreement and has failed to make reasonable progress on the Project.

CHSRA consistently and repeatedly failed in its management and delivery of the Project, and in meeting the terms and conditions of the FY 1O Agreement, all of which constitute violations of the FY lO Agreement. Despite extensive guidance from FRA, CHSRA was unable to prepare and submit fundamental Project delivery documents (e.g., budgets, Funding Contribution Plans (FCPs), and Project Management Plans (PMPs)). CHSRA’s inability to track and report near-term milestones, as described further below, shows that CHSRA is likewise unable to forecast accurately a long-term schedule and costs for the Project. Further, after almost a decade, CHSRA has not demonstrated the ability to complete the Project, let alone to deliver it by the end of 2022, as the FY 10 Agreement requires. As described further below, CHSRA is chronically behind in Project construction activities and has not been able to correct or mitigate its deficiencies. Overall, such critical failures completely undermine FRA’s confidence in CHSRA’s ability to manage the Project effectively. [footnote omitted]

This is what almost every critic of this project has said from day one. The cost has gone from $10 billion to somewhere north of $70 billion (I’ve seen estimates that range from $72 billion to well over $100 billion). The demand for high-speed rail between Bakersfield and Merced isn’t high, so the project is going to have problems breaking even.

California Governor Gavin Newsom said he would fight the decision in court. But for now, I will not be surprised if the California high-speed rail line turns into a brand new bikeway sometime in the future.

Bozo Tax Tip #2: We Don’t Need No Stinkin’ Employees (Especially Because We’re Lawyers)

Thursday, April 11th, 2019

A few years ago, I first heard about the law firm that had no employees. Now, I can imagine a small firm of, say, three or four partners, with no clerical staff as a possibility. However, having dealt with enough attorneys there are always secretaries, paralegals, clerks, and junior lawyers because most clients don’t way to pay $400 an hour for typing.

Joe Kristan (who formerly had the Roth CPA tax update blog) wrote about the Donald Cave Law Firm in Baton Rouge, Louisiana. A few years ago the firm found itself in Tax Court claiming that the three associates of the firm weren’t employees because the owner, Mr. Cave, alleged he didn’t have enough control over them. Now, do you really believe that a senior lawyer at any firm would allow junior attorneys to do their own thing? Of course not, and the Tax Court didn’t believe it either.

That wasn’t the end of the story, though. The firm appealed and their fate at the Fifth Circuit was, well, what you would expect.

Finally, with respect to the law clerk, Michael Matthews, the record shows that Donald Cave hired Matthews and exercised complete control over the assignment of Matthews’ work for the Firm. Although Matthews also worked for other lawyers and law firms, providing services to multiple employers does not necessitate treatment as an independent contractor…Matthews was paid a salary by the Cave Law Firm of approximately $1250 every two weeks, which amounts to $30,000 per year, regardless of the amount of work he performed during that time period. Contrary to the Firm’s suggestion, Matthews was not paid a minimal amount for essentially piecework. Instead, he entered into a verbal contract with Donald Cave and the Firm for a fixed sum to provide services at the direction of Cave, and there was no evidence that he could reject any work he did not wish to perform. Furthermore, Matthews could neither increase his profit through his own skill and initiative, nor would he suffer the risk of any losses. Matthews also made no investment in the facilities because the Firm provided him with the amenities needed to complete his work.

Can you really imagine that a clerk at a law firm isn’t an employee? I can’t, and neither could the judges at the Fifth Circuit.

The point of this is to be careful about who you claim are independent contractors. If you give John a research project, and don’t control his activities, and he’s working in another state on his own, that truly sounds like an independent contractor. However, if John’s working in your office, and your supervising his every move, etc., trying to claim he’s an independent contractor when he’s really an employee can lead to a big heartache.

Additionally, some states are far tougher on the independent contractor/employee decision than the IRS. Indeed, my old homestead of California is probably the most difficult state in the country to have independent contractors. California’s Employment Development Department (EDD) has an excellent publication on this issue (EDD Publication 38). There’s even a help line you can call.

So if you really have independent contractors, great. But if you’re a law firm and you really, really think that your secretary and the filing clerk are independent contractors you are committing a Bozo act.

Bozo Tax Tip #9: Nevada Corporations

Tuesday, April 2nd, 2019

Actually, this isn’t that much of a Bozo Tax Tip. Nevada is a great state to have your business in. But the key is being in Nevada (or operating in multiple states and selecting Nevada as your corporate domicile). You cannot escape California taxes by being a Nevada corporation if you’re still operating in the Bronze Golden State.

If the corporation operates in California it will need to file a California tax return. Period. It doesn’t matter if the corporation is a California corporation, a Delaware corporation, or a Nevada corporation.

