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California Appellate Court Holds LLC Fee Unconstitutional

In a judgment filed on August 11, 2008 by the California Court of Appeal (the Court) in Ventas Finance, LLC (Ventas) v. California Franchise Tax Board (FTB), the Limited Liability Company (LLC) gross receipts fees were held unconstitutional. The Court partially affirmed the Superior Court's decision and concluded that the state's unapportioned annual fee imposed on limited liability companies registered or doing business in California violates the U.S. Constitution's fair apportionment standards. This is in contrast to the Court's earlier ruling in Northwest Energetic Services case, which involved an out-of-state taxpayer that had registered to conduct business in California but never did any business in the state. In this case, Ventas actually had taxable activity in California. The Court determined that Ventas is entitled only to a partial refund equal to an amount remitted in prior years that exceeded the amounts Ventas would have been assessed had a method of fair apportionment been in place. The Court determined that neither federal due process nor any principle of California Law requires the FTB to refund the entire amount paid by the taxpayer.

Ventas has announced that they will appeal this decision. Another lawsuit currently pending in state trial court is Bakersfield Mall LLC (taxpayer) v. FTB. In this case, despite the taxpayer having its entire activity in state, the taxpayer is arguing that it is due a refund for the entire amount of the LLC fee paid because the fee is unconstitutional.

It is important to note that the LLC fee statute was amended during 2007 and now provides for apportionment and limitations on the amount of the refund that would have been assessed under the amended statue.

A year is open with respect if a protective claim for refund of the California LLC gross receipts fees has not been filed based on Northwest Energetic Services Case, clients with open years (typically four years) that paid these fees should consider filing a protective claim.

For more information, contact Jason Parish at jparish@BlackmanKallick.com or 312-980-2959, or your Blackman Kallick representative. Our thanks to Deb Rood for her contribution to this article.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.