ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – SUSPENDED CORPORATIONS AND REFUND CLAIMS
By Robert S. Schriebman
The Franchise Tax Board (FTB) is authorized to suspend a domestic corporation for the failure to file a tax return or the failure to pay any tax, penalty, or interest due (R&TC, §§23301, 23301.5). A suspended corporation is basically in a legal coma and cannot legally function. This includes the filing of a claim for refund. The refund claim can involve the FTB, EDD, or the CDTFA (sales tax people). A suspended corporation cannot legally litigate or enter into any type of contract. The only way its actions can be legally recognized as valid and legal is if the corporation obtains a Certificate of Revivor from the FTB. The Certificate relates back to the time the corporation was suspended and this relation back means that its past illegal activities retroactively become legal. The corporation wakes up from its legal coma so to speak. These rules and concepts also apply to LLCs.
What if a suspended corporation files a claim for refund and obtains a revivor certificate before the statute of limitations for filing a refund claim expires? That was the issue raised before the Office of Tax Appeals (OTA) in the Cornerstone Compounding Pharmacy, Inc. case (OTA Case No. 19024279, April 7, 2021). This article will discuss the Cornerstone case and the distinction made between substantive acts and procedural acts.
The Cornerstone Compounding Pharmacy, Inc. Case
This case involved a corporate FTB refund claim in the amount of $7,130 for the year 2014.
On August 1, 2017, the FTB suspended Cornerstone for not filing tax returns and paying taxes. On September 7, 2017 the corporation filed its 2014 return. On November 7, 2018 it filed a claim for refund for $7,130. On December 6, 2018 the FTB issued the corporation a Certificate of Revivor.
The FTB denied the refund claim because it was made while the corporation was suspended. The claim was filed timely and the FTB admitted that Cornerstone would have been entitled to the refund if it was not suspended. But the FTB argued – no legal corporation – no legal refund claim.
The issue before the OTA was whether the Certificate of Revivor relates back to the time the refund claim was filed. If so, the claim is righteous and the FTB must issue the refund. Is a refund claim filed when the corporation is suspended a valid claim nevertheless?
The OTA pointed out that while suspended, a corporation cannot exercise its corporate powers, rights, and privileges unless there is a statute giving them limited life. No statute is on the books giving a suspended entity the ability to file a claim.
Procedural Acts and Substantive Acts
In the Cornerstone case, the issue was whether the filing of a refund claim during the period of suspension may be retroactively validated upon issuing a revivor where that revivor occurs prior to the expiration of the statute of limitations for the filing of a refund claim. To answer this issue the OTA had to distinguish between procedural and substantive acts. The revival of corporate powers validates any procedural step taken on behalf of Cornerstone while it was under suspension. Most litigation activity has been characterized as procedural for purposes of corporate revival. On the other hand, issues relating to the statute of limitations are regarded as substantive acts. If the statute of limitations for filing a refund claim expired before the revivor was issued, that cannot be corrected and the statute cannot be extended. The filing for a claim for refund is a purely procedural act. The FTB admitted that the claim was timely filed and the revivor was issued before the expiration of the claim filing statute.
The OTA ruled in Cornerstone’s favor. The FTB must issue the refund check.
This is one of the truly rare cases where a taxpayer wins before the OTA. If your corporation or LLC has been suspended, your best bet is to go to the nearest FTB branch office and file your returns and pay back taxes on the spot. Do all this by mail may hurt you.
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 50 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.
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