Calculation of LLC Fee for Dealers in Real Property

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July 1, 2016

Purpose of Bulletin

To advise FTB staff that on July 14, 2016, we issued Legal Ruling 2016-01, that clarifies the calculation of the LLC fee for dealers in real property is based on trade or business gross receipts.

Background

We wrote Legal Ruling 2016-01 in response to practitioner concerns regarding FTB Form 568 Instructions. These instructions told taxpayers that the cost of goods sold did not include the adjusted basis of real property held for sale to customers in the ordinary course of business.

This legal ruling clarifies that a dealer in real property calculates the LLC fee based on gross receipt amounts for sales of real property held for sale to customers in the ordinary course of business, but calculates the LLC fee based on gross income (i.e. gain amounts) for sales of real property held for investment.  This result is consistent with the calculation of the LLC fee for other industries.

We estimate the affected taxpayers will be limited to a small number of California’s real estate companies.

Additional Information

The Taxpayer Advocate has the authority (RTC 21004(c)) to abate underpayment penalties for LLCs (RTC section 17942(d)) that relied on previous guidance.  Use FTB 3705, Request for Taxpayer Advocate Equity Relief, to submit your request.

Taxpayer Inquiries

Taxpayers can request penalty abatement for this issue at 800.883.5910.

Questions/Comments

For additional contact and other information for the Taxpayer Advocate go to ftb.ca.gov and search for taxpayer advocate.

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