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Dangers of Internal 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
Rated:
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. http://www.boe.ca.gov/legal/pdf/90_sbe_004.pdf

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 need not be dissolved:

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 ? The case refers to tax year 1980, and to a California code section that no longer even exists (R & T Code Section 25701(a)).

3 ? The answerer does not claim the corp. will be dissolved automatically by the state, only that the back taxes don?t have to be paid.

MOST IMPORTANTLY, THOUGH?

4 - The shareholders of the corporation in this 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.? The case, is not a straight-forward minimum franchise tax non-payment case for a dormant/suspended California corporation; rather, it turned on other issues relating to fraudulent transfers. This case is linked on the California Board of Equalization website. Generally, tax agencies such as the IRS, BOE, & FTB like to publicize on their website and elsewhere cases they win, not cases they lose.

5 - 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 corp. properly.

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....

Full post as published by California Business Law Blog on April 16, 2008 (boomark / email).