Visiting the Committees

• Publication year: 2020

Visiting the Committees

Commentary and Updates by the Committees

CORPORATE AND PASS-THROUGH ENTITIES COMMITTEE

The Corporate and Pass-Through Entities Committee focuses on issues faced by corporate taxpayers and provides opportunities for practitioners and corporate tax counsel to maintain a level of expertise in the field of corporate tax law, expand their professional contacts, and serve the profession, the public and the legal system. Membership in the Committee offers practitioners information on developments with respect to corporate and business tax and a greater voice on developments in such legislation.

Committee Activities

Normally, the Committee holds monthly meetings via teleconference and interested members of the Tax Section are welcome to participate. The Committee is sponsoring a four-part webinar CLE/CPE series on various partnership tax topics. In addition, members and other interested parties are welcome to submit articles for Quick Points on Corporate and/or Pass-through topics of general interest to the members of the Taxation Section. For more information regarding upcoming meetings and events should contact the Committee Co-Chairs, Erin L. Fraser at efraser@fbm.com, or Cameron Hess at (916) 920-5286 or chess@wkblaw.com.

Quick Points

Trusts as Partners

On August 21, 2019, the California Supreme Court granted review in Han v. Hallberg, 35 Cal. App. 5th 621, 247 Cal. Rptr. 3d 526 (2nd Dist. May 21, 2019). The Hallberg case holds that (i) an ordinary express trust could be a partner of a general partnership governed by the Revised Uniform Partnership Act of 1994 (RUPA) and (ii) the trust partner did not die to trigger a buy-out provision. The grant of review singled out those issues to be briefed.

In the 2009 Presta case, the court determined that the individual trustees were partners, not their trusts. Presta v. Tepper, 179 Cal. App. 4th 909 (Oct. 28, 2009). The court relied upon longstanding California law that ordinary express trusts are not legal entities. Accordingly, the Presta court found that the word "trust" in the definition of "person" in RUPA had to refer to a trust other than an ordinary express trust.

The Presta court added that the partnership agreements (with identical terms to an older agreement without the trusts) "bolstered" its conclusion. The partnership agreements referred to the individuals by name and used the pronoun "his" rather than "its."

The Hallberg court looked "cross-eyed" at Presta. First, it found no problem with finding a trust to be a "person" under RUPA even though a mere relationship under other California law. Second, it disagreed strongly with the statutory interpretations given in Presta to RUPA language. The Hallberg court distinguished Presta on the grounds that the partnership agreement in Hallberg did not bolster its ultimate holding as in Presta.

It is unclear how the California Supreme Court will rule. The Hallberg case stands out as better reasoned. The Presta court did not follow standard rules of statutory interpretation followed by Hallberg. The Presta court also found provisions in two later partnership agreements to be persuasive even though identical to an older agreement not involving trusts. However, the grant of review casts a shadow on Hallberg. Why not simply let Hallberg stand and let Presta die a "distinguished" death?

A basic question is whether a mere relationship that is not a legal person can still be a "person." Delaware resolved this question affirmatively by inserting the following after trust: "(including a common law trust, business trust, statutory trust, voting trust or any other form of trust)." See, 6 Del. Code §§ 15-101(18). Delaware trust law is in Title 12, Chap. 35 of the Delaware Code, and entitled "Fiduciary Relations." Accordingly, Delaware does not appear to have a problem with a fiduciary relationship being a "person" to be a partner. That treatment accords with promoting "freedom of contract."

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That a trust can only act through trustees should not be determinative. Corporations, and partnerships, as with trusts, act through others, e.g., officers, directors, and general partners.

We should know shortly the Supreme Court's decision in Hallberg. The decision may influence whether to form a Delaware entity and determine appropriate provisions in partnerships and operating agreements.

— Layton L. Pace, Hermosa Beach

ESTATE AND GIFT TAX COMMITTEE

The Estate and Gift Tax Committee is comprised of attorneys throughout the State of California who devote a significant portion of their practice to understanding the evolving areas of estate and gift tax planning, drafting, compliance, and controversy work. One of the primary functions of the Committee is to provide valuable, informative, high quality continuing education programs on behalf of the Taxation Section.

If you are interested in becoming a member or submitting a topic on which to speak or write, please contact the Estate and Gift Tax Committee Chair, Eric A. Baggett, at (619) 515-5645 or eric.baggett@bofa.com.

