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ASK THE EDD ATTORNEY – WILL YOUR CORPORATION OR LLC BE THROWN OUT OF COURT? WILL YOU LOSE YOUR EDD AUDIT BEFORE IT BEGINS?

By Robert S. Schriebman
November 9, 2016

Introduction

In a recent U.S. Tax Court case a corporation was thrown out of court because it was suspended by the California Secretary of State and the FTB. Don't let this happen to you.

We have represented many nursing registries involved in EDD worker status audits. Nurse's registries and domestic worker's agencies are big targets for EDD auditors. They are also targets for the IRS. On November 2, 2016 the U.S. Tax Court heard the case of Urgent Care Nurses Registry, Inc. v. Commissioner. This article will discuss what happens in federal court when a corporation is suspended by the California FTB and the Secretary of State. (Urgent Care Nurses Registry, Inc. v. Commissioner, U.S. Tax Court, Dkt. No. 24713-15L, TC Memo, 2016-198.)

The Case of Urgent Care Nurses Registry, Inc.

Urgent Care Nurses Registry, Inc. (Urgent) owed the IRS back payroll taxes. The IRS issued its standard collection notice inviting Urgent to file a Collection Due Process (CDP) Petition to work out a payment arrangement without the fear of enforced collection action. Urgent timely filed its Petition, but the IRS filed a motion to throw Urgent out of court because it had been suspended by the FTB and the Secretary of State for failing to file tax returns and to pay the minimum annual corporate franchise tax of $800 per year.

Urgent did not file past state tax returns nor did it catch up on the payment of annual franchise taxes. The U.S. Tax Court ruled in the IRS favor and held that Urgent's corporate powers were suspended and therefore Urgent had no standing to prosecute its case. The U.S. Tax Court cited the case of David Dung Le, M.D., Inc., 114 T.C. at 268, 2000).

Lessons Learned From The Urgent Care Case

In past articles I have written about the dangers of corporate suspension. What I want to discuss in this article is what can be done to cure this situation and have the corporation or LLC be in good standing so it will not be thrown out of court and it will be able to legally do business.

A suspended corporation or LLC that finds itself in litigation, or about to do serious business, may be able to obtain a Certificate of Revivor by getting current. This means that it must file all delinquent tax returns with the FTB and pay the annual minimum franchise taxes plus accruing penalties and interest. However, the FTB only issues Certificates of Revivor under limited circumstances such as engaging in litigation. Even if the Certificate will not be issued by the FTB, the FTB will notify the Secretary of State that the corporation or LLC is in good standing and this will appear when visiting the website of the Secretary of State.

A Certificate of Revivor or the good standing notice from the Secretary of State relates back in time to when the corporation should have complied with the law. The rules relating to corporate status also relate to good standings for LLCs. Therefore, most of the time the FTB may not issue a Certificate of Revivor but the company will be allowed to prosecute or defend its case in court or to do business. The absence of a formal certificate is known as the "Substantial Compliance Doctrine" that was set forth in the case of Sade Shoe Co. v. Oschin & Snyder, 162 Cal App 3rd 1178 (1984). Even through a certificate was not issued by the FTB, the company was reinstated and in good standing.

The FTB now has a new streamlined process for a corporation in litigation to obtain a Certificate of Revivor. These procedures are explained in Article 237.

The Suspended Corporation And The EDD

The EDD does not seem to be concerned with whether or not a corporation or LLC has been suspended at any time during the audit or post-petitioned process. In all the years that I have represented corporate and LLC clients before the EDD, no agent or any manager has paid any attention to the status of the taxpayer. A suspended corporation or LLC legally cannot engage in the audit process. In my opinion its officers and other responsible individuals may be personally accessed pursuant to CUIC § 1735 during the audit process or thereafter. No auditor or supervisor ever bothered to ask me if the company was in good standing nor have they gone to the Secretary of State to determine whether the entity is in good standing. Legally this means that if a suspended corporation or LLC files a Petition with the CUIAB that Petition is invalid. Likewise a hearing conducted by an ALJ with a suspended entity is invalid and the judge's decision may be legally unenforceable. Certainly, any settlement agreement would not be valid. These are scary thoughts but one day the EDD will do its homework and confront the suspended corporation or LLC.

Conclusion

A suspended corporation or LLC is operating in dangerous waters, especially when it comes to engaging in an EDD audit. If you receive a notice of audit for a suspended entity, you should take immediate steps to revive the entity before the audit gets underway.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

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