Wednesday, April 16, 2008

Dangers of Internet Legal Research: Misinformation Aplenty

A client recently was conducted some legal research on the Internet, and came across the following, which he then showed to me and asked me about:
Subject: Re: Closing down a california S-corp
Answered By: taxmama-ga on 31 Jan 2005 14:38 PST
Dear Yarbles,

The State of California would like you to believe that you must file each back year and pay the annual $800 fee AND all the penalties and interest related to that fee. They also will want all the fees and penalties for not keeping up with the annual report of officers taht the Secretary of State requires. (That's a $20 fee if you file it on time; $250 penalty if you don't.)

However, under the Ralite case, where the owner of the corporation was permitted to walk away from all these liabilities, by simply doing nothing. Do NOT file the closure paperwork with the State Franchise Tax Board or Secretary of State. Do nothing.

You can read the particulars here.

You may want to have your tax professional review the case and make sure that you qualify. In fact, they may be happy to see this for their files. It's a very valuable piece of information that most people don't seem to know.

Just be patient. The notices will stop. Someday.

Best wishes,

Your TaxMama-ga
Google Answers: Closing down a california S-corp

My response to the client, who had hoped this answer proved that dormant California corporations would be dissolved automatically and that the corporate veil could never be pierced to provide for personal liablity to the shareholders for California corporate tax obligations:
Dear [Client]:

1 – There is no indication that the answerer is an attorney or accountant. What are their qualifications to be giving legal or tax advice? There are reasons why attorneys and accountants have to meet certain educational, training, and licensing standards.

2 - The annual report fee referred to in the answer is actually $25, not $20.

3 – While not invalidating the law as precedent, it is worth nothing that the case refers to tax year 1980, and to a California code section that no longer even exists (R & T Code Section 25701(a)).

4 – The answerer does not claim the corp. will be dissolved automatically by the state, only that the back taxes won’t have to be paid.


5 - Contrary to what the answerer, who apparently did not read or understand the case, the shareholders of the corporation in the cited Ralite case were found personally liable and ordered to pay the franchise taxes. See paragraph 2 of page 29 of the case cited: “the shareholders are liable for Ralite’s [the corporation’s] tax.”

However, this result was because of fraudulent transfers by the shareholders; otherwise, the case does indeed provide that shareholders will not be personally liable for corporation franchise tax non-payment. But (A) without the assistance of an attorney and tax advisor, fraudulent transfers may inadverdently be made by shareholders closing down a corporate business and (B) it is possible California's legislature will change the law on this at some point. Until that time, it is true that many shareholders walk away from their corporations and allow them to become suspended and continue to accrue franchise taxes, penalties, and interest. This is not the proper or legal way to do things, however, and I believe the majority of business attorney or tax advisors would not routinely counsel a client to do this.

6 - Note that the person asking the question comments at the bottom of that they consulted their tax professional, and their tax advisor told them to pay the tax and dissolve the corporation properly.

7 - A tax clearance certificate is no longer required to dissolve a corporation, so there is little reason not to dissolve the corporation, to stop the tax clock from ticking, even if taxes are owed and cannot or will not be paid by the corporate shareholders.

This is a perfect example of the legal misinformation and half-truths that are all over the Internet and a good reason why you should take “advice” like this with a grain of salt and consider its (unknown) source, as well as the the fact that the law may have changed, or the one person's circumstances may not match yours....