ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – NOTHING GOOD COMES FROM A SUSPENDED CORPORATION OR LLC – THE EDD RAMIFICATIONS OF THE DEPOT REPAIR SERVICES CASE
By Robert S. Schriebman
Depot Repair Services, LLC (Depot) is a Nevada limited liability company whose legal status in California had been suspended by the Secretary of State. It received an audit assessment of close to $600,000 by the California Department of Tax and Fee Administration (CDTFA), formerly known as the SBE. The assessment covered the years 2008 – 2011. Depot sought to challenge the assessment, and filed a petition with the Office of Tax Appeals (OTA). Depot requested an oral hearing before the OTA, but the request was refused because the LLC was suspended. Its legal standing was forfeited.
In a short opinion, the OTA held that Depot lost the privilege of exercising the powers, rights, and privileges of a foreign LLC in California (Corp. Code §17713.11). The OTA also held that a forfeited or suspended corporation or LLC is without the capacity to defend itself or prosecute a civil action. This includes prosecuting an appeal before the OTA. In other words, Depot couldn’t even get its foot through the door. It had no legal standing. (See Tabarrejo v. Superior Court (2014), 232 Cal.App4th 849,861)
The EDD Ramifications of Depot
Whenever I read a case like Depot, I think of its impact should Depot had been involved in an EDD assessment matter. A suspended corporation or LLC legally means it is an impotent company. It is not dead in the legal sense, but it has no legal ability to contest an EDD audit or to challenge any EDD collection action; it’s a lame duck. For example, Depot would not have been legally allowed to file a petition to challenge an audit assessment before the CUIAB. It would not have the ability to seek a settlement. If Depot attempted to have a judge hear the merits of its defense against an audit, the judge would have the legal right, like the OTA, to throw Depot out of the hearing room. If the EDD filed an improper lien against Depot, it would have no ability or right to request any assistance from the Taxpayer Advocate or the ability to negotiate an installment payment arrangement with the assigned collector.
Can Depot Be Resuscitated?
What does “resuscitated” mean? Simply put it means that Depot may have the ability to be legally reinstated and have that reinstatement relate back to the time it was suspended. In that way Depot would have all of its past rights, powers, and privileges restored. The illegal petition it filed would be deemed valid. It could settle its EDD matter or have a judge hearing. In other words, it does not lose anything – everything relates back.
To accomplish the resuscitation process, Depot would have to file all delinquent tax returns and bring its account current with the Secretary of State. It might even be issued a Certificate of Revivor it is involved in litigation. This process can start through the FTB by making an appointment at a local FTB office and bringing a certified check for back taxes. Once the FTB and the Secretary of State issue receipts, the corporation or LLC is legally resuscitated.
There is a good lesson to be learned from the short OTA opinion in Depot. While it is rare that the EDD will look into the legal status of a corporation or LLC, don’t count on it. A smart EDD lawyer or other EDD official can make a very fast computer check of the legal status of the taxpayer. During audits it is very common for an EDD auditor to check with the Secretary of State. This is usually done only to determine the identity of corporate officers or LLC members for purposes of personal level assessments. It is rare for an auditor to check further to see if the company has valid legal status – but don’t bet that you will be able to fly under the EDD radar.
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. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
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.
Web Site Article 413