2018 Meeting Eagle Lodge West

• Jurisdiction: California,United States
• Citation: Vol. 27 No. 3
• Publication year: 2018
• topic: Business of Law,Tax Law,Real Estate

2018 Meeting Eagle Lodge West

April 19—20, 2018

Every spring, the California Lawyers Association sponsors the Eagle Lodge West Conference. This event is run by the Taxation Section and its State and Local Tax Committee. The conference is designed to provide government and private tax practitioners an opportunity to extensively discuss emerging tax policy problems, with the hope that solutions can be identified and incorporated into legislative or regulatory reform efforts of the Tax Section. The annual conference, which began in the early 1990s, traces its roots to the former federal tax Eagle Lodge conference sponsored by the New York University School of Law.

The 2018 Eagle Lodge West Conference took place April 19 to 20, 2018 at the Vintner's Inn located in Sonoma County. The participants discussed important topics with an aim at making sound policy recommendations applicable to California taxes. The conference is split into two committees: the property and sales tax committee and the income and franchise tax committee.

The following summarizes the discussions that took place in each of those committees:

I. PROPERTY AND SALES TAX COMMITTEE

A. Sales and Use Tax—Clarify Rules on Responsible Person Liability

Background. Revenue & Taxation Code § 6829 and Regulation 1702.5 permit the California Department of Tax and Fee Administration (CDTFA) to assess a responsible person who willfully fails to pay or to cause to be paid (in certain circumstances) taxes due from a corporation, partnership, limited partnership, limited liability partnership, or limited liability company.

Discussion. Although the CDTFA's regulation defines "responsible person" and "willful", those definitions can create surprises or confusion when personal liability is sought by the CDTFA. The committee agreed that there are two main goals with the responsible person law: (1) to ensure that actual bad actors can be assessed; and (2) to ensure that non-culpable people cannot be assessed. These goals can lead to problems in drafting the rules because a rule that is too narrow could cause no one to be subject to personal liability, while a rule that is too broad could subject non-culpable people to personal liability. The committee also agreed that it would be improper to cast a broad net just to allow pursuit of the most solvent persons, without regard to whether they were the bad actors responsible for the misappropriation of tax or tax reimbursement.

As to California sales tax, because the collection of sales tax reimbursement is merely a matter of contract between the retailer and the purchaser, one issue that was raised was whether the lack of an applicable constructive trust doctrine might inadvertently facilitate the misappropriation of sales tax reimbursement. In many other states, tax (and tax reimbursement) collected by retailers is deemed to be held in constructive trust for the state, which helps discourage misappropriation due to the potential for criminal liability. Another issue raised was the fact that, prior to recent amendments to Regulation 1702.5, often times it was the last person standing (e.g., a bookkeeper, etc.) at a failing company that got left holding the bag in regards to personal liability, even though he or she was not a bad actor responsible for the misappropriation.

Conclusion. The committee determined that the recent changes to Regulation 1702.5, which became operative April 1, 2017, need more time in effect before any additional changes should be made. However, since failing businesses are often faced with the decision of which creditors to pay with the limited funds available, the committee decided that it would make sense for the CDTFA to put on their website a warning that informs taxpayers that they could be subject to personal liability if they collect and fail to remit sales tax. It was also discussed whether the CDTFA's new computer system ("CROS") could eventually allow for a direct warning to be given to an online filer that reports an amount of tax or tax reimbursement collected that exceeds the amount of tax paid with the return filed.

B. Property Tax—Transfers of Real Property Between Parents, Children, and Legal Entities

Background. Revenue & Taxation Code § 63.1 excludes a transfer of real property from parents to children (and vice versa) from a reassessable change in ownership (under certain circumstances). However, transfers of real property to legal entities are not excludable from reassessment, although the legislative intent behind section 63.1 allows such transfers to be excludable if certain specified steps are taken. Therefore, if a parent transfers property directly to an LLC wholly-owned by the children, the real property experiences a change in ownership...