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Unused Corporation

2009-06-25 by

Today TaxMama hears from Luz in California with this problem. “I opened a corporation in 2001 but I never used it. I never filed tax returns. I didn’t even know how it works! Now I just learned that the state charges a fee for year that it is open. Is there a way or a law that I can reference to close the corporation and dismiss the past years?”

Dear Luz,

You’re in luck. You came to exactly the right person to help you.
The State of California wants 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. However, in the Court’s discussion of the Ralite case, the Court made it clear that if the corporation is insolvent, it cannot be required to pay the back taxes. http://www.boe.ca.gov/legal/pdf/90_sbe_004.pdf

As to holding the owners liable?

In Ralite, the owners were held liable. But the Court said the owners can’t be held liable if the owners of the corporation did not get any money from the company without consideration. In other words, if the shareholders took loans out from the company without repaying them – or got paid without doing any work.

In your case, you never funded the corporation. And you never drew money out. So just write the Franchise Tax Board a nice letter, saying that under the Ralite case you are not obligated to pay the corporation’s debts.

File a final return showing zeroes on all the lines. Check the box as FINAL RETURN to stop any new assessments.

Do NOT file the dissolution paperwork with the State Franchise Tax Board or Secretary of State. The dissolutions papers require you to accept liability for the corporation’s debts. So just be patient. The notices will stop. Someday.

Though, you may want to have your tax professional help you with this. After all there is well over $6,000 at stake here.

And remember, you can find answers to all kinds of questions about dissolving corporations and other tax issues, free. Where? Where else? At TaxMama.com

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  1. Blakely Sanford Says:

    I knew that rule, but I didnt know the case to attribute it to. Thanks.

  2. Robbe Says:

    Hi! I had a corporation and filed/paid all taxes etc from 1999-2006. The corp dissolved in July 2006 with FINAL return clearly marked on the return. It was a Nevada corp and I dissolved it there. Recently got a "request" from CA FTB for $1971 because they didn't receive tax returns for 2007 & 2008. I didn't dissolve the corp thru the SOS. From November 06 I became a W2 employee for another company and have had no income from my previous corporation. Are you saying that I can ignore the FTB's requests? Do I file $0 returns for '07 and '08? or do nothing? Since the case you mention is from 1980-81 is there a new section that this case would come under now, since the CA code section it was under no longer exists?
    Just a little nervous about ignoring the MAN and costing myself even more.
    Your response would be greatly appreciated.

  3. Eva Rosenberg, Your TaxMama® Says:

    Hi Robbe,

    Not knowing anything about your business, or how much you distributed to yourself in assets when you dissolved your corporation, I don't know if your situation qualifies for Ralite.

    I also don't understand the California connection if this was a Nevada corporation. Did you register it in California and file corporate returns in California? If you did, why didn't you dissolve it in California? After all, you were already filing a dissolution in Nevada.

    Sorry, I can't give you definitive advice. You'll have to make your own decision on this matter.

    It would be wise to consult with a tax attorney or EA who works with California corporations to get specific guidance on your situation, don't you think?

    Best wishes

    Eva

    Your TaxMama®

  4. Guy Says:

    Just got a letter from IRS asking for past due taxes ($426) + interest (252)stating: Tax Form: 941 (and) Tax Period 09/30/01. My corporation is suspended and I never funded the corporation, it never had any income and never operated in any way. It never had employees under the corporation either. My accountant back in 2002 said the IRS only asked that I write a letter stating that all the corporations assets had been sold. So I did and the letters stopped. Now I get this one out of the blue from the IRS. Does the Raelite case apply to me? What do I do? Should I answer the letter? Why is it Form 941 taxes – I thought that was payroll related? Do I call them and say the corporation never had income and never was funded etc..?

  5. Eva Rosenberg, Your TaxMama® Says:

    Hi Guy,

    Yup, the Form 941 is payroll related.

    Call IRS at the phone number on the notice. Be SURE to get the name and employee # of the person who answers the phone.

    Explain that the corporation is closed and was never funded. Have them clear your account. And FOLLOW UP in writing to confirm the conversation – certified mail, return receipt requested.

    I'll be we get more of these for folks who got TINs, but never had payroll.

    Uh oh!

  6. Brian Says:

    I have this same problem…all zeros for 2006-2009. The twist is I have an S Corp and I think FTB "minimum tax" is on the Corp and doesn't pass through, though it's a little murky. Do I have that right or does the FTB minimum pass through if the S Corp is insolvent?


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