2013 Dissolving and Walking Away from California Entities

2013 Dissolving and Walking Away from California Entities

This publication is distributed with the understanding that the authors and publisher are not engaged in rendering legal, accounting or other professional advice and assume no liability in connection with its use. Tax laws are constantly changing and are subject to differing interpretation. In addition, the facts and circumstances in your particular situation may not be the same as those presented here. Therefore, we urge you to do additional research and ensure that you are fully informed before using the information contained in this publication. Federal law prohibits unauthorized reproduction of the material in Spidell s 2013 Dissolving and Walking Away from California Entities manual. All reproduction must be approved in writing by Spidell Publishing, Inc. This is not a free publication. Purchase of this electronic publication entitles the buyer to keep one copy on his/her computer and to print out one copy only. Printing out more than one copy and any electronic distribution of this publication is prohibited by international and United States copyright laws and treaties. Illegal distribution of this publication will subject the purchaser to penalties of up to $100,000 per copy distributed.

2013 DISSOLVING AND WALKING AWAY FROM CALIFORNIA ENTITIES Course objectives: The purpose of this course is to provide a discussion of how to dissolve a California corporation, LLC, or partnership. Topics discussed include: domestic stock corporations, LLCs, problem dissolutions, a corporation moving out of state, document completion tips, filing the final return, walking away from the corporation, holding the shareholder liable, the Ralite decision, other state tax issues, real property taxes, suspensions and revivors, reviving a domestic limited partnership, corporate dissolution checklist for California corporations, and much more. After completing this course, you will be able to: Identify what forms are required to dissolve a California corporation Determine when the FTB can assess income and franchise tax against a shareholder Identify what a suspended corporation can and cannot do Determine when a final return must be filed when a corporation is suspended Category: Taxes Recommended CPE Hours: CPAs/PAs 1 CRTPs 1 California tax Level: Basic Prerequisite: None Advanced Preparation: None Expiration Date: March 2015

Table of Contents Dissolving and walking away from California entities... 1 Domestic stock corporations... 1 LLCs... 2 Limited partnerships... 3 General partnerships... 4 Avoiding the $800 tax... 4 Effective date of corporate dissolution... 5 Timing is everything... 6 Liability for dissolved corporations... 6 Liability of shareholders after dissolution... 6 Post-dissolution tax liabilities... 7 Nonprofit dissolutions... 7 Problem dissolutions... 8 Cash-basis exception... 8 Earned income is subject to tax... 8 Installment sales and S corporations... 8 Suspended corporations... 8 Corporation moving out of state... 9 Surrendering a foreign corporation s status... 9 Document completion tips... 9 Certificates of Election/Dissolution Tips for domestic stock corporations... 9 Certificates of Election/Dissolution Tips for domestic nonprofit corporations... 10 Statement and Designation by foreign corporation tips for stock and nonprofit corporations... 11 Certificate of Surrender by foreign corporation tips for stock and nonprofit corporations... 12 Filing the final return... 12 Walking away from a corporation... 12 Corporation owes the shareholder money... 12 Holding the shareholder liable... 13 How it works... 13 Summary of the Ralite decision... 13 How to do it... 14 How you can help your clients avoid liability... 15 Beware of the business still in business... 15 Shareholder owes the corporation money... 16 Liability of directors for improper distribution... 17 Walking away from an LLC... 17 August 2013 i Spidell Publishing, Inc.

Other state tax issues... 17 Sales and use tax... 17 Payroll taxes... 18 Real property taxes... 19 Suspensions and revivors... 19 Continuing to conduct business... 19 The revivor process... 21 SOS revivors... 21 FTB revivors... 21 FTB and SOS revivors... 21 Contract voidability... 22 Requesting relief... 22 Reviving a domestic limited partnership... 23 When to revive... 23 Which LPs can revive?... 24 How to revive... 24 Appendix... Appendix 1 Walking Away From a Corporation Qualifier... Appendix 1 Qualifying the sale of small-business stock for exclusion... Appendix 2 Corporate dissolution checklist for California corporations... Appendix 3 August 2013 ii Spidell Publishing, Inc.

DISSOLVING AND WALKING AWAY FROM CALIFORNIA ENTITIES For taxable years beginning on or after January 1, 2006, business entities, including corporations, no longer have to obtain a tax clearance from the FTB upon termination. In addition, if certain tests are met (see below), the FTB will no longer assess a corporation the $800 minimum franchise tax for the years after the corporation closes its doors. (R&TC 17937, 17947, 17948.3, 23332) A domestic (California) or foreign (out of state or out of country) business entity can dissolve, surrender or cancel by filing the applicable forms (as described below) with the California Secretary of State. DOMESTIC STOCK CORPORATIONS The voluntary dissolution of a domestic stock corporation is initiated by an election to dissolve. The election to dissolve may be made by: The vote or written consent of at least 50% of the outstanding shares of the corporation; The board of directors if no shares have been issued or in limited circumstances; or A majority of the incorporators if no directors were named in the original Articles of Incorporation and none have been elected. Following the dissolution election, the corporation must file documents with the SOS. To dissolve, the corporation must file a Certificate of Election to Wind Up and Dissolve (Form ELEC STK) prior to or together with a Certificate of Dissolution (Form DISS STK). However, if the election to dissolve is made by the vote of all the outstanding shares, only the Certificate of Dissolution is required. In lieu of the above-mentioned certificates, a domestic stock corporation can file a Short Form Certificate of Dissolution (Form DSF STK) if these requirements are met: The Short Form Certificate of Dissolution is being filed within 12 months from the date the Articles of Incorporation were filed; The corporation has no debts and liabilities (other than tax liability); The tax liability will be satisfied on a taxes paid basis or the tax liability will be assumed; The final tax return has been or will be filed with the FTB; The corporation has not conducted any business; The corporation has not issued shares; The majority of the directors (or incorporators, if directors were not named and none have been elected) authorize the dissolution and elect to dissolve the corporation; and The assets have been distributed to the persons entitled thereto or no assets have been acquired. Upon the filing of the Certificate of Dissolution or Short Form Certificate of Dissolution with the Secretary of State, the corporation will be completely dissolved and its corporate existence will cease. Statutory filing requirements are found in Corp. Code 1901 (Certificate of Election to Wind Up and Dissolve), 1905 (Certificate of Dissolution) and 1900.5 (Short Form Certificate of Dissolution). For proof of submittal when mailing document(s) to the SOS, send them by certified mail with return receipt requested. August 2013 1 Spidell Publishing, Inc.

Dissolution documents cannot be filed on behalf of a suspended corporation (R&TC 23301, 23775) and are not required to be filed on behalf of a corporation that has already dissolved, merged out of existence, or converted into another business entity type. You may complete the dissolution forms online at: Print the completed form and mail to: Web site www.sos.ca.gov/business/be/forms.htm Address Document Filing Support Unit Secretary of State 1500 11 th Street, 3 rd Floor Sacramento, CA 95814 You may also deliver the documents in person to the Sacramento office at the same address. LLCs To cancel the Articles of Organization of a domestic LLC, the LLC must file a Certificate of Dissolution (Form LLC-3) and Certificate of Cancellation (Form LLC-4/7). However, if all the members vote to dissolve, only a Certificate of Cancellation is required. To cancel the Application for Registration of a foreign (out of state or country) LLC, the foreign LLC must file a Certificate of Cancellation (Form LLC-4/7). Note: In lieu of the above-mentioned certificates, a domestic LLC can file a Short Form Certificate of Cancellation (Form LLC-4/8) if the following requirements are met: Form LLC-4/8 is being filed within twelve (12) months from the date the Articles of Organization were filed with the Secretary of State; The domestic LLC has no debts or other liabilities (other than tax liability); The known assets have been distributed to the persons entitled thereto or no known assets have been acquired; The final tax return or a final annual tax return has been or will be filed with the FTB; The domestic LLC has not conducted any business from the time of the filing of the Articles of Organization; A majority of the managers or members, or if there are no managers or members, the person or a majority of the persons who signed the Articles of Organization, voted to dissolve the domestic LLC; and If the domestic LLC received payments for interests from investors, those payments have been returned to those investors. Upon the filing of the Certificate of Cancellation (Form LLC-4/7) or Short Form Certificate of Cancellation (Form LLC-4/8) by the Secretary of State, the Articles of Organization or Application for Registration of the LLC will be cancelled and the powers, rights and privileges of the LLC will cease in California. You may complete the form online at: August 2013 2 Spidell Publishing, Inc.

