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Wednesday, March 3, 2010

S.F. Attorneys Plan $17 Million Fight with City's Taxman

Posted By on Wed, Mar 3, 2010 at 11:58 AM

click to enlarge New Math: Grinch v. Beelzebub = Taxman v. Lawyers
  • New Math: Grinch v. Beelzebub = Taxman v. Lawyers
As if they weren't already ornery enough, San Francisco attorneys on Monday were required to pay a new type of payroll tax, put in place by Proposition Q. Enacted by voters in Nov. 2008, this measure dings members of professional partnerships 1.5 percent of their take, as long as their firms make more than $250,000.

For white-shoe lawyers, "this is a big chunk of money," notes San Francisco barrister Diana Sam.

Attorneys, many of whom only recently became aware of the tax, have responded with either guile, or outrage.

"I've talked with to a lot of my colleagues on this, and some just learned of it," said Sam. "Other people have found ways to get around it -- that is until the city audits them."

With the help of Golden Gate University Law Professor Myron Moskovitz, Sam is plotting a class action lawsuit aimed at depriving the city of a projected $17 million in annual revenue from the tax. They claim the tax violates the U.S. Constitution's 14th Amendment, which guarantees people equal protection under the law. Because the Prop. Q payroll tax applies to partnerships -- but not sole proprietors -- Moskovitz and Sam say the tax is unfair, and unconstitutional.

When told of the attorneys' plans to file a class action lawsuit, City Attorney Spokesman Matt Dorsey said, "We believe we are on sound footing constitutionally on this


Dorsey notes that the city law has already withstood a challenge. In August of last year, a Superior Court judge ruled against John Chiatello, who alleged in a 2008 lawsuit that the Prop. Q tax would result in wasteful expenditures of taxes. That case is now on appeal.

Sam, however, says the court in the Chiatello case didn't rule on whether or not the proposition violates rules prohibiting municipalities from levying income taxes. And it didn't address whether or not the tax was constitutional.

Moskovitz, who teaches constitutional law, sent SF Weekly examples of case law where a California court of appeal overturned a city of Pacific Grove law that levied property taxes on nonprofit retirement homes differently than it taxed for-profit retirement homes. The court declared this law violated the 14th Amendment.

John Tennant Memorial Homes v. City of Pacific Grove.doc

"The interesting thing about the San Francisco law is that it doesn't cover sole proprietors. Only partners. So you've got some lawyers, or doctors all along making a ton of money, and they don't pay the 1.5 percent payroll tax because they're a sole proprietor," said Moskovitz.
"But if you put two of them together into a partnership, suddenly they're covered by the tax."

The tax applies also to hedge fund managers, plastic surgeons and other professional partnerships.

Sam and Moscovitz have run into a problem, however: They haven't yet found enough San Francisco members of professional partnerships willing to stick their necks out and become plaintiffs in a class action suit.

"We have a couple of people. But they don't want to go it alone," Sam said. "What everybody's afraid of is, if they become the lead plantiffs, the city is going to audit them."

Sam didn't specify whether she'd be passing a collection plate among non-lawyer, non-hedge-fund-manager San Franciscans to help pay for the suit.

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