Now, if you’re planning on moving to Nevada forming a business entity in the Silver State can be a very good idea (as I know). But thinking you’re going to avoid California taxes just because you’re a Nevada entity is, well, bozo.

Can a California or Massachusetts Professional Gambler Take a Business Loss on His or Her State Tax Return?

Tuesday, March 19th, 2019

The Tax Cuts and Jobs Act (TCJA) eliminated the ability of a professional gambler to take a loss on his Schedule C based on his business expenses; Congress specifically overrode the Mayo v Commissioner decision. But what about state taxes? Can a professional gambler who had a losing year take a loss on those returns?

First, no professional gambler can take a loss based on his gambling results. Internal Revenue Code Section 165(d) prohibits gambling losses in excess of wins. Every state with a state income tax conforms to this.

But state conformity to the TCJA is decidedly mixed. California does not conform to almost any part of the TCJA. The Franchise Tax Board produced a publication showing each change in law and the impact to California. At the bottom of page 89 is the beginning of the discussion on Section 11050 of the TCJA (which changed the rules for professional gamblers). The FTB publication notes:

California conforms, under the PITL, to the federal rules relating to the deduction for losses from wagering transaction[s] under IRC section 165(d), as of the specified date of January 1, 2015, but does not conform to the federal limitation on the deduction.

Thus, a California professional gambler can take a loss based on his business expenses on his state tax return.

Massachusetts also doesn’t conform to federal law in this area. However, Massachusetts does not allow losses from any business to be reported on its tax returns. Thus, a Massachusetts professional gambler wasn’t able to take a loss based on his business expenses in the past and cannot today.

State conformity on the provisions of the TCJA will vary among the states. If you reside in or must pay state taxes, this is a key issue that you must discuss with your tax professional.

Arizona Asks Supreme Court to Stop California From Imposing California Tax on Passive LLC Investments

Tuesday, March 12th, 2019

We’ve highlighted this issue before. Suppose you are an Arizona resident, and you form Primary LLC in Arizona. Its main purpose is owning a warehouse in Phoenix. But you have some extra money in the LLC, so you invest in Secondary LLC, a Nevada LLC. Secondary invests in various things, including Tertiary LLC, a California LLC. Would the Franchise Tax Board, California’s income tax agency, allege that Primary LLC is doing business in California? You bet. Would they come after you for California’s minimum $800 a year LLC tax? Absolutely. Would they then assess late filing penalties, filing fees, and interest if you don’t pay, and issue payment demands through banks? Of course they have and will do so.

Arizona’s Attorney General, Mark Brnovich, doesn’t like this. He alleges that California is illegally going after Arizona LLCs, and illegally demanding payments from Arizona banks. Mr. Brnovich is asking the US Supreme Court to allow Arizona to sue California at the Supreme Court, as there’s no other venue for such a lawsuit. The Supreme Court will likely rule on the first issue–whether the lawsuit can proceed–before the end of June. If the Supreme Court allows the lawsuit, it would likely be heard next fall or winter in Washington.

By the way, those entities who have fought the FTB in California courts have won their cases. The problem, though, is it costs just $800 to pay the LLC tax; it costs thousands of dollars to fight the FTB. Mr. Brnovich is absolutely correct that it doesn’t make sense for most companies to fight California.

No Man Is an Island

Monday, March 11th, 2019

On Saturday a superb editorial appeared in the Providence Journal, “When Taxpayers Flee a State.” Here’s an excerpt:

Despite its name, Rhode Island is not an island unto itself. People are free to come and go, including business executives who create jobs and pay high taxes. That is why the state has to be careful that its tax policies do not drive away too many investors or taxpayers…

In high-tax Connecticut next door, billionaires are already escaping. As Chris Edwards of the libertarian Cato Institute notes (“Wealthy Taxpayers are Fleeing These States in Droves,” Daily Caller, Oct. 2), Connecticut in recent years “has lost stock trading entrepreneur Thomas Peterffy (worth $20 billion), executive C. Dean Metropoulos ($2 billion), and hedge fund managers Paul Tudor Jones ($4 billion) and Edward Lampert ($3 billion).”

People can, and will, relocate no matter how nice the climate. I loved living in Irvine, California, but California’s business climate drove me (and I’m not a billionaire) to low-tax, low-regulation Nevada. Rhode Island has lost $1.4 billion of income over the last ten years. The solution for both a small state (Rhode Island) and a large state (California) is identical: low tax rates over a broad swath, rather than very high tax rates in narrow areas. Of course, California now has high taxes over almost everything and a regulatory climate that is the worst in the country.