Print the completed form and mail to: Web site www.sos.ca.gov/business/be/forms.htm Address Document Filing Support Unit Secretary of State P.O. Box 944228 Sacramento, CA 94244-2280 You may also deliver the documents in person to the Sacramento office at: Address Document Filing Support Unit Secretary of State 1500 11 th Street, 3 rd Floor Sacramento, CA 95814 LIMITED PARTNERSHIPS To dissolve a California or foreign limited partnership, file a Certificate of Cancellation (Form LP-4/7). For a California limited partnership the form must be signed by all of the general partners (Corp Code 15902.04). For a foreign limited partnership at least one general partner must sign. If a California limited partnership is dissolved and a person other than a general partner has been appointed to wind up the affairs of the limited partnership, Form LP-4/7 must be signed by that person and must be filed after or together with a Certificate of Amendment (Form LP-2) indicating the name and address of the appointed person. You may complete the forms online at: Print the completed forms and mail to: Web site www.sos.ca.gov/business/be/forms.htm Address Document Filing Support Unit Secretary of State P.O. Box 944225 Sacramento, CA 94244-2250 August 2013 3 Spidell Publishing, Inc.

You may also deliver the documents in person to the Sacramento office at: Address Document Filing Support Unit Secretary of State 1500 11 th Street, 3 rd Floor Sacramento, CA 95814 Upon the filing of Form LP-4/7: (1) the California limited partnership will be cancelled; or (2) the Certificate of Registration to transact business in California of the registered foreign limited partnership will be cancelled. GENERAL PARTNERSHIPS To dissolve a general partnership, file a Certificate of Dissolution (Form GP-4). You may complete the dissolution forms online at: Print the completed form and mail to: Web site www.sos.ca.gov/business/be/forms.htm Address Document Filing Support Unit Secretary of State P.O. Box 944225 Sacramento, CA 94244-2250 You may also deliver the documents in person to the Sacramento office at: Address Document Filing Support Unit Secretary of State 1500 11 th Street, 3 rd Floor Sacramento, CA 95814 AVOIDING THE $800 TAX The FTB will not assess the $800 minimum franchise tax for the current taxable year if an entity meets each of these three conditions: The entity files a timely final tax return on or before the extended due date for the preceding taxable year; The entity does not do business in California after the end of that year; and The entity files a Certificate of Dissolution, Certificate of Surrender, or Certificate of Cancellation with the SOS before the end of the 12-month period beginning with the date the final return was filed. August 2013 4 Spidell Publishing, Inc.

Unfortunately, the change in the law does not forgive a corporation that failed to file a valid and complete Certificate of Dissolution, Certificate of Surrender, or Certificate of Cancellation for a year prior to the 2006 taxable year. For an entity that failed to formally dissolve, use the Ralite decision, if applicable, to absolve shareholders of liability for unpaid minimum franchise taxes. Example of dissolution prior to filing final return Finish Up, Inc. closed its doors on October 1, Year 1. Finish filed a valid and complete Certificate of Dissolution and Certificate of Election to Wind Up and Dissolve on November 1, Year 1. Finish must file a final tax return on or before the extended due date and check the final box on the tax return. EFFECTIVE DATE OF CORPORATE DISSOLUTION For franchise tax purposes, the effective date of a dissolution of a corporation is the date on which the Certificate of Dissolution is filed in the Office of the Secretary of State. (R&TC 23331) (Letter to Spidell Publishing, dated May 7, 1993, 410:GSW:AI-93-0209) This means that the corporation is legally dissolved upon the filing of the Certificate of Dissolution. The majority of the directors currently in office not corporate officers must sign and verify each of the following: The corporation is completely wound up; The debts and liabilities are paid or adequately provided for; and The known assets are distributed to persons entitled to receive them. The certificate must be verified by affidavit or declaration of perjury. There is no filing fee. The original and two copies should be filed with the SOS. There is no charge for the two copies if they are submitted with the original. There is a fee for additional certified copies of the Certificate of Dissolution. Note The Certificate of Dissolution cannot be signed in counterparts. All directors must sign a single certificate. It is requested that you enclose, along with the signed original certificate, one copy to be certified and returned to you after the filing of the original document. Mail the Certificate of Dissolution to: Address Document Support Filing Unit Secretary of State 1500 11 th Street, 3 rd Floor Sacramento, CA 95814 A corporation is not subject to the minimum tax if the corporation did no business in this state during the taxable year and the taxable year was 15 days or fewer. (R&TC 17936) This means you actually have a 15-day grace period. Note: If the 15th day falls on a Saturday, Sunday, or holiday, the last day to file is not extended to the next business day. August 2013 5 Spidell Publishing, Inc.

TIMING IS EVERYTHING The critical date is not the date the forms are mailed, but the date the SOS receives the correctly completed forms. The SOS defines the word received to mean physically received and stamped in by its office. The SOS recommends mailing the documents by certified mail with return receipt; the SOS will acknowledge receipt of the documents within 21 days of receiving them. We recommend that you always allow enough time. If your documents are stamped as received (on the document itself) a day or more late, your dissolution will not be effective until the next year and your client will be assessed another ($800) minimum franchise tax. If you are up against the deadline you may want to hand-carry the documents to the Sacramento office of the SOS. If this is not convenient, there are legal service companies in Sacramento that will physically take the documents to the SOS and ensure that they are properly stamped in as received. Although the SOS has offices in other cities, those offices will not accept dissolution documents. You must file your dissolution paperwork with the Sacramento office at this address: Address Document Filing Support Unit Secretary of State 1500 11 th Street, 3 rd Floor 8 Sacramento, CA 95814 Note There are no reasonable cause exceptions to these filing deadlines, and filing late paperwork will result in assessment of another year s minimum tax. There is no fee for filing dissolution forms if filing by mail. There is, however, a $15 handling fee for documents that are delivered in person (over the counter) to the Sacramento office. Entities must remit this fee by using a separate check. The SOS keeps this fee whether it accepts or rejects the documents. LIABILITY FOR DISSOLVED CORPORATIONS LIABILITY OF SHAREHOLDERS AFTER DISSOLUTION Once a corporation dissolves, liabilities or causes of action against the corporation may be enforced against: The dissolved corporation to the extent of its undistributed assets (including any insurance that might be available); or The shareholders to extent of the lesser of: o Their pro rata share of the liability; or o The corporate assets distributed to them. (Corp. Code 2011) August 2013 6 Spidell Publishing, Inc.

Example of shareholder liability Bill, Brian, and Bob each held one-third of the shares in a corporation. The three decided to dissolve the corporation. At the time of the dissolution each of the three shareholders received $10,000 in corporate assets. Six months after the dissolution it was discovered that the corporation had not paid a $9,000 bill to one of its vendors. Bill, Brian, and Bob will each be liable for $3,000 of the debt ($9,000 3 = $3,000). If the debt were larger ($40,000 for example), each shareholder s liability would be limited to $10,000 (the assets they received on dissolution of the corporation). POST-DISSOLUTION TAX LIABILITIES Dissolving, withdrawing, or canceling a business s legal status does not nullify its legal tax requirements or outstanding liabilities. The entity or its transferees remain liable for the business s tax debts. A shareholder may be held personally responsible for the business s tax debt. For instance, sometimes business officers receive excessive funds or other assets from a business, preventing it from paying its tax debts. When this occurs, the officers may become personally liable for the tax debt. The FTB will attempt to collect the tax from the shareholder who has the resources to pay. The FTB will not consider percentage of ownership, or whether a shareholder was an officer, when deciding who to pursue for the tax. That shareholder is entitled to reimbursement from the other shareholder(s) for their pro rata share of the tax. If the other shareholder(s) do not voluntarily share the burden, the shareholder who made the payment would be forced to file a civil suit for the reimbursement. Example of shareholder holding the bag Bill, Brian, and Bob from the above example dissolved their corporation in January 2012. In April of 2013, the corporation was audited for a prior year, and the FTB assessed $10,000 in tax. The FTB will choose one of the shareholders and attempt to collect the entire tax liability from him. That shareholder will then have to seek reimbursement from the other two shareholders. If the shareholders walked away from the corporation without taking any assets, then they are not personally liable for any taxes. For these shareholders, Ralite is still here to provide relief. (Appeal of Howard Zubkoff and Michael Potash, Assumers and/or Transferees of Ralite Lamp Corporation (April 30, 1990) 90-SBE-004) See explanation on page 13. NONPROFIT DISSOLUTIONS A nonprofit public benefit corporation s Certificate of Dissolution, when filed with the SOS, must be accompanied by either of the following: The Attorney General s written waiver of objections to the dissolution; or The Attorney General s written confirmation that the corporation has no assets. August 2013 7 Spidell Publishing, Inc.

