In Berkes Crane Robinson & Seal LLP v. The City of Los Angeles, Case No. BC473557, the Los Angeles Superior Court found that the City of Los Angeles erroneously included reimbursed expenses in the tax measure used as a basis for the Los Angeles City Business Tax (LACBT) and established a class settlement fund of $4.6 million for affected lawyers and law firms. The settlement includes two classes of taxpayers, the first includes Class Members who were audited and assessed additional tax, interest and penalties on reimbursed expenses. The second subclass includes Class Members who filed annual tax renewals for tax years 2010 through 2016, and included reimbursed expenses in their tax base.
The general position of the City is that reimbursed expenses are included as taxable gross receipts if the reimbursed expenses are the legal obligation of the taxpayer, however, if the expenses are reimbursements to the taxpayer for amounts advanced on behalf of clients, then such gross receipts are not taxable.
In November 2011 a lawsuit was initiated by Berkes Crane Robinson & Seal LLP challenging whether reimbursed expenses were subject to LACBT. On October 26, 2017, Los Angeles Superior Court Judge Maren E. Nelson provided preliminary approval for a tax settlement of $4.6 million for lawyers and law firms that paid LACBT upon their reimbursed expenses. The case hinged on whether expenses which were reimbursed by law firm clients were a taxable gross receipt. In the settlement the City agreed to an injunction “whereby the City will hereafter be enjoined from requiring lawyers or law firms to include in their calculation of gross receipts, Reimbursed Expenses which have been reimbursed to the lawyer or law firm at cost by a client pursuant to an agreement that said expenses would be reimbursed.”
The settlement benefits two identified classes of taxpayers, Class 1(A) members were audited anytime between May 1, 2010 and December 31, 2013 and received and paid an assessment based on the Los Angeles Office of Finance's policy to include reimbursed expenses as part of gross receipts, and Class 2(A) includes those law firms that self-reported gross receipts that included reimbursed expenses as part of their gross receipts measure as part of their annual renewal filings for tax years 2010 through 2016, as paid in years 2011 through 2017.
It should be noted that there will be a final fairness hearing, which is currently scheduled for March 2, 2018.
Affected lawyers and law firms that were not previously audited during the 2010 through 2013 window who included reimbursed expenses in their LACBT base should review their historical LACBT filings and complete a claim form before January 13, 2018. Those lawyers and law firms audited during the 2010 through 2013 window should soon expect to receive a communication from the City if one has not already been received. Lawyers and law firms filers for the 2018 City business tax year should ensure that reimbursed expenses are not included in their LACBT base.
If you would like to discuss the effect this settlement may have on your firm, please give us a call to start the conversation.
Tax Partner, Los Angeles, PwC US
Gary M. Pogharian
Partner, PwC US
Partner, Law Firm Services Tax Leader, PwC US
Tax Managing Director, PwC US
Tax Director, PwC US