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ASK THE EDD LAWYER – WHY IS IT IMPORTANT FOR MY CORPORATION OR LLC TO BE CURRENT WITH THE FTB?

by Robert S. Schriebman

First, let us define what it means to be current with the FTB. Every year a California corporation or LLC has two minimum requirements. First, it must file a California corporate income tax return, Form 100, and pay the minimum annual franchise tax of $800. This is required even if the corporation had no taxable income. If the corporation is not current with this basic compliance, its status as a legal entity will be suspended by the FTB. This means that the corporation has no legal existence. It can not transact business, and it can not sign contracts. If the corporation is involved in state or federal litigation the case may be dismissed because the corporation has no legal standing. Both lawyers and accountants need to check the legal status of their client corporations before engaging in routine services.

PROBLEMS IN THE COURTS

Perhaps an example will help. Several years ago I represented a California corporation before the U.S. Tax Court concerning its payment of delinquent federal employment taxes. I timely filed a petition in the Tax Court, and we had a good case. To my surprise the IRS attorney filed a motion to throw my client out of court because it had been suspended for its failure to pay minimum franchise taxes and file annual tax returns. In response to this motion I arranged with the FTB to promptly file all returns and to pay the franchise tax of $800 per year plus penalties and interest. It was touch and go with the Tax Court, but we came out okay. The stress and inconvenience, however, took its toll on both lawyer and client. A valuable lesson was learned.

PROBLEMS WITH THE IRS

The failure to revive a corporation can have very serious consequences in both IRS and EDD audits. I was recently retained by a CPA firm on this issue of compliance. The firm was handling a routine IRS audit of a corporation. In the middle of the audit the IRS agent, diligently doing his homework, called their attention to the fact that the corporation was suspended by the FTB for failing to file three years of income tax returns. The corporation did not owe any income taxes for each of the three years in issue, but that was not the point. Regardless of whether the corporation had any taxable income, it was legally obligated to timely file a return each year and pay a minimum $800 franchise tax. The IRS auditor informed the CPA firm that the audit could go no farther and disallowed all federal deductions for the years under audit (The corporation filed federal income tax returns but not California returns). An expensive mess was created because the corporation's owners tried to save $800 each year in California taxes.

PROBLEMS WITH THE EDD

The EDD is becoming more aware of suspended California corporations. EDD auditors are now going online to look up all kinds of issues. For example, if you are a licensed general contractor, and you hire sub-contractors, the EDD will research to determine if you or those whom you engaged have valid or suspended licenses. If the licenses are suspended there is a good chance the sub-contractor will be treated as your employee. We are not far away from the day when the EDD will research to determine whether any corporation under audit is legally viable. If the corporation has been suspended it may not be able to appeal an adverse audit determination. The corporation may not be able to file a valid petition with the California Unemployment Insurance Appeals Board (CUIAB) to contest the audit assessment. This unfortunate situation could result in the corporation having to fully pay the assessment and file a costly and time-consuming refund process that could wind up in the courts. Even more frightening is the EDD's ability to disregard the legal status of the corporation and go after responsible individuals by holding them personally liable for every dime owed by the suspended corporation.

HELP FROM THE FTB

What happens when a corporation catches-up and pays its delinquent franchise taxes and files its delinquent returns with the FTB? A recent California Supreme Court case ruled that once the corporation is current and obtains a Certificate of Revivor from the Franchise Tax Board, a legal fiction is created and the corporation becomes resuscitated and can proceed as though it was never suspended. See the California Supreme Court case Bourhis v. Lord, Cal. Supreme Ct. Case No. S199887 (March 4, 2013).

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©Robert Schriebman 2013.

An EDD attorney, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angles County serving clients throughout California and the United States. As a trusted EDD lawyer, Robert Schriebman has successfully dedicated more than 30 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 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.