The existing procedure for winding up and dissolving a nonprofit public benefit corporation does not provide the Attorney General with any audit or review capabilities of the distribution of assets before the corporation is dissolved. (Corp. Code 6615) PROBLEM DISSOLUTIONS CASH-BASIS EXCEPTION With the filing of the corporation s first return, the corporation elects the type of accounting method it will use. Problems can arise when a cash-basis accounting method was elected and the corporation is dissolving. The FTB has the legal right to force the dissolving cash-basis corporation to pick up earned income (accounts receivable and installment obligations) but the corporation cannot accrue liabilities on dissolution (accounts payable). (R&TC 24651, 24672) R&TC 24651(b) provides that if the taxpayer s method of computation does not clearly reflect taxpayer s income, the FTB is authorized to recompute a taxpayer s income under another method. According to the FTB, this section addresses the treatment of income only, not net income or income and expenses. EARNED INCOME IS SUBJECT TO TAX Based on the Appeal of Williams & Glass Accountancy Corporation ((February 1, 1982) 82- SBE-020), when accounts receivable represent amounts owed to a corporation in payment for services that were fully performed, the corporation s rights to receive those amounts are fixed and unconditional. Consequently, those amounts constitute earned income, subjecting the corporation to the resulting tax. Because earned income is accrued in the year in which a cash-basis corporation is dissolved, it is extremely important to remind your clients that they should pay off their accounts payable while the corporation is still in existence in order to lessen or avoid any unforeseen tax liabilities. INSTALLMENT SALES AND S CORPORATIONS Under federal law, if certain conditions exist, the shareholders of a cash-basis S corporation may defer gain recognition when the S corporation sells its assets in exchange for an installment note and then transfers the note to the shareholder in exchange for stock in a complete liquidation. (IRC 453B(h)) For California purposes, the S corporation recognizes all gains on installment sales in the year of liquidation. (R&TC 24672) However, in conformity to federal law, the shareholders will continue to report gain as it is received. SUSPENDED CORPORATIONS Dissolution documents cannot be filed on behalf of a suspended corporation (R&TC 23301, 23775) and are not required to be filed on behalf of a corporation that has already dissolved, merged out of existence, or converted into another business entity type. You must revive the corporation business before you file dissolution, surrender, or cancellation forms with the SOS. August 2013 8 Spidell Publishing, Inc.

CORPORATION MOVING OUT OF STATE Sometimes a shareholder moves him or herself and the corporation to another state. If the corporation is not doing business in California, the shareholder may want to dissolve the California corporation and reform in the new state. However, this could result in double tax on the assets in the corporation. An alternative is for the shareholder of a California domestic corporation to form a new corporation in the new state and merge the old corporation into the new one, thus stopping the annual minimum franchise tax, provided the corporation is not transacting business in California. To do this, the corporation must file documents with the SOS pursuant to Corp. Code 1108. A foreign corporation qualified to transact intrastate business in California is subject to the corporation minimum franchise tax until it has formally surrendered. SURRENDERING A FOREIGN CORPORATION S STATUS To stop the clock on the minimum franchise tax, the foreign corporation must file a Certificate of Surrender in compliance with Corp. Code 2112. See Corp. Code 1100 1113 for more information on merging California corporations. DOCUMENT COMPLETION TIPS CERTIFICATES OF ELECTION/DISSOLUTION TIPS FOR DOMESTIC STOCK CORPORATIONS Note: Sample forms can be found online at: Web site www.sos.ca.gov/business/bpd_forms.htm#be The name of the corporation, as stated on the dissolution document(s), must match exactly the name of the corporation as it appears on the SOS records, including punctuation. If the election to wind up and dissolve was made by a vote of all of the issued and outstanding shares, dissolution of a domestic stock corporation may be accomplished by filing a single document. The document, entitled Certificate of Dissolution, must include the statement: The election to wind up and dissolve was made by a vote of all of the shares. (Corp. Code 1901(c), 1905(a)(6)) If the election to dissolve was made by less than 100% shareholder approval, or if no shares are outstanding, both a Certificate of Election to Wind Up and Dissolve and a Certificate of Dissolution must be filed. (Corp. Code 1901, 1905) The Certificate of Election to Wind Up and Dissolve and/or the Certificate of Dissolution must be properly verified under penalty of perjury and include the actual date of signing. (Corp. Code 173, 193, 1901, 1905.) A sample of an acceptable verification is: We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct and of our own knowledge. The verification cannot be postdated. (Corp. Code 193) August 2013 9 Spidell Publishing, Inc.

The certificate(s) must be signed and verified by the appropriate individual(s), not by the corporation. (Corp. Code 193) Any indication of the corporation on, above, or near the signature line, other than the title(s) of the designated individual(s) signing the certificate(s), must be omitted. The Certificate of Dissolution must be signed and verified by a majority of directors (or the sole director, if there is only one). (Corp. Code 193, 1905(a)) The Certificate of Dissolution must include a statement concerning the disposition of the corporation s known debts and liabilities. The certificate must state that the known debts and liabilities have been paid, or that the corporation never incurred any known debts or liabilities, or that the known debts and liabilities have been adequately provided for. If there are known debts and liabilities for which adequate provision has been made, the certificate must set forth what provision has been made, including the name and address of the corporation, person, or governmental agency that has assumed or guaranteed the payment, or the name and address of the depositary with which deposit has been made, or any other information necessary to enable the creditor to claim payment of the debt or liability. (Corp. Code 1905(a)(2)) The Certificate of Dissolution must include the statement: The corporation is dissolved. (Corp. Code 1905(a)(5)) A final tax return, as described by R&TC 23332, has been or will be filed with the FTB. CERTIFICATES OF ELECTION/DISSOLUTION TIPS FOR DOMESTIC NONPROFIT CORPORATIONS The name of the corporation, as stated on the dissolution document(s), must match exactly the name of the corporation as it appears on the SOS s records, including punctuation. If the election to wind up and dissolve was made by a vote of all of the members of a corporation with members or by all members of the board of directors of a corporation without members, dissolution of a domestic nonprofit corporation may be accomplished by filing a single document. The document, entitled Certificate of Dissolution, must include one of the following statements: o o The election to dissolve was made by a vote of all the members of the corporation. The corporation has no members, the election was made by all the directors of the corporation. (Corp. Code 6611(c), 8611(c)) If the election to dissolve was made by less than 100% approval of the members or less than 100% approval of the board of directors for a corporation with no members, both a Certificate of Election to Wind Up and Dissolve and a Certificate of Dissolution must be filed. (Corp. Code 6611, 6615, 8611, 8615) The Certificate of Election to Wind Up and Dissolve and/or the Certificate of Dissolution must be properly verified under penalty of perjury and include the actual date of signing. (Corp. Code 5062, 5076, 6611, 6615, 8611, 8615) A sample of an acceptable verification is: We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct and of our own knowledge. The verification cannot be postdated. (Corp. Code 5076) The certificate(s) must be signed and verified by the appropriate individuals, not by the corporation. (Corp. Code 5076) Any indication of the corporation on, above, or near the signature line, other than the title(s) of the designated individual(s) signing the certificate(s), must be omitted. The Certificate of Dissolution must be signed and verified by a majority of directors (or the sole director, if there is only one). (Corp. Code 5076, 6615(a), 8615(a)) August 2013 10 Spidell Publishing, Inc.

The Certificate of Dissolution must include a statement concerning the disposition of the corporation s known debts and liabilities. The certificate must state that the known debts and liabilities have been paid, or that the corporation never incurred any known debts or liabilities, or that the known debts and liabilities have been adequately provided for. If there are known debts and liabilities for which adequate provision has been made, the certificate must set forth what provision has been made, including the name and address of the corporation, person or governmental agency that has assumed or guaranteed the payment, or the name and address of the depositary with which deposit has been made, or any other information necessary to enable the creditor to claim payment of the debt or liability. (Corp. Code 6615(a)(2), 8615(a)(2)) The Certificate of Dissolution must include the statement: The corporation is dissolved. (Corp. Code 6615(a)(4), 8615(a)(4)) A final tax return has been or will be filed with the FTB. A nonprofit public benefit or religious corporation must attach to the Certificate of Dissolution a document issued by the Attorney General that either waives objections to the distribution of the corporation s assets pursuant to Corporations Code 6716(c) or confirms that the corporation has no assets. (Corp. Code 6615(b), 9680(a)) Information regarding the required document from the Attorney General can be obtained by calling the Attorney General Registrar of Charitable Trusts at: Telephone (916) 445-2021 A written request for the required document can be mailed to: Address Office of the Attorney General Registrar of Charitable Trusts P.O. Box 903447 Sacramento, CA 94203-4470 STATEMENT AND DESIGNATION BY FOREIGN CORPORATION TIPS FOR STOCK AND NONPROFIT CORPORATIONS A current original Certificate of Good Standing issued within the last six months by the appropriate public official of the state of incorporation must be submitted with the Statement and Designation. (Corp. Code 2105) Note: To register as a nonprofit corporation, the Certificate of Good Standing must indicate the qualifying corporation is a nonprofit, nonstock corporation. The name of the corporation stated in the Certificate of Good Standing must match exactly the name of the corporation on the Statement and Designation, including punctuation. (Corp. Code 2105) If an individual is designated as agent for service of process, the Statement and Designation must contain the complete business or residence address of the agent. (Corp. Code 2105, 2117) If a corporation is designated as agent for service of process, the Statement and Designation must reflect the corporate name, but cannot reflect the address. (Corp. Code 2105, 2117) August 2013 11 Spidell Publishing, Inc.

