Prop tax assessments: plus: practice privilege, Nevada LLCs and more.

A client took out a building permit to remodel her home and received a letter from the county asking her how much the work would cost. She asked her CPA how she should respond and her CPA posted the question on TaxTalk.

When a homeowner pulls a building permit, the city forwards the information to the county assessor for reassessment, according to material from a Spidell Publishing course. Only new construction results in a reassessment, however. Remodeling and alterations are not considered new construction and hence are not subject to a property tax reassessment.

Letters to Assessor No. 78/188 include these examples of alterations that should not be considered new construction:

* Roof replacement;

* Replacement of bathroom and kitchen fixtures; and

* Replacement of interior partitions. Features that, if added, would be considered new construction include:

* Converting existing floor space to an additional bath;

* Finishing previously unfinished areas, such as attics, porches and basements; and

* Addition to any previously nonexistent structure.

One caveat: "Substantially equivalent of new" can be considered new construction when an owner does a major remodel. Check out Property Tax Rules No. 463 at www.boe.ca.gov/proptaxes/pdf/r463.pdf and also the Letters to the Assessors on the subject. The current year index can be found at www.boe.ca.gov/proptaxes/pdf/lta05001.pdf.

Nevada LLCs & CA Residents

Everyone probably has heard the ads about the alleged tax benefits of incorporating in Nevada, or forming a Nevada LLC. In virtually all cases involving California resident ownership, or all business operations in California, the benefits alleged in the ads simply don't exist.

A specific question was posted on TaxTalk about a California resident owning a Nevada LLC and whether California Form 568 is required.

The answer is yes.

California will take the position that management control is exercised in California. The only way to avoid California nexus for the Nevada LLC would be to have all board meetings outside of California; the LLC or corporate records, including accounting, would have to be maintained outside of California; and every time there was a purchase or sale of a security, it would have to be done outside of California, irrespective of where the brokerage house is located.

See the State Board of Equalization decision in the Appeal of Norton Simon. Simon was a prominent Los Angeles resident with timber interests in Washington. California was held to have jurisdiction since management control was exercised from California.

Another CA/Nevada Question

A Nevada resident who lived in California until 2004 received a payment on the following installment note. He sold the stock of a California-based company in 1986 for $1 million via an installment note. The balance due on the note, $542,000, was paid to him in 2005.

The question: Will California consider the amount fully taxable to California? The answer: Yes.

See FTB Publication 1100, Page 6, example 7, and the Appeal of McCreary. In the latter case, the State Board of Equalization held that the gain realized by the receipt of the installment payments was taxable by California; the interest received was not.

The case involved a resident of the state of Washington who had moved from California.

CA CPAs Preparing Non-CA Returns for CA Residents

The latest flap to hit the licensing field is practice privilege. Some states are requiring that if a California CPA prepares a non-California return for a California resident, that CPA must register with the board of accountancy of the other state.

It has long been understood that if a California CPA goes to another state to see clients, then the CPA must register in that state.

However, merely doing a tax return for the other state, perhaps because of a realty sale in the other state, for example, has never before posed a problem.

CalCPA has encouraged the California Board of Accountancy to develop information or see that the National Association of State Boards of Accountancy develops information that can assist CPAs in complying with the requirement.

Suspension or Disbarment From Practice Before the FTB

This is a precis of material reported by CCH July 25, 2005.

If the Treasury suspends or disbars someone from practice before it, the FTB--after notice and opportunity for a proceeding--must suspend or disbar that person from practice before the FTB during the period of the federal suspension or disbarment, unless the FTB determines that the action of the Treasury clearly was erroneous.

Thanks to CPAs Jim Bone, Jim Counts, David Kelly, Michael Melland, Ed Melia, Bob Petersen, Diane Sandigo and William Sturgeon.

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By Leonard W. Williams, CPA

Leonard W. Williams, CPA is a Sunnyvale-based sole practitioner. A member of CalCPA's Committee on Taxation, the AICPA Tax Division and a former Peninsula Chapter president, you can reach him at [e-mail].