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Gross receipts fees discussed at CalCPA

On October 28, we attended the CalCPA Committee on Taxation, our annual liaison meeting. We shared legislative updates affecting us, changes to our auditing and collections, and new communication products available to our taxpayers and tax professionals. Also, we participated in a question and answer session on emerging issues. The following is a question asked by the CalCPA members and our response from the meeting:

Question:

Under the calculation of "gross receipts" for the LLC, one can exclude allocations, distributions, or gains from another LLC that was already subject to the gross receipts fee. If one LLC pays a consulting or management fee to another related LLC, can the second LLC exclude this income from its gross receipts since the first LLC paid a gross receipts fee?

Answer:

R&TC Section 17942(b)(1)(A) provides, in relevant part:

For purposes of this section, "total income from all sources derived from or attributable to this state" means gross income, as defined in Section 24271, plus the cost of goods sold that are paid or incurred in connection with the trade or business of the taxpayer.
However, "total income from all sources derived from or attributable to this state" shall not include allocation or attribution of income or gain or distributions made to a limited liability company in its capacity as a member of, or holder of an economic interest in, another limited liability company if the allocation or attribution of income or gain or distributions are directly or indirectly attributable to income that is subject to the payment of the fee described in this section.

The consulting or management fee paid to the second limited liability company by the first limited liability company, as posed in the question, is clearly not within the meaning of "allocation or attribution of income or gain." However, the facts of the question are not clear as to the capacity in which the second limited liability company has provided services to the first limited liability company. Therefore, at least a potential issue exists as to whether the consulting or management fee payment may be a "distribution" described in Section 17942(b)(1)(A), and may be excludable to the extent it is attributable to income subject to the payment of the fee by another limited liability company, i.e., the first limited liability company.

Regardless of whether the second limited liability company is directly a member of, or holder of an economic interest in, the first limited liability company, if:

(1) The payment of a consulting or management fee by one limited liability company to a second limited liability company is a payment to the second limited liability company in the second limited liability company’s capacity as other than a member of, or holder of an economic interest in, the first limited liability company, (such as in the second limited liability company’s capacity as operating a separate trade or business), or
(2) The payment is treated under a provision of the R&TC, (such as Section 17851, incorporating by reference Internal Revenue Code Section 707(c)), as a payment to the second limited liability company other than in its capacity as a member of, or holder of an economic interest in, the first limited liability company for purposes of determining the gross income of the second limited liability company,

then the fee payment is not a "distribution" described in Section 17942(b)(1)(A), and is not excluded from the total income of the second limited liability company under Section 17942(b)(1)A) for purposes of computing its annual fee. The determination of whether a member is acting in a nonmember capacity, e.g., conducting a separate trade or business when providing services to another limited liability company depends on the particular facts and circumstances. Similarly, whether a payment for services made to a member acting in its member capacity must be treated as made to a member acting in a nonmember capacity also depends on the particular facts and circumstances.

A transcript of all the questions submitted by CalCPA members and respective answers from us will be available in early 2010 and posted to calcpa.org.

Back to December 2009 Tax News