Q&A with: Manchester attorney John Cronin
John Cronin, who founded the Manchester law firm of Cronin & Bisson in 1991, is the attorney who has filed a class action lawsuit against the state over a change in the interest and dividends tax -- included as an 11th-hour change to the state budget last June. The change allows the imposition of a 5 percent tax on distributions from limited liability companies.
Q. What led to the lawsuit?
A. When it first passed, nobody paid attention to it. It was only around August and September that people contacted us, and we contacted accountants and the Department of Revenue Administration. No one knew what it meant. The focus was on the rules. The longer they dragged out the hearings on the rules, the more it was obvious that DRA was running for cover and was going to pass the tax [rules] as written.
The interest and dividends tax has been around for a while, so they were presenting it as a loophole, but the interest and dividends tax usually tax a benefit on an investment, based on performance, like GE or another company. It is not based on personal services. The LLCs that our group represents are the small businesses that drive the economic engine in New Hampshire. When you look at the impact to them, it is really on income.
There is talk about a safe harbor, but there is no safe harbor in the rules. In some examples, a reasonable compensation is $30,000 or $40,000, going back to a pre-existing law where the compensation is based on what you can pay someone to do the work. How can a bureaucrat say $30,000 or $40,000 is all you should make? The owners of an LLC don't get a check every Friday. They don't get health benefits paid for. They don?t get a pension.
Q. Tell me the legal arguments of the suit.
A. We are suing on three constitutional principles. The strongest case is on retroactivity -- both the bill being retroactive in January of 2009 and prior to the company's formation, based on accumulation capital.
Q. But don't the rules passed now give a choice -- to go back to January 2009 or go back to the beginning of the accumulation of capital, depending on what is advantageous and what records you have?
A. That is a step in right direction, but the court is going to look at what administrative bodies can do. These rules are really legislative, changing the text of the statute. The key language is distribution, and there is nothing in the statue saying it is going back to prior years.
Q. Tell me about the other two arguments.
A. There's due process, the way it was considered. When the Legislature adopted the bill, constitutionally they should have held hearings, some forum other than in middle of the night, to weigh the impact. Some will say this happens all of the time, but with the current state of politics, and people of both sides calling for transparency, we think the court will consider this.
Q. And the third argument?
A. Equal protection. Those in similar situations are treated the same. If I own a piece of investment real estate in my own name, I won't be taxed, and if I own it in an LLC, I will be.
Q. Where do we stand now?
A. Right now we have a motion for class certification.
Q. Are you looking for other businesses to join the suit?
A. Not really. I have a list of 75 LLCs, and they cover the whole alphabet.
Q. Have you ever been involved in a suit like this before?
A. Cronin and Bisson represents small business in tax matters most of the time. We did a constitutional challenge if the excavation activity tax. We lost in Superior Court and won in the Supreme Court. We are involved in a number of cases involving current use taxes.
Q. What you think your chances are?
A. I think whenever you challenge a statute on constitutionality the presumption is that the Legislature gets it right, but we have made these challenges in the past, and we have succeeded.
Q. What about legislation that would define reasonable compensation?
A. It's our hope that the problem is addressed legislatively. If at the end of the day if the state needs their money, they are going to have to raise some sort of a tax, but they need to do it properly with reasonable public debates.
Bob Sanders can be reached at firstname.lastname@example.org.