Fact Sheet – Abandoned Corporations 

A California Domestic Corporation (or a foreign corporation qualified to do business in  California) is required to file annual income tax returns and to pay the appropriate tax until  it formally dissolves (or surrenders the right to transact business in California) with the  California Secretary of State’s office. The minimum tax is $800 per year, but it could be  higher if you had income during any year. Even if you did not file tax returns, you are still  liable for the tax (in many cases the FTB will prepare tax returns and bill you for their  estimate of the tax due). This is true even if the corporation becomes suspended or its  powers forfeited. 

If you are in the position of owning a corporation with no assets and a huge tax liability,  you may be able to seek relief under the Appeal of Howard Zubkoff and Michael Potash,  Assumers and/or Transferees of Ralite Lamp Corporation, 90-SBE-004, (April 30, 1990)  (“Ralite“) rather than effecting an “orderly” dissolution of the company. 

In this case, held that when FTB has exhausted all reasonable remedies of collecting the  tax due from a corporation, it can collect the unpaid tax from the shareholders based on  transferee liability only if the shareholders received assets of the corporation without  adequate consideration. 

The FTB attempts all reasonable means to acquire any delinquent entity returns and/or any  balances due from the entity itself. For those entities where a shareholder could be held  responsible for the entity’s debt, they evaluate the applicable tenets of the law, including  liability in equity as outlined in the Ralite case. Prior to pursing a transferee assessment,  the FTB analyzes and considers the facts of the collection case for collection remedies  against the transferor entity. For transfer of liability at equity, the Ralite decision and  California law requires the FTB to have “exhausted all reasonable remedies against the  “taxpayer-transferor” prior to pursuing a transferee assessment. Exhausting such  reasonable collection remedies against the entity as required by law delays assessment  against any transferee/shareholder(s). 

In Ralite, the corporation had approximately $106,000 in cash. The two shareholders took  the cash as a pay out in the form of a dividend and abandoned the corporation without  having paying the franchise tax. The shareholders failed to formally dissolve the  corporation with the Secretary of State and the Franchise Tax Board (FTB) subsequently  sued for the tax owed. 

In the Ralite case, the FTB had to prove all of the following before the shareholders could  be held liable for the corporation’s franchise tax:

  • The corporation transferred property to the shareholder(s) for less than full and  adequate money 
  • At the time of the transfer and at the time the shareholder liability was asserted, the  corporation was liable for the tax 
  • The transfer was made after liability for the tax was accrued, whether or not the tax  was actually assessed at the time of the transfer 
  • The corporation was insolvent at the time of the transfer or the transfer left the  corporation insolvents, and 
  • The FTB had exhausted all reasonable remedies against the corporation. 

If the FTB comes to you as the shareholder and demands payment under the transferee  liability doctrine, you will need to show that you did not take compensation without  adequate consideration: We will probably need to provide the following to document your  position: 

  • A copy of the final balance sheet, which probably includes loans from shareholders  and capital stock as well as a negative earnings account; 
  • A list of assets with book value and fair market value. Indicate which shareholders  took which assets; and 
  • A list of loans from each shareholder to the corporation, debts each shareholder  paid, and basis of each shareholder’s capital stock. 
  • Minutes or action by consent and waiver of notice for the final shareholders and  directors disposing of the assets and approving the dissolution of the company. 

If you continued the business in a different manner, such as a self-employed person, you  may have trouble using the Ralite case to protect you. According to California Tax Audit  Manual Sect 3010.12 – sole proprietors may be held liable for tax liabilities of a  predecessor business. Thus, it is important to draw a distinction between abandonment of  a corporation versus continuing the business as a sole proprietor. Corporate property taken  by the shareholder to use in a business includes but is not limited to: notes and accounts  receivable, inventories, real and personal property, goodwill, and client lists 

Since a limited liability company (LLC) has limited liability like a corporation, the same  analysis of transferee liability as that used in the Ralite case may apply, but there are no  court cases on point. Additionally, an LLC may be liable for substantial additional LLC  fees, even if it hasn’t reported any income for the last few years. 

While you have a legal right to apply Ralite, it should be your last resort. It may be easier  to file the returns and put the unpaid tax on a payment plan, rather than fighting the  FTB. Fees incurred with a CPA or lawyer can easily exceed the potential tax savings. 

This information is provided by Tarlson & Associates, an independent certified public  accounting firm which serves individuals, businesses, estates, trusts and nonprofits  worldwide. We have significant experience assisting our clients with evaluating their  options when dissolving, winding down, or abandoning business entities. Contact us for  more information on how we can help you.