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Michael Gray, CPA's Tax and Business Insight

March 13, 2006

© 2006 by Michael C. Gray

ISSN 1539-395X

A monthly report to help you prepare for your financial future, keep more of what you earn by minimizing your taxes, and build an extraordinary business!

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Table of Contents

• California Superior Court says LLC fee is unconstitutional.
• Do you have employee stock options?
• Do you have real estate tax issues?
• PS Marché Aux Fleurs
• Subscribe/Unsubscribe from Michael Gray, CPA's Tax & Business Insight

California Superior Court says LLC fee is unconstitutional – file a claim for refund by April 17.

The San Francisco Superior Court has issued a proposed decision holding California’s fee for limited liability companies (LLCs) is an unconstitutional tax.

The Court said that the fee is actually a tax because it was clearly intended to replace income taxes that would be lost from the enactment of an LLC statute and bears no relationship to costs associated with regulating or providing services to LLCs. The fees collected exceed the entire budget for the California Secretary of State.

Since the "fee" is based on gross income regardless of where the income was earned, an LLC that is simply registered with the California Secretary of State but has no activity in California is subject to the full fee. A tax determined without apportionment for activity among the states violates the Commerce Clause of the U.S. Constitution.

Once the decision becomes final, the case will probably be appealed by the Franchise Tax Board.

If your business is an LLC, you should consider whether to file a protective claim for refund. A timely filed claim for refund for 2001 has to be filed by April 17, 2006.

The fee only applies when the LLC has gross income of at least $250,000.

If you have any questions about this matter or need help to file a claim, see your tax advisor or call Michael Gray at 408-918-3161.

(Northwest Energetic Services, LLC v. California Franchise Tax Board)

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Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.

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If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert?

To subscribe or review past issues, go to www.stockoptionadvisors.com/subscribe.shtml.

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We are starting a newsletter devoted to real estate tax issues.

Like this newsletter, we will talk about new developments, have reports on special tax concerns, and answer questions and answers. The subscription rate is $19.95 per month. For a sample issue, visit www.realestatetaxletter.com.

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P.S.

My daughter and her husband, Holly and Dan Baker, have a Southern French Restaurant at 23 Ross Common, Ross, California, about 15 minutes north of the Golden Gate Bridge. The name of the restaurant is Marché Aux Fleurs and their website address is http://marcheauxfleursrestaurant.com. For the best meal of your life, call 415-925-9200 for a reservation and give them a try! For directions, visit our website at http://www.taxtrimmers.com/directions.shtml.

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P.P.S.

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.