SAN FRANCISCO — Continuing the industry's fight against an initiative that raised law firm payroll taxes, Arnold & Porter and Coblentz, Patch, Duffy & Bass have filed new suits against San Francisco seeking to reclaim some of their 2011 taxes.
Passed in 2008 but modified by voters last year, Proposition Q established a 1.5 percent tax on profit distributions made to owners of so-called pass-through entities like law firms.
But since its passage, the voter-approved measure has become a lightning rod, with at least eight firms challenging the city's interpretation and enforcement of the law. Coblentz's case over its 2010 taxes was dismissed last year by S.F. Superior Court Judge Harold Kahn and an appeal is pending before the First District Court of Appeal.
Deputy City Attorney Jim Emery said he has not yet seen the two newest suits. Pointing to last year’s cases, he seemed optimistic about prevailing.
“The Superior Court sustained San Francisco’s demurrer on all grounds,” Emery said. “We look forward to the court of appeal affirming that and then this litigation will be over.”
Coblentz's latest suit, filed on Sept. 6, seeks a $192,147 refund from its 2011 payroll taxes; Arnold & Porter claims in a complaint filed Wednesday that the city owes its partners $64,679.
Both firms are represented by Amy Silverstein of Silverstein & Pomerantz, also lead counsel for related litigation on behalf of Hanson Bridgett; Sideman & Bancroft; Shartsis Friese; Hassard Bonnington; Pillsbury Winthrop Shaw Pittman; and Orrick, Herrington & Sutcliffe.
Echoing arguments made in the prior suits, Silverstein contends Prop Q only allows the city to impose the payroll expense tax on distributions made as 'compensation for services.' But 'compensation' to a partner must be guaranteed, she argues, not dependent on whether the firm earns a profit. Silverstein also cites provisions in California's tax code prohibiting municipalities from taxing income of partnerships.
Representatives for Arnold & Porter and Coblentz declined interview requests. Silverstein did not respond to a request for comment.
Proposition E, passed in 2012, gradually replaces the 1.5 percent payroll with a system in which companies pay a percentage of their gross receipts based on industry classification.
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