Nevada LLCs: plus, 'Difficult' Residency issues and 'memo to file'.

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

A California resident client established a Nevada LLC that holds stocks and mutual funds. Its only activity is investing in the stocks and funds, receiving interest and dividends, paying the expenses of the fund, and distributing cash.

The CPA believed this constituted doing business in California.

The client's attorney believed otherwise, and wrote: "The LLC is not doing business in California. It simply invests in publicly traded securities. It will report its income to its California partners/members."

The questions to the listserve were who is right and what should the CPA do?

The sense of the listserve members was that if the investments are made under the direction and control of California situs members, then the CPA is right, and the FTB will consider the entity as engaged in business in California.

At this point, the CPA has four alternatives:

1) Contact the attorney and discuss it more fully with a goal to gain the attorney's agreement that a return should be filed, thus eliminating the conflicting advice and creating a win-win situation for everyone.

2) Refuse the engagement. This, though, might result, unnecessarily, in an unhappy client.

3) Have the attorney provide a formal legal opinion that the entity isn't subject to the California LLC tax, and that the client "may rely on this opinion for purpose of not preparing a California LLC return for the venture."

Follow up to the attorney's letter with a letter to the client stating that "We are not preparing, and understand that you will not be filing, a California LLC return based on the opinion of your legal counsel (place name here), that the LLC is not engaged in business directly or indirectly attributable to the activities of any member."

4) Check with CAMICO (or other errors and omissions insurance carriers) for guidance.

Speaking of Checking with CAMICO

Recently, at a CalCPA Committee on Taxation meeting, a CAMICO attorney discussed various types of claims situations that CAMICO encounters.

The attorney made an interesting point regarding the types of documentation used to defend a client's claim against a CPA: each method of documentation has a different level of evidentiary value. Because notes to the file are unilateral (the client has not seen or approved them), they have low evidentiary value. E-mails sent to the client provide a higher degree of evidentiary value. E-mails which have received a response from the client or letters which the client has signed provide...