CA Tax: 1099 Update
Plus: LLC regs and more Madoff guidance.
Leonard W. Williams, CPA
Prior columns have mentioned the requirement for businesses and rental property owners to file 1099 forms for payments to unincorporated independent contractors or incorporated attorneys. A surprising number of readers contested that conclusion, and said that when their business clients have been audited, the auditors never have asked for such copies of 1099s.
Spidell’s California Taxletter (March 1, 2009) says the same thing that this column said for California’s position on the lack of a 1099—“no 1099 means no deduction,” and cites Revenue and Taxation Code secs. 17299.9 and 24447. In addition to disallowing the deduction, the FTB also may penalize the taxpayer for failure to file information returns, and Spidell cites RTC 18631, 19183 and 19184 for that.
In light of the controversy raised by some readers, the matter was referred to an IRS technical coordinators, and also will be referred for discussion at the CalCPA Committee on Taxation IRS liaison meeting.
An informal reply from the technical coordinator was that the Internal Revenue Code doesn’t have a position equivalent to California’s RTC position mentioned above. The fact that some IRS auditors have asked for copies of 1099s filed, and threatened to disallow deductions of more than $599 if none are forthcoming, probably is a policy of the local IRS office.
While most people complain about policies they don’t like, they feel that it’s cheaper to comply than to fight. That doesn’t mean that all taxpayers should roll over and play dead if they disagree with the IRS or FTB. If everyone did that, there would never have been the Starker case, which opened up the realm of delayed Sec. 1031 exchanges.
Managing Vs. Non-managing Members
A booby trap in LLC taxation is that California’s Employment Development Department differentiates between “managing members” and “non-managing” members.
The EDD considers managing members to be similar to partners and therefore follows the federal practice of reporting everything on the K-1. Non-managing members, however, usually are considered employees under the common-law tests, and the EDD considers their wages reportable on Form W-2, and subject to California payroll taxes.
The EDD takes this position irrespective of whether the LLC is taxed as a partnership or as a corporation, which can lead to some strange looking W-2 forms for California LLC members, as well as differences between federal and California wages on the payroll tax reporting forms.
Tax Preparer Privileged Communications
There was a taxpayer confidentiality provision for enrolled agents and CPAs granted by IRC Sec. 7525 in 1998, as part of the Taxpayer Bill of Rights, which was inadvertently allowed to sunset in December.
California had conformed to that provision, but that conformity ended when California’s RTC provision sunsetted last year. However, AB 129 (Ma) would continue that conformity. CalCPA is working with enrolled agents to reinstate this provision.
Another Penalty Proposed
AB 347 (Brock) proposes to amend RTC Sec. 7054 to impose a 25 percent penalty when a taxpayer fails or refuses to provide any information by the date specified in writing. Updates may be obtained by e-mail.
Lessor Couldn’t Recover LLC Fee and Taxes from Tenants
Where a lessor (landlord) reserved the right to charge tenants with all costs relating to ownership and operation of a shopping center, a California Court of Appeals held that LLC fees and taxes did not qualify as costs relating to ownership and operation of the shopping center [Tin Tin Corporation v. Pacific Rim Park, LLC, 6th District (Cite as 2009 SOS 684)].
Guidance, Post-Madoff
Our own Kip Dillinger authored an article in Spidell’s California Taxletter (March 1, 2009) discussing the alternatives with respect to the Madoff losses. Subsequent to Kip’s article, the IRS issued Rev. Proc. 2009-09, which provides an optional safe harbor method for eligible taxpayers to deduct theft losses from criminally fraudulent investment arrangements that take the form of Ponzi schemes. The safe harbor method provides a uniform, simplified method for eligible taxpayers to determine the amount and timing of their theft loss deductions.
Thanks to CPAs Jim Counts, Melody Thornton and Ralph Weintraub for contributions to this column.
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.
