State and Local Tax Insights -- Winter 2007
In this issue:
New Jersey continues to take aggressive stances against foreign corporations. It asserts that physical presence is not necessary
to subject a foreign corporation to income taxation in New Jersey. See Lanco, Inc. v. Director, Division of Taxation, 188 N.J. 380 (2006) (petition for certiorari pending) (holding that Quill’s physical presence test does not apply to income
taxes under the Commerce Clause). It applies the alternative minimum assessment (“AMA”) to foreign corporations that are protected
from net income based taxes by federal law P.L. 86‑272 only if those corporations do not consent to jurisdiction under New
Jersey’s regular Corporation Business Tax (“CBT”). It removes receipts from the denominator of the receipts fraction based
on whether another state has jurisdiction to tax the corporation or whether another state has decided to exercise its right
to tax the corporation, under what has become known as the “throwout” rule. Further, when New Jersey throws receipts out of
the denominator, it contradicts its subjectivity position (its Lanco economic nexus position) because it applies economic
nexus standards for subjectivity in New Jersey yet refuses to apply those same economic nexus standards for subjectivity in
other states.
Section 17942 of California’s Revenue & Taxation Code[1] imposes an annual levy[2] on all limited liability companies (“LLC”) registered to do business in the state. Currently, the levy is unapportioned,
such that an LLC’s liability for the fee is set by its total gross receipts worldwide, rather than its income attributable
to business within California. The San Francisco Superior Court in Northwest Energetic Services, LLC v. Franchise Tax Board
[3]“Northwest”) found the unapportioned levy unconstitutional, and awarded Northwest Energetic Services a full refund of the
amounts it had paid under section 17942. While the superior court’s decision in Northwest is legally binding only for the
taxpayer that brought the suit, because California’s Franchise Tax Board (“FTB”) recently sought review of the trial court’s
decision, the case will likely determine the fate of section 17942 on appeal. Similarly, another case challenging the constitutionality
of section 17942 under different facts, Ventas Finance I, LLC v. Franchise Tax Board[4] (“Ventas”), was recently decided by the San Francisco Superior Court. As in Northwest, the San Francisco Superior Court
in Ventas ruled that section 17942 is unconstitutional because it is not apportioned.
On October 27, 2006, the California Franchise Tax Board (“FTB”) issued two Legal Notices regarding revised time goals for
the processing of docketed protests. The first of these was Notice 2006-5, which announced a pilot project allowing certain
taxpayers to request a one-year timeline for resolving a docketed protest. The second was Notice 2006-6, which announced a
goal under new FTB procedures to complete docketed protests within 24 months or less of the filing date of the protest. These
two recent Notices are the latest developments in a long history of efforts to expedite the California protest process.
After years of litigation and speculation, the California Supreme Court issued its decisions in Microsoft Corp. v. Franchise Tax Board, 139 P.3d 1169 (Cal. 2006) (“Microsoft”) and General Motors Corp. v. Franchise Tax Board, 139 P.3d 1183 (Cal. 2006) (“General Motors”). Both cases presented the Revenue and Taxation Code section (“section”) 25120 “gross receipts” issue and the section 25137
“distortion” issue. The decisions will unquestionably have varied and widespread effects on many taxpayers doing business
in California.
LLC Fee Refund Procedures
The FTB has posted the procedure for filing a protective claim for refund of fees paid pursuant to California Revenue & Taxation
Code Section 17942 at: http://www.ftb.ca.gov/professionals/taxnews/article/llcfee.html.
The FTB’s website states that to file a protective claim pending the final outcome of litigation, an LLC should fax a letter
to the FTB containing the following information:
- The name of the LLC and the identification number issued by the Secretary of State (unregistered LLCs should use the identification
number issued by the FTB).
- A statement indicating that the LLC is filing a protective claim for refund.
- The tax years involved.
- The amount of the claim, which should match the amount of the annual fee that the LLC paid.
- A description of the issue (stating that the LLC fee is unconstitutional is sufficient).
