LLCs and small biz: highlights from CalCPA's TaxTalk Listserve.

• Author: Williams, Leonard W.
• Position: California. Franchise Tax Board - California Society of Certified Public Accountants

Exchange accommodators frequently use single member LLCs to transfer title. Since SMLLCs are a transparent entity, one would think that the transfer of ownership would be considered the same as the transfer of title.

However, in at least one case, the FTB is attempting to invalidate a reverse Sec. 1031 exchange on the premise that the recipient received an SMLLC interest and not title to property.

One TaxTalk participant, a partner in a large local firm in Los Angeles, said that he hasn't seen the FTB accept a delayed (aka Starker) exchange (either forward or reverse) in the past three years.

A Common LLC Change of Ownership Problem

When an LLC is required to file two tax returns for the same year due to a change of ownership of more than 50 percent, does the client have to pay two separate gross receipt fees for the two short-year period periods entirely within the same year?

The answer is yes. According to Form 568 instructions, two Form 568s must be filed, one for each period.

However, that sets up the LLC for correspondence from the FTB because the total LLC tax paid between the two forms will be less than it would have been for just one Form 568.

The instructions to Form 568 also state that the FTB may aggregate the receipts of commonly controlled LLCs, which might cause the FTB to suspect tax avoidance (i.e., breaking up the entity into several small LLCs to reduce the LLC fee). The instructions define "commonly controlled" as more than 50 percent of the capital interest or profit interest of the taxpayer and any other LLC or partnership by the same persons.

Unregistered Tax Preparers--FYI

Tax preparers who aren't CPAs, attorneys or enrolled agents (or aren't employed by a member of one of those categories) must register with the California Tax Education Council, an entity created by the California Legislature. The total number of registrants is about 40,100.

The FTB has been walking the street looking for unregistered preparers. The ones they find are told how to get registered, and are notified that there is a $2,500 penalty for being unregistered. The penalty is waived if they register within 90 days. If they don't register, and still are doing tax returns a year later, the penalty is $5,000.

From January 2006 to May 2006, the FTB issued 21 $2,500 notices. Eleven registered, one died, two are no longer doing returns, one disappeared and six received $5,000 penalties.

The FTB made 715 site visits in January 2007. Twenty-four stopped...