If the designated corporate agent for service of process is not a California corporation, the Statement and Designation must reflect the correct state of incorporation for the corporate agent for service of process. (Corp. Code 2105, 2117) A designated corporate agent for service of process must comply with Corp. Code 1505 prior to filing the Statement and Designation. (Corp. Code 2105(c)) A designated corporate agent for service of process must be currently authorized to engage in business in this state and must be in good standing on the records of the Secretary of State before it may be designated as the agent for the purpose of service of process. (Corp. Code 1505) A final tax return has been or will be filed with the FTB. CERTIFICATE OF SURRENDER BY FOREIGN CORPORATION TIPS FOR STOCK AND NONPROFIT CORPORATIONS The name of the foreign corporation must match exactly the name as shown on the records of the California Secretary of State and set forth the state or place of incorporation for the foreign corporation. (Corp. Code 2112(a)(1)) There is no statutory authority for a director or authorized representative to sign a Certificate of Surrender. The certificate must be signed by a corporate officer. (Corp. Code 2112(a)) The certificate must provide a post office address to which the Secretary of State may mail a copy of any process against the corporation that is served upon the Secretary of State. (Corp. Code 2112(a)(5)) A final tax return has been or will be filed with the FTB. FILING THE FINAL RETURN A corporation must file a final tax return on or before the extended due date of the return. (R&TC 23332(c)(2)) Remember that the final year may be a short year, which means the due date is sooner than a full year. For example a calendar-year corporation that is dissolved on October 15, has until July 15 (federal) and August 15 (California) of the following year to file an extended final return. WALKING AWAY FROM A CORPORATION Many of our clients never formally dissolve their corporations because the business has become a money pit. They don t want to spend the money to file bankruptcy or formally dissolve. They simply walk away and change careers, go to work for someone else, or retire. Even if no corporate return is filed, when the business closes down and stops sales and expenses, the shareholder will have a taxable event. CORPORATION OWES THE SHAREHOLDER MONEY A shareholder recognizes gain or loss on liquidation of the corporation. If the stock is worthless, the shareholder will have a loss. The problem when a shareholder walks away from the corporation is how to determine the exact date when the stock became worthless. Generally, there is a particular event that will determine the stock worthless, for example: Bankruptcy; Stopping business activities; or Revocation of the corporate charter. August 2013 12 Spidell Publishing, Inc.

There are exceptions, however, and the IRS or the FTB may deem that the stock was worthless in a different year. Usually, the taxing agencies will want to push the determination of worthlessness back to a prior year when the statute of limitations is closed. Planning Tip Take the deduction for the worthless stock in the earliest year where facts indicate worthlessness. This will prevent a statute of limitations problem resulting from an IRS or FTB disallowance. Example of walking away from a corporation Tom formed a C corporation, Tried But Failed, Inc., in Year 1 to market his line of selfhelp books. During Year 1 and Year 2, he loaned the corporation $50,000 to meet his large advertising expenses. He realized in Year 3 that this venture was not going to work. So he did not pay his registration fee to the state of incorporation and did not file tax returns. The state suspended his corporate charter on December 1, Year 3. At that time, his books showed he had assets with a fair market value and basis of $5,000, capital stock of $5,000, and an outstanding loan to Tom of $50,000. Tom should claim a deduction in Year 3, the year in which he ceased operation and his corporation was suspended. How it works HOLDING THE SHAREHOLDER LIABLE Many of our clients form corporations and never use them. Or, the incorporated business fails and the shareholders simply abandon the business and go to work somewhere else, doing something else. In many of these cases, the shareholders do not formally dissolve the corporation with the SOS. These shareholders subsequently receive a bill from the FTB for the minimum tax, plus penalties and interest. If certain conditions are met, the FTB may not hold your shareholder/client liable for any taxes due. Summary of the Ralite decision Here is a synopsis of the Ralite case, a citable BOE opinion. (Appeal of Howard Zubkoff and Michael Potash, Assumers and/or Transferees of Ralite Lamp Corporation (April 30, 1990) 90-SBE- 004) Although the shareholders lost this case and were liable for the corporate tax, your client may use this case to win the argument that the shareholder is not liable for the tax. In Ralite, the corporation had approximately $106,000 in cash, which apparently came from earnings because the corporation owed the state about $10,000 in franchise taxes. The two shareholders took the cash as a dividend and walked away from the corporation without paying the tax. At the appeal, the FTB conceded that there was no law that allowed the FTB to pierce the corporate veil and hold shareholders liable because the shareholders did not expressly assume the liabilities of Ralite. The Board stated that the only way shareholders could be held liable for the corporation s franchise tax would be in equity based on the law of fraudulent conveyances. (R&TC 19073(a); Civil Code 3439.12) August 2013 13 Spidell Publishing, Inc.

This meant that 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 consideration; 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 insolvent; and The FTB had exhausted all reasonable remedies against the corporation. Because all five of these conditions were met in Ralite, the Board held that the shareholders were liable for the corporation s franchise tax. How to do it If your client meets the criteria set forth in the Ralite decision, here s what you must do to get your client off the hook. First, remember that Ralite applies to the shareholder, not the corporation. So, you cannot use the decision until the FTB has made its assessments, given up trying to collect from the now-defunct corporation, and actively pursues the individual shareholder to pay the tax liability. Here is how the chain of events will occur: 1. The shareholder gives up the business, doesn t formally dissolve, and stops filing tax returns. Maybe the shareholders filed tax returns marking them as final with the IRS and FTB. However, the taxpayer did not formally dissolve with the SOS within 12 months of filing the final return with the FTB. 2. Because the taxpayer did not dissolve, FTB sends the corporation a Demand to File notice. Do nothing. If you respond by invoking the benefits of the Ralite decision, the FTB will send a notice stating that Ralite doesn t apply. 3. The taxpayer still does nothing and the FTB begins billing the corporation. Assuming the corporation has no assets, there will be nothing for the FTB to collect. 4. Eventually, the FTB may come to the shareholder and demand payment. At this time, you should invoke the Ralite decision, explaining that the taxpayer did not take compensation without adequate consideration. Enclose: 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. A list of loans from each shareholder to the corporation, debts each shareholder paid, and basis of each shareholder s capital stock. If it is clear that the shareholder did not get more value out of the corporation than was owed, the FTB will generally stop pursuing the shareholder(s) and close the account. August 2013 14 Spidell Publishing, Inc.

How you can help your clients avoid liability Knowing what the rules are for establishing shareholder liability, it should be fairly easy for you to help your clients follow the rules that prevent them from being liable for their corporation s franchise tax. Because all five of the conditions must be met in order to establish shareholder liability, shareholders only need to avoid one of the conditions to prevent liability. We suspect that in most cases the first condition transfer of property to the shareholders without full and adequate consideration will be the easiest one to avoid. Although cash was transferred from the corporation to the shareholders in Ralite, it would seem that after a corporation s tax liability accrued, a transfer for less than full and adequate consideration of any corporate asset should be avoided, including but not limited to: Notes and accounts receivable; Inventories; Furniture, machinery, and equipment; Real property; Goodwill; and Client list. If a corporation transfers any cash or property to the shareholders, you should make sure that full and adequate consideration is given in return. Although the term full and adequate consideration was not defined, we think that you could make a strong case that most transfers to a corporation at fair market value including but not limited to the following could qualify: Loans from shareholders; Services performed for the corporation with fair market value included in compensation; Expenses incurred on behalf of the corporation; and Stock in the corporation. BEWARE OF THE BUSINESS STILL IN BUSINESS Often, a taxpayer decides that being a corporation is too cumbersome or decides to get rid of employees and just continue the business alone. In this case, you will have a difficult time using Ralite to save the shareholder from being personally liable. According to the FTB s General Tax Audit Manual 3010.12: Corporate property taken over by the principal will be considered as liquidating dividends and a return of capital; Sole proprietors may be held liable as transferees for delinquent corporate taxes unpaid before the change or transfer; The sole proprietor should report the income from the business on his/her personal income tax return (Schedule C); and Stockholders may wish to terminate a corporation and operate as a sole proprietor for the following reasons: o To take advantage of corporate losses on their individual income tax returns; o To avoid paying the minimum tax; and o By coming to the realization that there is no practical reason to be incorporated. Note that corporate property taken by the shareholder to use in the Schedule C business includes goodwill and trademark value. These assets are often well in excess of the shareholder s loans and capital stock. August 2013 15 Spidell Publishing, Inc.

