March 2006

In a recent San Francisco Superior Court case, California's Limited Liability Company (LLC) annual fee based on total income was deemed to be an unconstitutional tax (Northwest Energetic Services, LLC v. California Franchise Tax Board).

The California Franchise Tax Board (FTB) has outlined the protective claim procedures that taxpayers who have previously paid an LLC fee should follow in light of the San Francisco Superior Court's proposed decision in Northwest Energetic Services, LLC. Taxpayers should fax their protective claims to the FTB at 916-845-9796. In the fax, taxpayers should note that this is a protective claim and assert that the LLC fee is an unconstitutional tax. The following information should also be included:

1) The LLC's name and identification number
2) The tax years involved
3) The amount of the claim with back up
4) The name of the contact person and his or her phone number and fax number

The FTB will send an immediate fax confirmation.

Although the FTB prefers to have these protective claims faxed, taxpayers may also mail a claim or file an amended returns with the FTB. Protective claims or amended returns should be mailed to the Franchise Tax Board at P.O. Box 942857, Sacramento, CA 94257-0600.

The Franchise Tax Board will most likely appeal the decision. Accordingly, it will probably be at least three years before a final decision is made. In the mean time, we recommend that LLCs continue to pay the LLC fee for each year that a return is filed. At this point, we feel that the Franchise Tax Board will continue to enforce the fee and would encourage suspension of nonpayers. Once a LLC return is filed and the fee is paid, however, we would recommend that a follow up claim for refund be filed.

Please contact us if we can provide any additional information or clarification.