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bizmatters, Attorney
Category: Tax
Satisfied Customers: 1132
Experience:  Licensed Practicing Attorney
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How to set up a California tax board payment plan?

Customer Question

Can the California Franchise Tax Board collect against an individual for taxes not paid by a corporation owned by the individual? I owned a corporation that closed two years ago, and never made money, but also never paid the minimum taxes for a corporation of $800 annually that is levied by the franchise tax board even if money is not earned. I get letters personally every few months with penalties and interest for the corporation with my name on them. Am I liable for the payment? At the end, the corporation paid all the outstanding balances that it could before it closed, but did not have money left over for tax payments.

Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.

Any owner, shareholder or officer of the corporation can be held personally responsible for the payment of the CA franchise taxes. The corporate veil of protection does not extend to these taxes.

The Franchise Tax Board can place a levy or lien on any of the assets of these individuals if the tax is not paid.

I am giving you a couple of links below which talk more about this and the collection activities they may use to try and collect this debt.

If you do not have the money to pay the taxes due in full at this time, you may be able to set up an installment payment plan with the Tax Board to satisfy the amount that is owed.

Customer: replied 7 years ago.

I am not sure that I fully understand your answer. It seems like the sources you provided state that the Franchise Tax Board can only collect if the officer receives excessive funds or assets from the business, preventing it from paying its tax debts.

The business always lost money and I borrowed money to keep it afloat and never took a salary payment, or any other payment, over the 2.5 years the business was open. When the corporation was finally closed, I did not take any assets, the money that was left was used to pay the final set of bills for the business that were affordable. Do you have any sources on the situation in which the FTB goes after the individual or if there is any way to stop the letter of collection from the FTB?

Expert:  Merlo replied 7 years ago.

We have some experts here in the forum who are actually from the state of California, and I think they may be better qualified to address your particular situation.

Let me put your question back on the open board to see if one of them can assist you. I am not certain if any of them are in the forum this evening, but certainly by tomorrow at least I believe someone will be.

Expert:  bizmatters replied 7 years ago.

Basically, I agree with the other expert’s comments. Please let me explain it to you. The first link he gave you only provides an "example" and is not all inclusive. Please read on.

The corporate veil is pierced in the following ways.

1. Responsible officer

2. Personal Guarantee

3. Alter ego

4. Exemptions

Responsible Officer. If the state or court determines that the debt is due because of the actions of the officers, those who have control over the action, can be held personally liable. This happens frequently with regard to payroll taxes, property taxes, sales taxes, and corporate income taxes. The position taken by the state is that the officers of the company including the owners have at least oversight responsibility to ensure these taxes are paid.

Personal guarantee: If a corporate officer or owner gives their personal guarantee, essentially they are divesting themselves of corporate protections. At least in the are of sales tax and payroll taxes, the personal guarantee is the default relationship. It is thrust upon you.

Alter-ego: If a court or government entity determines that the corporation is a mere alter-ego of the ownership, then the owners can be held personally liable for the liabilities of the corporation.

EXEMPTED: This pertains to certain classes of obligations and liabilities that are exempt from the corporate protections. payroll taxes fall into this category.

In order to answer further, I need to know what kind of corporation it was? LLC, S, C?

Were you the sole owner?

Customer: replied 7 years ago.
It was an S Corp and I was the sole owner. The business lost 5k in 2005, 8k in 2006, and 8k in 2007 before it was closed. I never took a salary or transferred corporate assets to my personal accounts. In fact, I was in no way compensated throughout the course of the business, it was a pure loss. I fulfilled all of the corporate reporting obligations and there are no other debts outstanding for the corporation other than the tax obligation.
Expert:  bizmatters replied 7 years ago.

The law is clear on this, that you are responsible. I am trying to find a way for you to approach the franchise board to avoid or get the tax abated.

Tell me this – the problem is that as sole owner, and if you did not have a full board of directors who met regularly and kept a diary of board meetings, then you are a prime target for being determined an alter ego corporation. As sole owner you would, by default be the responsible owner to make tax payments, etc to happen, or pay them out right.

Most people, not just you, form corporations to attempt to gain these protections. However, most people are unaware of the traps that divest them from those protections.

Tell me this – it may be stated in the text of the string – but I need to know. When you ceased operation in 2007, did you quit reporting, or did you use an official state form to notify the state that you are no longer operational? You do this by completing a certificate of dissolution. Did you file such a document or one like this:

Here is a case history that may help you. I could not find one where someone simply stopped doing business. This business was sold and the state was holding the former owners liable.">

Customer: replied 7 years ago.

I filed the certificate of dissolution when the corporation was dissolved at the end of 2007. I filed the correct form and checked "The corporation's known debts and liabilities have been paid as far as its assets permitted" box. The remaining balance of a couple hundred dollars in the bank account was used to pay the final debts. I kept all records throughout the course of the business, had annual meetings, kept minutes of those meetings and officially documented all business decisions. Would you recommend calling the franchise tax board?

Expert:  bizmatters replied 7 years ago.

If you timely filed the dissolution, and the taxes they are trying to assess and collect are after that date, then yes. By all means you need to contact them and discuss this issue.

Be sure to have your evidence for the document you filed for corporate dissolution.

bizmatters, Attorney
Category: Tax
Satisfied Customers: 1132
Experience: Licensed Practicing Attorney
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