INCOME AND OTHER TAXES COMMITTEE

The Income and Other Taxes Committee provides an outlet for its members to actively participate in the Taxation Section with respect to issues relating primarily to federal income taxation. The Committee's mission is to: (i) promote dialogue and maintain the expertise of its members through the annual provision of continuing education with respect to recent developments on various income (and other) tax issues; and (ii) provide a networking forum for members to expand their professional contacts.

Committee Activities

The 2019 Annual Income Tax Seminar was a big success and well-received by attendees. The event took place on Friday, June 28, 2018, at the Catamaran Resort Hotel and Spa in San Diego, and included the following topics: U.S.-Mexico Outbound Tax Planning; I.R.C. § 199A Final Regulations; Ethical Issues in Tax Practice and Procedure; Qualified Opportunity Zones; and Mechanics of a State Income Tax Dispute. The event was co-sponsored by the California Lawyer's Association and CalCPA.

Please contact the Committee Chair, Matthew Carlson, at mcarlson@wkblaw.com for information on joining the Income and Other Taxes Committee, participating in the 2021 Annual Income Tax Seminar, or participating in future Income and Other Taxes Committee submissions and projects. The Committee holds monthly meetings by teleconference on an ad hoc basis, so please reach out to the Committee Chair at mcarlson@wkblaw.com to confirm the date and time of the next Committee meeting if you are interested in participating.

Quick Points

CDTFA to Increase Cannabis Excise Tax Mark-Up Rate to 80%

Effective January 1, 2018, Cal. Rev. & Tax. Code § 34011 imposed a 15% excise tax upon purchases of both recreational and medicinal retail cannabis. Unlike a sales tax, the cannabis excise tax is not directly calculated by reference to the actual retail sales price. Instead, the excise tax is calculated when the distributor sells to the retailer based upon a fictional "average market price."

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The average market price is generally determined by the wholesale price paid by the retailer to the distributor, plus a mark-up percentage that is determined by the CDTFA on a semi-annual basis. However, in the case of a "non-arm's length" transaction between a distributor and retailer, the average market price is instead the actual retail sale price.

From January 1, 2018 through December 31, 2019, the CDTFA determined a 60% mark-up percentage. However, the CDTFA has announced that effective January 1, 2020, the mark-up percentage will be increased to 80%. The increased mark-up percentage results in a higher average market price and a higher excise tax paid to the distributor. Additionally, the cannabis cultivation tax will increase to reflect an adjustment for inflation. Additional information regarding cannabis excise taxes and cultivation taxes can be obtained at the CDTFA Tax Guide for Cannabis Businesses, available online at www.cdtfa.ca.gov/industry/cannabis.htm.

— Matthew D. Carlson Mather, CA

Change in Reporting Requirements for Domestic Pass-Through Entity Withholding

Following the Office of Administrative Law's (OAL) approval of the amendments to California Code of Regulations, Title 18 (CCR), sections 18662-0 through 18662-6 and 18662-8, California will no longer require domestic pass-through entities to report withholding paid on behalf of nonresident members quarterly on Form 592, but instead will require pass-through entities to report annually on the newly created Form 592-PTE (as set forth in CCR sections 18662-4 and 18662-8). Under CCR section 18662-8(c)(2)(B), a pass-through entity must report quarterly withholding payments made on the Form 592-PTE to the FTB no later than January 31st of the year following the year for which the withholding of tax was required to be remitted to the FTB. The switch from a quarterly due date to an annual due date provides upper tier pass-through entities with more time to receive a Form 592-B from a lower tier pass-through entity and file the annual Form 592-PTE on a timely basis.

To facilitate transitioning from the quarterly filing scheme to an annual filing scheme, CCR section 18662-4(j)(3) requires a checkbox on Form 592-PTE to indicate total withholdings for the year. Additionally, CCR section 18662-4(j)(4) allows an upper tier pass-through entity to identify the original withholding agent by requiring the current Form 592-PTE filer to include on Form 592-PTE the withholding agent's name, address, telephone number, and identification number (SSN or ITIN, FEIN, California Corporation Number, or SOS file number).

In addition, CCR section 18662-8(l) also replaces the Form 592-V (which will still be used by all non-pass-through entities) with the successor Form 592-Q as the payment voucher required to be filed in conjunction with quarterly remittance of nonresident withholding on domestic nonresident partners or members to...