Example of no liability to a shareholder Ken and Barbie Dahl owned 100% of the stock in Toy Computer Engineering, Inc., a computer programming business. Ken passed away and Barbie, a physician who knew nothing about the business, sold the only asset in the corporation a computer to another programmer for $5,000. She kept the $5,000 and took the $1,000 from the corporate bank account. She never liquidated the corporation with the Secretary of State. When Ken passed away, the balance sheet showed: Assets Liabilities Cash $ 1,000 Loan from shareholders $25,000 Computers (FMV $5,000) 19,000 Retained earnings ( 5,000) Total assets $20,000 Total liabilities $20,000 Barbie received a total of $6,000 in compensation when she abandoned the corporation. The corporation owed her $25,000. Thus, she would not be liable for the $800 minimum franchise tax for the years she failed to file. Example of liability to a shareholder Hugh Pullem, DDS, formed a corporation in Year 1 and began practicing dentistry. In Year 12, he decided that it was too much trouble to be a corporation so he closed the corporate account and began operating as a sole proprietor, filing a Schedule C to report the income from his dentistry practice. Since he never filed tax returns for Year 12 or Year 13, the FTB assessed $800 per year, plus penalties and interest. His balance sheet showed: Assets Liabilities Cash $ 5,000 Accounts payable $ 5,000 Accounts receivable $ 5,000 Equipment loans $45,000 Equipment (FMV $25,000) $50,000 Loan from shareholder $10,000 In this case, Hugh may be personally liable for taxes owed to the FTB because he has taken compensation without adequate consideration. Since he continued to operate the dental practice, he received compensation equal to the value of the dental practice. Assume the value of his practice was $100,000. Although Hugh did not receive a hard asset worth $100,000, he did keep the business and continue to operate it. Assets Liabilities Cash $ 5,000 Accounts payable $ 5,000 Accounts receivable 5,000 Loan from shareholder 10,000 Equipment 25,000 Equipment loans 45,000 Goodwill/client list 100,000 Total $135,000 Total $60,000 SHAREHOLDER OWES THE CORPORATION MONEY Under IRC 6901, the IRS can hold a shareholder liable for corporate taxes when the corporation transfers assets to the shareholder and liquidates or merges with federal taxes due. When the corporation is insolvent and there are neither loans to the shareholder nor transfer of assets to the shareholder, depending on state law, the IRS generally cannot attach liability to the shareholder except for unpaid payroll taxes. (IRC 6672) The Merriam v. Comm. (TCM 1995-432) case illustrates August 2013 16 Spidell Publishing, Inc.

that, depending on state law, the IRS can pierce the corporate veil when a shareholder/director has deemed shareholder loans worthless, as an excerpt from the case illustrates: Petitioner would have us believe that as a director she can cause a corporation to make loans to its shareholder of substantially all of its assets and then cause the corporation to liquidate, forgiving these loans without making arrangements for the payment of the claims of creditors. This is exactly the type of situation in which transferee liability, or secondary liability, is imposed upon a transferee. Unsecured creditors necessarily take the risk that a business may fail because of adverse economic conditions or unwise business decisions. However, they do not accept as a risk without remedy the possibility that a corporation will make substantial loans to its sole shareholder and formally forgive these loans in the corporation s plan of liquidation without making provisions for the payment of the corporation s debts. If a shareholder s debt is cancelled in connection with a complete liquidation, the amount of the cancelled debt is treated as part of the liquidating distribution to the shareholder. (Morris Alexander v. Commissioner (1973) 61 TC 278) LIABILITY OF DIRECTORS FOR IMPROPER DISTRIBUTION Directors who approve the distribution of assets without paying or adequately providing for all known liabilities excluding claims not filed within the time limit set by the court in Notice to Creditors are jointly and severely liable to the corporation for all creditors entitled to sue. They are also subject to criminal liability by approving unlawful distribution. WALKING AWAY FROM AN LLC We are often asked if the Ralite decision can be applied to an LLC where the member walked away. The answer is: possibly, probably, and maybe! Although there are no cases on this point, it would seem that because the LLC has limited liability like a corporation, Ralite may apply. OTHER STATE TAX ISSUES SALES AND USE TAX Although a corporation has dissolved, the liability remains for sales tax received in the normal course of business. The liability belongs to the corporation and any officer or other person having control or supervision or who is charged with responsibility for the filing of the returns, until the returns are approved by audit or the statute of limitations expires. The liability includes unpaid tax, interest, and penalties. Whether the sale of corporate tangible personal property is taxable in connection with its liquidation depends on whether the sale is a qualifying occasional sale. The sale will be an occasional if: The assets were not used in a business that required a seller s permit; and The sale of the assets are themselves not part of a series of sales sufficient in number, scope, and character to require the holding of a seller s permit. Generally, the minimum number of sales to require the holding of a seller s permit by a person not otherwise engaged in a selling activity is three within any 12-month period. (18 Cal. Code Regs. 1595) August 2013 17 Spidell Publishing, Inc.

When a corporation is engaged in multiple businesses, tax applies to any part of the business engaged in a business requiring a seller s permit. For example, operators of service enterprises may make some sales incidental to their primary service business. A theatre, for example, may sell popcorn to patrons. If the assets of such a business are sold, tax applies only to the gross receipts from the sale of assets held or used in the selling activity. The sale of stock in a corporation is not a sale of tangible personal property and is not subject to sales tax even if the transfer is treated as an asset acquisition under IRC 338. A distribution of assets, including corporate tangible personal property, by a corporation upon its dissolution to its shareholders in accordance with their ownership interests is a liquidation and is not a sale when no consideration is given other than the shareholders return of their stock certificates for cancellation. The shareholders subsequent sale of assets would be an exempt occasional sale if the shareholder and the sale itself meet the criteria for occasional sales. The corporation is required to pay use tax under R&TC 6094 on transfers of property purchased tax-free for resale to a shareholder as a liquidating dividend and the shareholder does not in turn hold the property for resale in his regular course of business. The corporation must file with the Form BOE-65, Notice of Close Out for Seller s Permit, and file a final sales tax return. The BOE recommends the use of a certified check or money order when making final payment to expedite closing the sales tax account. Beginning January 1, 2009, there is a specific statute of limitations period for issuing deficiency determinations against corporate officers and other responsible persons liable for unpaid California sales and use taxes of a terminated business. (R&TC 6829) Instead of using the general statute of limitations rules, the new law requires the BOE to mail deficiency determinations to corporate officers and other responsible persons within the earlier of: Three years after the last day of the calendar month following the quarterly period in which the BOE obtains actual knowledge, through its audit or compliance activities or written communication by the business or its representative, of the termination, dissolution, or abandonment of the entity; or Eight years after the last day of the calendar month following the quarterly period in which the entity was terminated, dissolved, or abandoned. If the business files a Notice of Termination, Notice of Dissolution, or Notice of Abandonment of the entity with a state or local agency other than the BOE, that filing does not constitute actual knowledge by the BOE under this statute. PAYROLL TAXES Any officer, majority shareholder, or other person having charge of the corporation s affairs is liable for the payroll contributions, withholdings, penalties, and interest due, even though the corporation has dissolved. The EDD enforces criminal provisions for payroll tax requirements. The intentional failure to withhold, collect, truthfully account for, and pay any tax required to be withheld is a felony punishable by a fine of up to $20,000 and state imprisonment. (Civil Code 2118.5) Unintentional or accidental failure to withhold or pay is a misdemeanor and is punishable by a $1,000 fine and imprisonment not to exceed one year. (Civil Code 2118) All California employers are required to provide information about unemployment benefits to workers who have become unemployed. Employers can meet this requirement by providing terminated employees with EDD Publication DE 2320, For Your Benefit California s Programs for the Unemployed. August 2013 18 Spidell Publishing, Inc.

