California Franchise Tax Board Hot Audit Issues Part III

By Mayer Nazarian and Geoffrey A. Weg

Recently, the California Franchise Tax Board announced the most common tax audit issues affecting Individuals, Pass-Through Entities and Corporations.  In the previous couple weeks we highlighted the first two taxpayer groups.

In this last installment, we will discuss the top issues for Corporate Taxpayers.

1. Sales Factor and Gross Receipts - Items included in the sales factor denominator that do not meet the definition of "gross receipts" or result in distortion.  (The sales factor denominator is the total sales everywhere during the taxable year.  Only sales derived from business activities are considered in the sales factor -- nonbusiness sales are excluded.)

2. Abusive Tax Shelters - Abusive tax shelters involving the creation of entities or deductions without economic substance or a business purpose that attempt to avoid state or federal tax.

3. Credits - Credits such as the Enterprise Zone and the Research and Development Credit not properly reported.

4. Cost of Performance and Sourcing of Intangible Sales - Utilization of market rules for assigning sales from intangibles and services when electing a single sales factor for apportioning business income to California.

Please contact our Tax and Wealth Planning attorneys for consultation or assistance in the identification, clarification or resolution of these issues. 
Contact Mayer Nazarian
Contact Geoffrey Weg

California Franchise Tax Board Hot Audit Issues Part II

By Mayer Nazarian and Geoffrey A. Weg

As discussed in our previous post, the California Franchise Tax Board recently announced the most common tax audit issues affecting Individuals, Pass-Through Entities and Corporations.  Last week we highlighted personal income taxpayers.

 

This week, we will review the top issues for Pass-Through Entity Taxpayers.

 

1. Disposition of Real Estate - IRC Section 1031 and 1033 issues: specifically with respect to deferred gain, incorrect treatment of cancellation of debt (COD) income within short sales or deeds in lieu, and failure to report California-source income by nonresident taxpayers . 

 

2. Final Year of Limited Liability Companies (LLC) or Partnerships - In the final year of an LLC or Partnerships, verification of proper gains or losses, reconciliation of negative capital accounts, distributions of installment notes, and COD income.

 

3. Apportioning Trust Income - When trust income is from sources within and without California, the apportionment of income to California and the residency status of the trustee must be appropriate. (A trust will be subject to taxation in California if the fiduciary or a noncontingent beneficiary is a resident of California.)

 

4. Other State Tax Credits - Verification of taxes paid to the other states is another audit priority.

 

5. Shareholders Basis - Review of shareholder's basis to determine correct flow through income, losses, deductions, credits, as well as taxability of distributions, debt repayments, and dispositions.

 

6. Built-in Gains - The recognition period and the basis of the disposed asset must be properly reported.  (If an S corporation that was formerly a C corporation sells an appreciated asset (such as real estate) and the appreciation occurred during the time the corporation was a C corporation, the S corporation will probably pay C corporation taxes on the appreciation--even though the corporation is now an S corporation. This Built In Gain (BIG) tax rate is 35% on the appreciated property, but is only realized if the BIG asset is sold within 5 years (starting from the first day of the first tax year of conversion to S-Corp status.))

Please contact our Tax and Wealth Planning attorneys for consultation or assistance in the identification, clarification or resolution of these issues. 

 

Contact Mayer Nazarian

Contact Geoffrey Weg 

Another Case on Unconscionability

By Laurie Murphy

Laurie Murphy

In previous blogs we've reported on what makes a boilerplate agreement unenforceable.  Recently another appellate court weighed in in another automobile purchase case.  Two buyers of a new car were presented with a long, two sided contract containing an arbitration clause on the back of one the pages at the very bottom of the page.

The arbitration clause itself was harsh and one sided favoring the dealer of course.  The buyers were not given the opportunity to review the contract and did not even know it was two sided.  The trial court did not find the contract was unconscionable.  The appellate court reversed finding both procedural and substantive unconscionability. 

