Tax News
Ask the Advocate – CalCPA Annual Meeting

Steve Sims, Taxpayers' Rights Advocate.

CalCPA Annual Meeting

On October 22, 2013, we held our annual liaison meeting with the California Society of Certified Public Accountants (CalCPA). This year, like every year, they had some great questions for FTB staff. I want to share a few of the questions I thought our Tax News readers would find most interesting and helpful in my Ask the Advocate column this month.

Exclusion of service fees from one Single Member Limited Liability Company (SMLLC) to another SMLLC

Question #1

A husband and wife own two separate single member LLCs (both are disregarded for tax purposes) and report the income on their personal FTB 540 return on two separate Schedule Cs. One of the LLCs pays service fees to the other LLC. Is there a way to exclude these service fees from the gross receipts fee calculation for the recipient SMLLC? It does not appear to meet the exception for the allocation of income to a member LLC from another LLC (such as from a K-1). Does the fact that they are both disregarded entities owned by the same couple result in them just paying income to themselves and therefore there is no gross receipt?

Answer #1

No. First, you are correct that the exception in California Revenue and Taxation Code (R&TC) Section 17942(b)(1)(A) does not apply in this situation and there is no exception in Section 17942 that would allow the service fees to be excluded from the gross receipts fee calculation for the recipient single member LLC (SMLLC) in this situation. Second, these two disregarded SMLLCs have gross receipts (for purposes of the LLC fee in R&TC Section 17942) irrespective of the fact that they are disregarded entities owned by the same couple. By way of background, in the case of an LLC with only one member, unless the SMLLC checks the box to be taxed as a corporation, the default treatment is to disregard its status as an entity separate and distinct from its owner for tax purposes. Thus, for tax purposes, the activities of the SMLLC are treated as the activities of its sole owner. (For more information, see Legal Ruling 2011-01, Subject: Activities of a Disregarded Entity, January 11, 2011.) However, R&TC Section 23038(b)(2)(B)(iii) explicitly provides that the separate existence of the eligible business entity is not disregarded for purposes of the LLC tax (R&TC Section 17941), LLC fee (R&TC Section 17942), and LLC tax return filing requirement (R&TC Section 18633.5). Accordingly, the fact that the two SMLLCs are both disregarded entities owned by the same couple does not change the answer.

Mandatory Electronic Payment

Question #2

It was my understanding that taxpayers had to use Web Pay for the first payment after they met the required criteria. However, I have had clients receive penalty notices who had never before been required to pay electronically. What are the rules for penalty abatement in this situation?

Answer #2

Under Revenue and Taxation Code Section 19011.5, individuals must remit all future payments electronically once they:

  • Make an estimated tax or extension payment (by check or electronic method) over $20,000 for a taxable year beginning on or after January 1, 2009; OR
  • File an original return with a tax liability over $80,000 for a taxable year beginning on or after January 1, 2009.

When payments are received that meet the mandatory requirement, we will send the taxpayer an FTB 4106MEO advising the taxpayer that all future payments must be made electronically.

Electronic payments are not limited to the Web-based method. Taxpayers may also:

  • Request an Electronic Funds Withdrawal (EFW) on your e-file return.**
  • Pay by credit card.
  • Use the pay-by-phone option.

If your client has received a penalty notice that he or she believes is an error, we suggest that you call the Tax Practitioner Hotline 916.845.7057 and we can review and correct the account, if applicable.

Alternatively, if your client is subject to mandatory electronic payments but would like to pursue a waiver, there are three types of possible waivers available. They are:

General Mandatory e-Pay Waiver
Taxpayers can request a general waiver from mandatory e-pay if one or more of the following is true:

  • They have not made an estimated tax or extension payment in excess of $20,000 during the previous income year AND
  • Their tax liability they reported for the previous income year did not exceed $80,000.
  • The amount they paid is not representative of their total tax liability.
  • They had a one-time event, such as lottery winnings or inheritance.

If we grant a waiver and the taxpayer subsequently meets the mandatory e-pay requirements, they must resume making electronic payments.

Permanent Physical or Mental Impairment Wavier
Taxpayers can request a permanent waiver from mandatory e-pay if they provide a physician’s declaration stating that they have a permanent physical or mental impairment that prevents them from using a computer.

Reasonable Cause
If your client is subject the mandatory e-pay requirements you can request a penalty waiver if your client has reasonable cause. To request a penalty waiver based on reasonable cause you need to:

  1.  Mail us a letter listing the facts.
  2. And if needed, include supporting documents.

Both the general and the permanent physical or mental impairment waivers can be requested using FTB 4107PC, Mandatory e-pay Election to Discontinue or Waiver Request.

Group nonresident amended tax return.

Question #3

Can a group nonresident tax return be amended? If so, what is the statute of limitations?

Answer #3

Yes, a group nonresident tax return can be amended.

As explained in FTB Publication 1067, each nonresident individual must decide whether to be included in the group nonresident tax return prior to its filing. Once the group nonresident return is filed, the election to be included in the group nonresident tax return is irrevocable for the taxable year. Once filed, the group tax return cannot be amended to either include or exclude a nonresident individual. Similarly, once an electing nonresident individual is included in the group tax return, the individual may not subsequently file a separate individual tax return for the taxable year. See R&TC Section 18535.

Exception:
The individual may discover after the group tax return was filed that he or she did not qualify to be included in the group nonresident tax return. For example, the individual had income from other California sources that were not reported on any other group nonresident tax return. The individual must file a tax return on a separate basis reporting all his or her California source income. Having other sources of California losses will not disqualify the individual from being included in a group nonresident tax return.

Amended tax return:
Amend your tax return using California Form 540X. Refund claims must be filed within the statute of limitation period (generally four years after the due date of the original tax return, one year after overpayment, or two years after a final federal determination, whichever is later). If you are filing your amended tax return after the normal statute of limitation period, attach a statement explaining why the normal statute of limitations does not apply.

Steve Sims, EA
Taxpayers' Rights Advocate

Follow me on Twitter at twitter.com/FTBAdvocate.

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