California employers with 100 or more employees must also comply with the WARN Act and provide affected employees with at least 60 days advance notice of any plant closing or mass layoff. For more information on the WARN Act, visit: Web site www.edd.ca.gov REAL PROPERTY TAXES The removal of real property from the corporation may change the basis of the property for real property tax. Proposition 103 (Article XIIIA of the California Constitution) allows the County Assessor to revalue the property upon change of ownership. However, there is an exception. If the proportional interest in the real property remains the same as proportional interest in the stock of the corporation, prepare and file a Form 62, Claim for Change of Ownership Exclusion. If the County Assessor does not have this form and the Assessor s Office attempts to revalue the property, write and explain that R&TC 62 allows for this exclusion. The exception only applies if the resultant beneficial ownership is identical to pre-liquidation ownership. However, if one shareholder receives property, and another receives cash and other assets, this is considered a sale and reassessment is applicable. SUSPENSIONS AND REVIVORS Both domestic corporations and domestic LLCs can be suspended by either the FTB or the SOS. In the case of foreign corporations and foreign LLCs, forfeitures apply. Suspensions and forfeitures occur by: The SOS for failure to file the required Statement of Information, along with the filing fee; and/or The FTB for failure to file a tax return and/or failure to pay taxes, penalties, fees (collection, filing enforcement, lien, or sheriff), or interest. Failure to file a Statement of Information with the SOS will also result in a $250 penalty, which is billed by the FTB. (Corp. Code 17651) The FTB will impose penalties for late returns, taxes, and fees (Corp. Code 17651, 17653; R&TC 19141), and will impose a $2,000 penalty whenever any nonfiling foreign corporation fails to register with the SOS. (R&TC 19135) If the business entity has failed to filed a Statement of Information during the preceding 24 months and has been assessed the $250 penalty for the same period, the SOS will then mail a Notice of Pending Suspension/Forfeiture to inform the business entity that if it fails to file a Statement of Information, its powers, rights, and privileges will be suspended after 60 days from the date of the notice. CONTINUING TO CONDUCT BUSINESS If a corporation or LLC continues to do business or receives income after it is suspended or forfeited, it is still required to file tax returns. (R&TC 23303) August 2013 19 Spidell Publishing, Inc.

Effect of suspensions Corporations and LLCs that are suspended or forfeited lose their powers, rights, and privileges. A suspended or forfeited corporation or LLC cannot: Transact its business and carry on its operations; Protect and preserve the entity s name; Sue, be sued, complain and defend any action, arbitration, or judicial or administrative proceeding; Adopt, use, or alter a company seal; Make contracts and guarantees, incur liabilities, act as surety, and borrow money; Sell, lease, exchange, transfer, convey, mortgage, pledge, and otherwise dispose of all or any part of its property and assets; Purchase, take, receive, lease, or otherwise acquire, own, hold, improve, use, or otherwise deal in and with any interest in real or personal property; Lend money to and otherwise assist its members and employees; Issue notes, bonds, and other obligations and secure any of them by mortgage or deed of trust or security interest of any or all of its assets; Purchase, take, receive, subscribe for, or otherwise acquire, own, hold, vote, use, employ, sell, mortgage, loan, pledge, or otherwise dispose of and otherwise use and deal in and with stock or other interests in and obligations of any person, or direct or indirect U.S. or other government obligations; Invest its surplus funds, lend money in any manner that may enable it to carry on the operations or fulfill the purposes set forth in its Articles of Organization, and take and hold real property and personal property as security for the payment of funds so loaned or invested; Be a promoter, stockholder, partner, member, manager, associate, or agent of any person; Indemnify or hold harmless any person; Purchase and maintain insurance; Issue, purchase, redeem, receive, take, or otherwise acquire, own, hold, sell, lend, exchange, transfer, or otherwise dispose of, pledge, use, and otherwise deal in and with its own bonds, debentures, and other securities; Pay pensions and establish and carry out pension, profit-sharing, bonus, etc., plans for all or any of the current or former members, managers, officers, or employees or any of its subsidiary or affiliated entities, or to indemnify and purchase and maintain insurance on behalf of any fiduciary of such plans, trusts, or provisions; Make donations, regardless of specific benefit to the entity, to the public welfare or for community, civic, religious, charitable, scientific, literary, educational, or similar purposes; Make payments or donations that further the entity s business; Pay compensation to any or all managers, officers, members, and employees for services; Insure for its benefit the life of any of its members, managers, officers, or employees, insure the life of any member for the purpose of acquiring at his or her death the interest owned by such member, and continue such insurance after the relationship terminates; or Do any other acts that promote and attain the purposes set forth in its Articles of Organization. (Corp. Code 207, 15901.05, 17003) In addition, a suspended or forfeited corporation or LLC cannot: Be granted an extension of time to file; File a claim for refund or amended return; File or maintain an appeal before the BOE; or Begin or continue to protest an assessment. August 2013 20 Spidell Publishing, Inc.

What a suspended corporation or LLC may do Corporations or LLCs may legally take these actions while suspended or forfeited: Apply for revivor; Pay any balance due; File delinquent returns to revive; Amend their Articles of Incorporation (corporations) or Article of Organization (LLCs) to change their name; Apply for exempt status; or Amend their Articles of Incorporation (corporations) or Article of Organization (LLCs) to perfect their exempt application. THE REVIVOR PROCESS The revivor process is fairly straightforward, and reviving is the only way to bring the business back to life. If your client has been suspended and wants to revive, you may need to contact both the FTB and the SOS to determine what triggered the suspension. For example, did the client fail to file a return, pay a tax, file a Statement of Information, or all these? SOS REVIVORS If your client was suspended or forfeited by the SOS because of a delinquent Statement of Information, then you may revive the entity by filing the delinquent Statement of Information and paying the $20 filing fee and $250 penalty, along with interest. FTB REVIVORS If your client was suspended or forfeited by the FTB, you may revive it by: Filing all delinquent tax returns; Paying all outstanding taxes, penalties, interest, and fees; and Filing with the FTB Form FTB 3557 LLC or Form FTB 3557 BC, Application for Certificate of Revivor. FTB AND SOS REVIVORS If your client was suspended or forfeited by both the FTB and the SOS, the entity should first file a current Statement of Information with the SOS, and get a letter of proposed relief from suspension or forfeiture from the SOS to give to the FTB. Once this is completed, follow the instructions above for reviving the business entity with the FTB. For information on reviving an LLC or a corporation, go to the SOS website at: Website www.sos.ca.gov/business/be/faqs.htm August 2013 21 Spidell Publishing, Inc.

CONTRACT VOIDABILITY If a taxpayer fails to file or pay any balance due to the FTB within 60 days after the FTB mails a written demand, any contract made in California by the taxpayer during the period beginning at the end of the 60-day demand period and ending on the date the FTB grants relief, or the date the taxpayer qualifies to do business in California, whichever is earlier, is voidable at the instance of any party to the contract other than the taxpayer. (R&TC 23304.1) Contract voidability does not apply to entities that are suspended solely by the SOS. The FTB also assesses a $2,000 per taxable year penalty against suspended domestic corporations doing business and failing to file a tax return. (R&TC 19135) REQUESTING RELIEF While the procedure for relief is simple, there are timing concerns. There are also additional penalties to pay to obtain relief. 1. You must complete all steps prior to requesting a Certificate of Revivor, including filing delinquent returns and paying taxes, penalties, and interest. 2. In addition to the application for a Certificate of Revivor, the suspended corporation must complete Form FTB 2518, Application for Relief from Contract Voidability. 3. The FTB imposes additional penalties for contract voidability relief. The amount of the penalty is the lesser of: The amount of the California corporate taxes due as shown on the tax returns for those years for which relief is requested; or $100 for each and every day during the period for which contract voidability relief is granted. (R&TC 23305.1(b)) If a taxpayer concurrently requests both a revivor and contract voidability relief, the taxpayer may designate the earliest year for which relief is requested; the above-mentioned penalties will be limited to the tax returns for that year and later years. Conversely, if the corporation first files for revivor and subsequently requests contract voidability, the FTB will grant relief for all years and the corporation must pay these penalties on all years beginning with the earliest year of suspension. When filing the application with penalties, use the following address: Address Franchise Tax Board P.O. Box 942857 Sacramento, CA 94257-0500 The process usually requires several weeks. If special circumstances necessitate a one-day turnaround (i.e., a lawsuit, a federal grant, or other circumstance), you may present the application to a district office in Sacramento, Los Angeles, or Santa Ana with a request for immediate relief and the reason for a faster response. If approved, the FTB will generally issue the certificate the next business day. August 2013 22 Spidell Publishing, Inc.

Example of relief requests Late Slide, Inc. was suspended for failure to file returns since 2009. Late Slide s 2010, 2011, and 2012 calendar-year returns each show only a minimum franchise tax due of $800. To obtain a revivor, Late Slide must pay the minimum franchise tax for each of the three years, in addition to penalties and interest. To obtain contract voidability relief, Late Side must file the Application for Relief from Contract Voidability at the same time as requesting a revivor. By sending the requests together, Late Slide may designate only the 2010 year for contract voidability relief, thereby limiting the R&TC 23305.1 penalty to $800. However, if contract voidability is requested after the Certificate of Revivor is filed, relief from contract voidability must cover all prior suspension years and the penalty will be imposed on all years, for a total due of $2,400. Helping your corporate client fix a suspension with a Certificate of Revivor is only a partial cure. You should always concurrently consider an Application for Relief from Contract Voidability. REVIVING A DOMESTIC LIMITED PARTNERSHIP Domestic LPs may revive a cancellation. (Corp. Code 15902.09) Domestic LPs with an SOS file status other than canceled are not eligible for revival. WHEN TO REVIVE A canceled LP may want to revive when the LP: Formally canceled with the SOS, and then found an asset that it needs to liquidate or found other affairs that need winding up; or Formally canceled with the SOS, but no longer wants to be canceled. Note: If an LP is canceled, all contracts the entity has entered into become voidable. Once the LP is revived, the contracts are enforceable again. A technical termination under IRC 708(b)(1), to which California conforms, or a fixed date of termination in a partnership agreement that has past, does not cancel an LP for purposes of reviving it. Those rules relate to terminations for tax purposes, not for legal purposes. Example of revival Basketball Madness registered with the SOS as an LP on January 2, 2011, and formally dissolved on August 1, 2012. In October 2012, one of the general partners discovered real property (with four basketball courts) still in the name of the partnership. The partner revived the LP so there would be an authorized person to sign the deed upon the sale of the property. August 2013 23 Spidell Publishing, Inc.