- The name of a contact person and that person’s phone number and fax number.
The letter must be signed by a representative with power of attorney or by the LLC’s managing partner. We recommend that
a taxpayer who may wish to file a claim for refund consult with counsel, to ensure that its claim is complete and timely filed
within the statute of limitations.
The Summer Tax Institute
The Summer Tax Institute is an educational program administered by the Center for State and Local Taxation at the University
of California, Davis and is offering an intensive four-day course for professionals who wish to gain expertise in state and
local taxation.
June 18-21, 2007
University of California, Davis campus
You earn continuing education credits for 33 course hours. Classes include Comprehensive Income Tax Track, Advanced Income
Tax Track, and Multistate Sales & Use Tax Track.
Please visit www.summertax.org for more information.
Welcome!
Morrison & Foerster’s State and Local Tax Group would like to welcome Scott Reiber as an associate in the San Francisco office.
Scott received his B.Comm. in International Business from the University of Alberta in 2003 and his J.D. from Columbia Law
School in 2004.
Scott Reiber can be reached at sreiber@mofo.com or 415.268.7630.
Upcoming 2007 Conferences
Following is a list of SALT conferences through June 2007, in which Morrison & Foerster attorneys will be participating.
March 29
Cleveland TEI Tax Conference
Cleveland, OH
Paul H. Frankel
April 24
Dallas TEI Tax Conference
Dallas, TX
Paul H. Frankel
April 25
Philadelphia TEI Tax Conference
Philadelphia, PA
Eric J. Coffill and Hollis L. Hyans
April 26
Morrison & Foerster Annual “East Coast” Tax Seminar
New York, NY
Paul H. Frankel, Hollis L. Hyans, Craig B. Fields, Irwin M. Slomka, Carley A. Roberts, Michael Pearl, Amy F. Nogid, Roberta
Moseley Nero, R. Gregory Roberts, and Mitchell A. Newmark.
May 1
New Mexico Tax Conference
Santa Fe, N.M.
Paul H. Frankel
May 3
COST School
Atlanta, GA
Paul H. Frankel
May 7
Energy Tax Association, 2007 Annual Meeting
San Antonio, TX
Craig B. Fields
May 8
Portland TEI Tax Conference
Portland, OR
Paul H. Frankel
May 16
Georgetown University Law Center, Advanced State and Local Tax Institute
Washington, D.C.
Craig B. Fields and Hollis L. Hyans
May 17
Morrison & Foerster Annual “West Coast” Tax Seminar
San Francisco, CA
Thomas H. Steele, Eric J. Coffill, Peter B. Kanter, Irwin M. Slomka, James P. Kratochvill, Andres Vallejo, Carley A. Roberts,
and Pilar M. Sansone
May 18
Georgetown SALT Conference
Washington, D.C.
Paul H. Frankel
May 18
Los Angeles TEI Tax Conference
Los Angeles, CA
Thomas H. Steele, Eric J. Coffill, Peter B. Kanter, Andres Vallejo, Carley A. Roberts, and Pilar M. Sansone
May 21
COST Income Tax Conference
New Orleans, LA
Paul H. Frankel
May 23
Denver TEI Tax Conference
Denver, CO
Thomas H. Steele
May 30
Cincinnati IPT Tax Conference
Cincinnati, OH
Paul H. Frankel
June 14
University of Wisconsin Tax Conference
Milwaukee, WI
Paul H. Frankel
October 17-19
Paul J. Hartman SALT Forum (Vanderbilt University)
Nashville, TN
Paul H. Frankel, Hollis L. Hyans, and Craig B. Fields
*****
To ensure compliance with requirements imposed by the IRS, Morrison & Foerster LLP informs you that, if any advice concerning
one or more U.S. Federal tax issues is contained in this publication, such advice is not intended or written to be used, and
cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or
recommending to another party any transaction or matter addressed herein. For information about this legend, go to http://www.mofo.com/Circular230.html.
