Talking California Tax.

The Debate Goes On

Finding Help for Terminating a California Corporation

The alternatives of formally dissolving or simply walking away from a California corporation have generated considerable discussion on the TaxTalk listserve.

A group of CPAs and attorneys, who meet (offline) bimonthly to discuss tax subjects, agreed that it is impossible to generate a general rule. The attorneys didn't have a slam-dunk general answer and often just let corporations die.

However, more formal help is available. Spidell Publishing has an excellent book, "Spidell's Guide to Dissolving California Corporations," that discusses when to just walk away and let it die. It costs about $35 and ordering information can be obtained at www.caltax.com.

Also, the course manual from Professor Kitty Wright's California CPA Education Foundation course on "Corporate Liquidations and Dissolutions," is available for purchase online at www.educationfoundation.org. Click on Products and search by key word for corporate liquidation.

Which is Better--An LLC, Partnership or Corporation?

In the June 2001 issue of California CPA, I reported on an earlier discussion of which is better--an LLC, partnership or corporation. The debate has continued.

The biggest drawback to an LLC is the fee that must be paid to the state of California, in addition to the $800 LLC tax. The fee is a function of the total annual income, pursuant to a table in General Instruction G in the instructions for FTB Form 568. The fee doesn't Kick in until total annual income reaches $250,000. In 2000, it was 1,042 with a maximum fee of $9,377. For 2001, the maximum fee is slated to crop to $8,814.

The fee is deductible for California income tax purposes.

One venerated CalCPA member says: "If have not been able to find any compelling reason to choose LLCs except that the lawyer already had set it up."

While a couple of members mentioned several distinct advantages, assuming that the client is willing to pay California's fee based on total annual income. Those advantages included:

* The three aspects of ownership (voting, capital and profits) do not have to be proportional to an individual's ownership interest as they do with a corporation.

* LLCs eliminate C corporation issues such as unreasonable compensation, accumulated earnings and disguised dividends. While an S corporation has many of the same benefits, an S corp does not have the flexibility of a partnership in post year-end allocations. An S corp also has a limit on the number of shareholders.

* The disadvantage of a partnership, as everyone knows, is the unlimited liability of a general partner. A limited partnership can mitigate that, but it still must have a general partner. The general partner should be a corporation to limit liability, but that's one more taxable entity to deal with. In an LLC, all members have limited liability with no general partner.

One warning from the discussion: Be careful of an LLC's non-recourse debt which, in the 11th hour, the bank forces members to personally guarantee. This defeats the purpose of an LLC's limited liability feature.

For more information, try the Education Foundation update course on LLCs, partnerships, and S corporations, or the course "Choosing the Right Business Entity and Getting Cash Out of It." If you can't sign up in time for this year, try purchasing the course manuals from the Education Foundation's Web site.

Inheritances and Divorces

Someone posted the following question on TaxTalk: If inheritances are separate property but are put into a joint account with one's spouse, does that make the money community property?

One TaxTalk member posted a very clear explanation to this question, which is widely misunderstood by the general public.

It doesn't automatically become community property. However, if there is a divorce after the separate property has been put into a joint account with one's spouse, the person whose separate property it was must prove that it is his or her separate property.

This involves keeping all bank statements and showing that the balance never went below the amount of the separate property that was put into the account. This type of tracing customarily is handled by CPAs who specialize in divorce matters.

However, there are exceptions to every rule. A TaxTalk war story tells of a client who put his separate property into the joint account, then paid all of the community expenses out of his separate property account. In connection with the divorce proceeding, the CPA prepared tracing schedules to show that the joint account had a positive $100,000, and the separate property account actually was a negative $100,000. The judge ruled that the $100,000 was separate property.

Speaking of divorce, the Education Foundation offers an excellent course "Tax Consequences of Divorce," presented by Beverly Brautigam, CPA and Hal Bartholomew, Esq.

Thanks to CalCPA members Barbara Aue, Larry Burns, Joyce Estes, David Klassing, John Levy, Patrick McDermott, Arlene K. Mose, and Bob G. Trimm for their participation in these discussions.

Leonard W. Williams, CPA, is a Sunnyvale-based sole practitioner. He is a member of CalCPA's Committee on Taxation, AlCPA Tax Division member and former Peninsula Chapter president.