For an LP to qualify for revival: WHICH LPs CAN REVIVE? One of the general partners listed on the Certificate of Limited Partnership at the time of cancellation must still be a general partner; and The LP must have canceled on or after January 1, 2008, pursuant to Corp. Code 15902.03 of ULPA 08. After revival, the LP and partners will have the same rights as if the Certificate of Limited Partnership had not been canceled. HOW TO REVIVE If qualified to be revived, requests for revival may be done by a creditor, partner, or other interested party. The requester must file Form LP-7, Limited Partnership Certificate of Revival, with the SOS, along with a $30 filing fee and written confirmation from the FTB that all returns have been filed and all taxes, penalties, fees, and interest have been paid to the FTB. (Corp. Code 15902.09(a)) August 2013 24 Spidell Publishing, Inc.

APPENDIX WALKING AWAY FROM A CORPORATION QUALIFIER Follow this checklist to see if the FTB can hold the shareholder liable for unpaid corporate and franchise taxes. Part I 1. Compensation taken from corporation: A. Cash... $ B. Fair market value of tangible personal property... C. Fair market value of real estate... D. Fair market value of inventory... E. Fair market value of accounts/notes payable... F. Face value of loans to shareholder... G. Fair market value of goodwill... H. Fair market value of other intangibles... I. Other compensation taken... J. Total compensation received by shareholder (Add lines A I)... $ 2. Consideration given by shareholder: A. Wages or other compensation paid... $ B. Loans from shareholder to corporation... C. Liabilities assumed by shareholder... D. Corporate expenses paid by shareholder... E. Other consideration... F. Capital stock at shareholder s cost... G. Total consideration given by shareholder (Add lines A F)... $ Part II If the answer to ALL of the following questions is YES, the FTB may hold the shareholder liable for corporate income or franchise taxes: Yes No 3. Is the total on Part I, line 1J greater than the amount in Part I, line 2G?... 4. At the time of the transfer and at the time the shareholder liability was asserted, was the corporation liable for the tax?... 5. Was the transfer made after liability for the tax was accrued, whether or not the tax was actually assessed at the time of the transfer?... 6. Was the corporation insolvent at the time of the transfer or the transfer left the corporation insolvent?... 7. Had the FTB exhausted all reasonable remedies against the corporation?... August 2013 Appendix 1 Spidell Publishing, Inc.

QUALIFYING THE SALE OF SMALL-BUSINESS STOCK FOR EXCLUSION Yes Yes Yes Was the stock issued for money, property other than stock, or as compensation for services other than underwriting to a non-corporate investor? Was the stock originally issued either directly or through an underwriter on or after August 10, 1993? Was the stock issued by a C corporation other than a DISC, former DISC, RIC, REIT, REMIC, or cooperative? No No No Yes Yes Yes Yes Is the corporation doing business in California? Did the corporation at all times on or after July 1, 1993, and before issuing the stock have assets totaling $50 million or less? Immediately after issuing the stock, did the corporation have assets totaling $50 million or less (taking into account the amounts received in the stock issuance)? Did the corporation use at least 80% of its assets in the active conduct of at least one trade or business? No No No No No Yes Was the corporation a specialized small-business investment company? No Yes Did the corporation have at least 80% of its total dollar value of payroll attributable to employment located within California? No Yes Was the corporation conducting a trade or business in a field other than: health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services or brokerage services, banking, insurance, financing, leasing, investing, farming, oil and gas extraction, or hotels, motels and restaurants? No Yes Yes Did 10% or less of the corporation s assets total value consist of real estate used in the active conduct of its trade or business, not including owning, dealing in, or renting real estate? Did 10% or less of the corporation s net worth consist of stock or securities, other than working capital, or a non-subsidiary corporation? No No The sale may qualify for exclusion under R&TC 18152.5. The sale does not qualify for exclusion under R&TC 18152.5. August 2013 Appendix 2 Spidell Publishing, Inc.

CORPORATE DISSOLUTION CHECKLIST FOR CALIFORNIA CORPORATIONS Note The Corporate Dissolution Checklist should be used by California domestic stock corporations that have 100% shareholder approval of the dissolution and an assumption of tax liability. Planning for Dissolution Tax effects on corporation and shareholder 1. Calculate federal/state tax on liquidation to the corporation as if the assets distributed to the shareholders were sold at fair market value. Assets distributed include the fair market value of goodwill and cash-basis accounts receivable. Date completed 2. Calculate federal/state tax on liquidation to shareholders as if stock were sold for fair market value of assets distributed to shareholder. Assets distributed include fair market, value of goodwill and cash-basis accounts receivable. Steps in filing for dissolution 3. Secure a copy of shareholders plan of liquidation. 4. File Form 966 with the IRS Service Center within 30 days of adoption of the plan of liquidation. Attach a copy of the plan of liquidation to the Form 966. 5. File the following documents with the Secretary of State of California: a. Certificate of Election to Wind Up and Dissolve (not necessary with 100% shareholder approval); and b. Certificate of Dissolution 6. Close up the business, pay or adequately provide for debts of the business and distribute any remaining assets to the shareholders. 7. File final payroll reports: a. Federal forms include: Form 940, Form 941, W2s, and W-3. b. California forms include: DE-6 and DE-7 (DE-9 for 2011 and later years). 8. File final sales tax reports (including the sale of any fixtures or equipment). (Form BT-401-AC2) 9. File Form 1099-DIV for distributions to shareholders and Form 1096. 10. File final state and federal corporate tax returns. August 2013 Appendix 3 Spidell Publishing, Inc.

GLOSSARY contract voidability: if a taxpayer fails to file or pay any balance due to the FTB within 60 days after the FTB mails a written demand, any contract made in California by the taxpayer during the period beginning at the end of the 60-day demand period and ending on the date the FTB grants relief, or the date the taxpayer qualifies to do business in California, whichever is earlier, is voidable at the instance of any party to the contract other than the taxpayer dissolution: dissolution is the last stage of liquidation, the process by which a company (or part of a company) is brought to an end, and the assets and property of the company redistributed domestic stock corporation: a for-profit U.S. corporation which the ownership of the corporation is expressed by shares of stock forfeited corporation: the business entity's powers, rights and privileges were suspended or forfeited in California 1) by the Franchise Tax Board for failure to file a return and/or failure to pay taxes, penalties, or interest; and/or 2) by the Secretary of State for failure to file the required Statement of Information and, if applicable, the required Statement by Common Interest Development Association. Information regarding the type of suspension can be obtained by ordering a status report liquidation: the process by which a company (or part of a company) is brought to an end, and the assets and property of the company redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation minimum franchise tax: the amount a corporation must pay the first quarter of each accounting period whether the corporation is active, operates at a loss, or does not do business. The current minimum tax is $800 suspended corporation: the business entity's powers, rights and privileges were suspended or forfeited in California 1) by the Franchise Tax Board for failure to file a return and/or failure to pay taxes, penalties, or interest; and/or 2) by the Secretary of State for failure to file the required Statement of Information and, if applicable, the required Statement by Common Interest Development Association. Information regarding the type of suspension can be obtained by ordering a status report August 2013 Spidell Publishing, Inc.

C Cash-basis corporation... 8 Contract voidability... 22 D Date of dissolution... 5 Domestic nonprofit corporations... 10 Domestic stock corporations... 1, 9 E Earned income... 8 F Final return... 4, 12 Foreign corporation...9, 11, 12 FTB revivors... 21 Full and adequate consideration... 14, 15 I Improper distribution... 17 Installment sales... 8 L Liability of directors... 17 Liability of shareholders... 6 LLC... 17 M Minimum franchise tax... 4, 6, 9 N Nonprofit corporations... 11, 12 INDEX Nonprofit dissolutions... 7 O Out-of-state corporations... 9 P Payroll taxes... 18 Problem dissolutions... 8 R Ralite... 7, 13 Real property taxes... 19 Revivor process... 21 S S corporations... 8 Sales and use tax... 17 Shareholder liability... 13, 16 Sole proprietors... 15 SOS revivors... 21 Suspended corporation... 2, 8 Suspensions... 19, 20 T Tax liabilities... 7 W Walking away... 12 Walking away from an LLC... 17 Worthless stock... 13 August 2013 Spidell Publishing, Inc.

