Written By: Roger Brothers and Ryan Lockhart
Buchman Provine Brothers Smith LLP
Walnut Creek, California
The California Franchise Tax Board ("FTB") recently announced that it has discovered that it had misapplied a partnership late-filing penalty, pursuant to Revenue and Taxation Code §19172, to single-member limited liability companies ("SMLLC") that had been treated as disregarded entities.
For income tax purposes, a SMLLC is typically treated as a disregarded entity. That means that the income or loss of the entity is reported by an individual taxpayer on Schedule C of the taxpayer's tax return. That also means that the entity is not required to file a partnership income tax return. To the extent that the taxpayer reported any income or loss of the entity on the taxpayer's Schedule C, an affected taxpayer may be eligible for a refund or credit of an imposed partnership late-filing penalty.
The Franchise Tax Board plans to issue a refund (or a credit) to the affected taxpayers to cancel the unpaid penalty. The refund will also include interest from the date paid to the FTB. A separate refund check will be issued for each tax year. In some cases, the Franchise Tax Board may apply the refund to an outstanding liability on another tax year or to another state department. Taxpayers can expect to receive refund checks within approximately two (2) weeks after the date on which the FTB notifies the taxpayer. However, the FTB expects the notification process to take several months.
Taxpayers may also take a proactive approach and file a claim for refund with the FTB. If denied, the taxpayer is entitled to file an appeal with the Board of Equalization. Taxpayers who operate a SMLLC should review past tax returns in order to identify any partnership late-filing penalties. Taxpayers should also contact their tax return preparers regarding any (a) potential application of the penalty and/or (b) plan to claim a refund. If a taxpayer believes a refund is due, but does not receive any notification from the FTB, the taxpayer is encouraged to contact the FTB directly, as the refund may have been applied to an outstanding liability.
Refunds will be made to taxpayers who paid the late-filing penalty within the applicable statute of limitations for refunds as of June 26, 2013, which is the date that the Franchise Tax Board says that it discovered the misapplication of the penalty. The statute of limitations for refunds generally requires the refund be filed no later than (a) four (4) years from the original due date of the return or (b) four (4) years from the date the return is filed if the return was filed within the "automatic extension" period. The FTB will not provide a refund as to those years barred by the statute of limitations for refunds, but it has announced that it is exploring alternative relief options, including potential legislation. We will be monitoring these alternative relief options to be proposed by the FTB regarding refunds for years barred by the statute of limitations.
If the SMLLC was suspended by reason of this incorrectly applied penalty, the FTB will reinstate the entity. Please contact our office if you have any questions regarding the FTB's misapplication of the partnership late-filing penalty to SMLLCs.
For more information about Buchman Provine Brothers Smith, please visit the International Society of Primerus Law Firms.