LLC talk: plus: audit changes and a sales/use tax update.

• Author: Williams, Leonard W.
• Position: CATax

Several of us have encountered this situation: Taxpayers pool their money to buy an airplane for personal purposes only. However, their attorney has advised that they form an LLC for legal purposes. They've done that, opened a separate bank account and have an employee ID number (EIN). The LLC has no gross income, but it will have some non-deductible expenses.

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Should they should file a Form 1065/565?

The prevailing listserve advice was they should because there's an EIN in the IRS system and. by corollary; probably in the FTB system. So either the IRS or the FTB will be looking for a return. It's better to file the return with zero income and expenses than lo deal with worried clients phoning because they received a notice requesting a return.

Downside of Not Advising the FTB of an IRS Audit Change

A taxpayer appealed the FTB's proposed assessment for additional tax, interest and penally (based on an IRS audit report that the IRS had sent to FTB) because the assessment was more than four years alter the due dale of the return.

The taxpayer lost because he or she hadn't notified the FTB within six months alter the final federal determination. Consequently, the situation was governed by California Revenue and Taxation Code See. 19059, which gives the FIB a two-year statute after the receipt of a notice of Federal adjustment from the IRS (Appeal of Michael and Sauna Olins, SBE Case No. 437324. 5/25/2010). It says, "not to be cited as precedent," but the message is loud and clear.

LLC Development

Jacob Stein, an attorney and CalCPA Education Foundation instructor, published this summary in one of his recent newsletters, which also included a more lengthy analysis. It is presented here with his permission:

"In Olmslead, 2010 WL 2518106 (July 6, 2010), the debtor was the member of a Florida LLC, which, like California, permits single-member LLCs. The creditor the FTC sought to obtain an order permitting the attachment and sale of the debtor's membership interest, similar to the attachment of a share of corporate stock. Florida has a charging order statute similar to California's. The key provision in the Florida charging order statute provides that an assignee of a membership interest in an LLC may become a member only if all of the other members consent.

"Much to the surprise and chagrin of the debtor-member, the court ruled that this statute did not prevent the seizure of the members interest.

"It reasoned that in every...