NEW from Get the most practical CPE without leaving your office. LLC: Current Issues Presented by: Lynn Freer, EA and Debra Petersen, CPA, JD, LL.M. EARLY BIRD SPECIAL! Save $20 through August 1! Wednesday, September 4, from noon to 2:00 p.m. Pacific Time Or order on-demand and watch anytime With this 2-hour webinar, you will: Beware of the new $2,000 penalty Learn about the new foreign LLC doing business case See how to bring the LLC into compliance with California s law Understand tax issues of forming and dissolving an LLC See how and when to check the box to be taxed as a corporation See why and when the LLC is the best choice of entity Review computation of the LLC fee Find out how self-employment tax is computed for nonmanaging members About the presenters: Lynn Freer, EA Lynn Ms. California Tax Freer is President of Spidell Publishing, Inc. She works closely with all state tax agencies and is often consulted for input on policy decisions. She always has the inside information on what s happening at the state level because she devotes herself full-time to analyzing, writing about, and teaching California tax law and procedures. Lynn speaks at Spidell s annual Federal and California Tax Update Seminars as well as many other seminars. Debra Petersen, CPA, JD, LL.M. Debra, founder of Petersen Law, specializes in tax and estate planning and is an adjunct professor with the University of Pacific s McGeorge School of Law. Debra worked for the California Franchise Tax Board for 18 years, and prior to that she worked for Arthur Andersen & Co. and Coopers & Lybrand. Add CPE for only $19 per additional attendee Spidell Publishing, Inc. is registered with the National Association of State Boards of Accountancy (NASBA), as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN, 37219-2417. Web Site: www.nasba.org. This webinar is designed to meet the requirements for 2 hours of continuing education for the California Board of Accountancy. Intermediate Level. Field of Study: Taxation. Delivery method: Group Internet-Based. For more information regarding administrative policies, such as complaints or refunds, contact Spidell Publishing at (714) 776-7850. Basic knowledge of LLCs is required. P.O. Box 61044 Anaheim, CA 92803-6144 E-mail: webinars@spidell.com Phone: (714) 776-7850 Fax: (714) 776-9906 website: caltax.com

NEW from LLC: Current Issues Presented by: Lynn Freer, EA and Debra Petersen, CPA, JD, LL.M. Wednesday, September 4, from noon to 2:00 p.m. Pacific Time Or order on-demand and watch anytime EARLY BIRD SPECIAL! Save $20 through August 1! $179 $159 webinar includes: Additional CPE Cost: $19 per attendee This webinar is designed to meet the requirements for the specified number of hours of continuing education. This webinar has been designed to meet the requirements of the IRS Return Preparer Office; including sections 10.6 and 10.9 of Department of Treasury s Circular No. 230 (Provider No. CRA7E); the California State Board of Accountancy; the California Bar Association; and the California Tax Education Council. This does not constitute an endorsement by these groups. The state boards of accountancy have final authority on the acceptance of individual courses for CPE credit. For more information regarding administrative policies such as complaints or refunds, contact Spidell Publishing at 714-776-7850. There are no prerequisites required. A listing of additional requirements to renew tax preparer registration may be obtained by contacting CTEC at P.O. Box 2890, Sacramento, CA 95812-2890, or by phone at 877-850-2832, or on the internet at www.ctec.org. # Unlimited number of people may watch and listen on one computer and print course outline This webinar includes CPE for one attendee: 2 hours for CPAs, 2 federal tax hours for EAs and CRTPs, and 1.75 hours of General MCLE for California Attorneys Reference manual and PDF of PowerPoint slides You must have computer speakers to listen to this webinar. Fill out and fax to (714) 776-9906 today! LLC: Current Issues # LLC: Current Issues... $179.00 $159.00* G Live: Wednesday, September 4, from noon to 2:00 p.m. Pacific Time* G On-Demand (Available September 11, 2013): Watch it anytime! CPE @ $19 per additional attendee per webinar QTY: This course qualifies for up to 2 hours of CPE for one attendee. TOTAL $ G Payment enclosed. Check # G Charge my: G MC G Visa G AmEx G Discover Name Company Name Card Number Address City/State/ZIP Billing ZIP Exp. Date Security Code Phone Fax Signature E-mail *Discount expires August 1, 2013. No refunds will be given after noon on September 3, 2013. (CPE available for $19 per additional attendee) source code: WEB13 Additional Attendee CPE Information: We need your professional license/registration number(s) for continuing education credit. CPA No. PA No. PTIN EA No. CTEC No. CA Bar No. Name E-mail address License/Registration number Register by fax (714) 776-9906 or phone (714) 776-7850 Register by mail P.O. Box 61044 Anaheim, CA 92803-6144 Register online www.caltax.com

Get the most practical CPE without leaving your office. How and When to File a Combined Report Presented by: Debra Petersen, CPA, JD, LL.M. Thursday, September 19 Noon to 2:00 p.m. Pacific Time Or order on-demand and watch anytime With this 2-hour webinar, you will: Understand the unitary method See who can file a combined report Understand the difference between a consolidated return and a combined report Review the combined report mechanics (the steps to prepare a combined report) Learn the rules for making the election to file a group return Find out about how NOLs and credits work for combined reports and consolidated returns Review new definitions of doing business About the presenter: Debra Petersen, CPA, JD, LL.M. Debra, founder of Petersen Law, specializes in tax and estate planning and is an adjunct professor with the University of Pacific s McGeorge School of Law. Debra worked for the California Franchise Tax Board for 18 years, and prior to that, worked for Arthur Andersen & Co. and Coopers & Lybrand. Add CPE for only $19 per additional attendee Spidell Publishing, Inc. is registered with the National Association of State Boards of Accountancy (NASBA), as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN, 37219-2417. Web Site: www.nasba.org. This webinar is designed to meet the requirements for 2 hours of continuing education for the California Board of Accountancy. Basic Level. Field of Study: Taxation. Delivery method: Group Internet-Based. For more information regarding administrative policies, such as complaints or refunds, contact Spidell Publishing at (714) 776-7850. There are no prerequisites or advanced preparation required. P.O. Box 61044 Anaheim, CA 92803-6144 E-mail: webinars@spidell.com Phone: (714) 776-7850 Fax: (714) 776-9906 website: caltax.com

$259 Webinar features: How and When to File a Combined Report Presented by: Debra Petersen, CPA, JD, LL.M. Thursday, September 19 Noon to 2:00 p.m. Pacific Time Or order on-demand and watch anytime Unlimited number of people may watch and listen on one computer and print course outline This webinar includes CPE for one attendee: 2 hours for CPAs/PAs, 2 federal tax hours for EAs and CRTPs, and 1.5 hours of General MCLE credit for CA Attorneys Reference manual and PDF of PowerPoint slides You must have computer speakers to listen to this webinar. Additional CPE Cost: $19 per attendee This webinar is designed to meet the requirements for the specified number of hours of continuing education. This webinar has been designed to meet the requirements of the IRS Return Preparer Office; including sections 10.6 and 10.9 of Department of Treasury s Circular No. 230 (Provider No. CRA7E); the California State Board of Accountancy; the California Bar Association; and the California Tax Education Council. This does not constitute an endorsement by these groups. The state boards of accountancy have final authority on the acceptance of individual courses for CPE credit. For more information regarding administrative policies such as complaints or refunds, contact Spidell Publishing at 714-776-7850. There are no prerequisites required. A listing of additional requirements to renew tax preparer registration may be obtained by contacting CTEC at P.O. Box 2890, Sacramento, CA 95812-2890, or by phone at 877-850-2832, or on the internet at www.ctec.org. # Fill out and fax to (714) 776-9906 today! How and When to File a Combined Report # How and When to File a Combined Report... $259.00 G Live: Thursday, September 19 from noon to 2:00 p.m. Pacific Time* G On-Demand (available September 26): Watch it anytime! CPE @ $19 per additional attendee per webinar QTY: This course qualifies for up to 2 hours of CPE for one attendee. TOTAL $ G Payment enclosed. Check # G Charge my: G MC G Visa G AmEx G Discover Name Company Name Card Number Address City/State/ZIP Billing ZIP Exp. Date Security Code Phone Fax Signature E-mail *No refunds will be given after noon on September 18, 2013. (CPE available for $19 per additional attendee) We need your professional license/registration number(s) for continuing education credit. CPA No. EA No. CRTP No. source code: WEB13 CA Bar No. PTIN Additional Attendee CPE Information: Name E-mail address License/Registration number Register by fax (714) 776-9906 or phone (714) 776-7850 Register by mail P.O. Box 61044 Anaheim, CA 92803-6144 Register online www.caltax.com