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Shareholder Liability for Minimum Corporate Franchise Tax in California

An often asked question in California is whether a shareholder is liable for the minimum franchise tax that is unpaid on a corporation if the corporation is suspended. I believe it is clear that a shareholder is liable for the tax if they dissolve the corporation and take responsibility for all unpaid debts of the corporation. However, this is not always the case if a shareholder does not dissolve the corporation and allows it to go into a suspended status.

The Franchise Tax Board conceeded in the Ralite Lamp Corporation case taht there was no law that allowed it to pierce the corporate veil and hold shareholders liable because the shareholders did not expressly assume the liabilities of Ralite. The Board stated taht 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.

That means that the FTB would have to prove the following elements to find transferee liability in equity against the taxpayer: 1) The taxpayer-transferor transferred property to the transferee for less than full and adequate consideration; 2) at the time of the transfer and at the time transferee liability is asserted, the taxpayer-transferror was liable for the tax; 3) the transfer was made after liability for the tax accrued, whether or not the tax was actually assessed at the time of the transfer; 4) the taxpayer-transferror was insolvent at the time of the transfer or the transfer left the taxpayer - transferror insolvent; and 5) respondent has exhausted all reasonable remedies against the taxpayer-transferor.

To avoid the possibility of transferee liability the taxpayer just needs to supply the FTB some documents that voids even just one of the five elements listed above. You will need to do this when the FTB calls you and tries to make you personally liable for the debt.

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