The procedural unconscionability stemmed from the placing of the arbitration clause on the back of the two sided page at the bottom.  The substantive unconscionability stemmed from several clauses in the arbitration paragraph, one permitting an appeal in an award of injunctive relief, one permitting an appeal to an arbitration panel of three arbitrators if the award exceeds $100,000, another requiring the appealing party to pay the filing fee in advance and lastly a clause exempting repossession from arbitration though permitting injunctive relief.  Vargas v. SAI Monrovia  2013 DJDAR 7148. 

Contact Laurie Murphy

When Are Boilerplate Unfair And One-Sided Provisions In Consumer Agreements Unenforceable?

By Laurie Murphy

This question was answered in a recent case decided by the court of appeals.  When clauses are so one sided or unfair, the courts can decline to enforce them if they are found to be both procedurally and substantively unconscionable. 

Procedural unconscionability is found when there is unequal bargaining power and the contracts are foisted on the unsuspecting with no explanation and/or when their terms conflict with oral representations, are buried in the fine print and/or required as a "take it or leave it" proposition. 

Substantive unconscionability is where the complained of provision is overly harsh and one-sided.  In Vasquez v. Greene Motors Inc. 2013 DJDAR 4087 the appellate court overturned a trial court's finding that an arbitration clause in a used car sales contract was unconscionable. 

The appellate court found that though the sales contract was procedurally unconscionable because it was offered on a take it or leave it basis, there was not a high degree of procedural unconscionability.  And, the court further found that the complained of clause requiring the parties to arbitrate their dispute was not necessarily substantively unconscionable because there was no evidence that the cost to arbitrate would have been so significant to the plaintiff so as to prevent him from arbitrating and/or that arbitration necessarily favors the defendant dealership. 

Because there was not a high degree of procedural unconscionability and essentially no evidence of substantive unconscionability the court reversed the trial court effectively ordering the parties to arbitrate their dispute.

Contact Laurie Murphy

June 2013 the U.S. Supreme Court Expected to Decide a Federal Estate Tax Case and The Most Hotly Debated Civil Rights Case of the 21st Century: LGBT Rights v. Defense of Marriage Act

By Bruce D. Sires

Bruce D. Sires

This month, the U.S. Supreme Court is expected to rule on two cases argued last March which are at the forefront of the fight for civil rights for the LGBT community.  One challenges California’s Proposition 8, which overturned the marriage equality which had existed only briefly in that State.  The other challenges the 1996 Defense of Marriage Act, which deprives lesbian and gay couples who are legally married or in a civil union from obtaining any federally mandated benefit otherwise afforded to married couples, such as the federal estate tax marital deduction.

 

The case of United States v. Windsor arose in the State of New York.  Edith Windsor and Thea Spyer were married in Canada in 2007, and thereafter resided in New York when in 2009, Thea Spyer died, leaving her entire estate to her surviving spouse, Edith.  Edith filed a federal estate tax return, claiming the unlimited marital deduction.  The IRS denied the deduction based upon the Defense of Marriage Act which defines the terms “marriage” and “spouse” for all purposes under federal law.  Section 3 of the Act defines “marriage” as a legal union between one man and one woman as husband and wife, and defines a “spouse” as either a husband or a wife under the foregoing definition.  Edith paid the federal estate tax and filed a claim for refund.  The IRS denied the claim and Edith filed suit.  The U.S. District Court for the Southern District of N.Y. and the Second Circuit Court of Appeals both rejected the IRS’s position and ordered the refund.  The U.S. Supreme Court granted certiorari last December, and argument was heard at the end of March.

 

It does appear that time could well be ripe for the Supreme Court to overturn the Defense of Marriage Act, thereby providing marriage equality as to federal benefits, such as the marital deduction.  However, it would be irresponsible to speculate on whether the Court will hold that marriage equality is a constitutionally protected right, thereby overturning the law in the majority of states.

Planning for lesbian and gay clients, whether married, in a registered domestic partnership, in a committed relationship or single, requires care and sensitivity from the professionals called upon to advise them.  If you or your partner want to protect each other, or you're solo and want to protect your assets, seek sound, competent and sensitive financial and legal advice.  The Tax and Wealth Planning attorneys at Valensi Rose, PLC would be pleased to assist you.

 

Contact: Bruce Sires