In our July 2012, Ask the Advocate article, we addressed the penalty ($2,000 per tax year) that we can assess a suspended or forfeited corporations doing business in California, and in our Big Business article we addressed how a suspended or forfeited business entity can accumulate a substantial amount of tax, penalties, fees, and interest.But did you know a suspended or forfeited business entity is at risk of having their contracts voided?
Suspended/Forfeited Business Entities Contract Voidability
Under California law (R&TC Section 23304.1) every contract made in this state by a taxpayer during the time that the taxpayer’s corporation powers, rights, and privileges are suspended or forfeited can be voided by any party to the contract other than the taxpayer, including but not limited to any sale, transfer, or exchange of real property in California.
But did you know a business entity does not need to be suspended or forfeited to be at risk of having their contracts voided?
Foreign Business Entities Contract Voidability
Foreign corporations (including limited liability companies (LLCs) classified/taxed as corporations) that have not qualified to do business in California with California’s Secretary of State (SOS) and failed to file a return with us are also at risk of having their contracts voided.
Foreign Business Entities Public Record — Failure to Comply
Any contracts made by a foreign corporation, or taxpayer treated as a corporation, that is not qualified to do business in California that fails to file a return or to pay any tax owed within 60 days of our demand, may be voided at the instance of any party to the contract, except the taxpayer. When such taxpayers fail to comply with our demand, the taxpayer's contract voidability status becomes a public record which may be obtained upon request to us, as specified in R&TC Section 23304.1(d).
Purchasing Relief is an Option
The law does allow us (FTB) to give a taxpayer who makes an application and pays the daily penalty relief from the voidability provisions of R&TC Section 23304.1, in most cases.
The facts and circumstances of each taxpayer need to be considered to determine:
- If relief can be granted.
- The period to be covered by the relief.
- The amount of daily penalty that must be paid.
Generally, relief can be granted to corporation taxpayers, including limited liability companies (LLC) that are taxed as corporations and taxpayers that have an approved voluntary disclosure agreement. LLCs, foreign or domestic, that are registered with the SOS can request relief. Relief can only be granted if the contract has not already been rescinded by a final court order.
In addition to filing all required returns and paying all taxes due, a taxpayer wishing to obtain contract voidability relief must filed an application with us and pay a penalty of $100 per day (maximum penalty not to exceed the tax owed for each tax year). The taxpayer’s application for relief needs to specify the period for which relief is being requested.
The period for relief must begin on the first day of a tax period in which contract voidability relief is sought and ends on the date that relief is granted. However, if the taxpayer requests relief after a certificate of revivor has been issued, the period for relief will begin on the date the taxpayer’s powers, rights, and privileges were suspended or forfeited.
We will not issue a certificate of relief if we determine Section 23304.1 contract voidability provisions do not apply.
Once we have granted relief from voidability, we will issue a certificate certifying the relief period. The fact that a certificate of relief from voidability was issued and information contained on our certificate of relief is subject to public disclosure upon request to us. The taxpayer can have the certificate recorded in the office of the county recorder of any California county.
“Foreign” refers to any business entity’s whose legal existence is formed or organized in any jurisdiction (state or country) other than California.
The voidability provisions of R&TC Section 23304.1 do apply to foreign LLC classified/taxed under California’s Personal Income Tax laws when registered with the SOS.
FTB 2519, Certificate of Relief from Contract Voidability.