How Do I Resolve a California Franchise Tax Board Suspension or Forfeiture?
Corporations and limited liability companies must pay an annual tax for the privilege of doing business in California.[1] If a corporation or limited liability company fails to pay its annual tax or fails to file a tax return, then its corporate powers, rights, and privileges may be suspended or forfeited when the failure is reported by the California Franchise Tax Board.[2] The suspended or forfeited powers cover essentially all of the entity’s ability to function, including transacting business, making contracts, suing and being sued, and buying or selling real or personal property.[3] If a business nonetheless makes a contract during the period when its powers, rights, and privileges are suspended or forfeited, then the other party to the contract may bring suit to have the contract declared voidable and rescinded by a court.[4]
Any business taxpayer that has suffered the suspension or forfeiture of its corporate powers, rights, and privileges may be reinstated to good standing, or “revived,” by (1) filing an application for a certificate of revivor with the Franchise Tax Board, (2) filing all required tax returns, and (3) paying the tax that is due, together with additions to tax, penalties, and interest.[5] An application for revivor is made on Form FTB 3557 BC for a corporation and Form FTB 3557 LLC for a limited liability company.[6] Because the business entity’s corporate powers, rights, and privileges have already been suspended, the application must be filed by an individual or individuals, such as a stockholder or creditor, acting on behalf of the entity.[7] An entity is reinstated when the Franchise Tax Board grants the application and issues a certificate of revivor.[8]
Notwithstanding the general requirement that all outstanding taxes, penalties, and interest be paid, the Franchise Tax Board may reinstate an entity to good standing without full payment of the taxes, penalties, and interest due if the Board determines that doing so will “improve the prospects for collection of the full amount due” from the entity.[9] The Franchise Tax Board may limit such a revivor as to (1) time or (2) the functions the revived corporation can perform, or both, and the entity’s powers, rights, and privileges may again be suspended or forfeited if the Board determines that the prospects for collection of the full amount due have not been improved by the entity’s revivor.[10]
Upon the issuance of the certificate of revivor by the Franchise Tax Board, the taxpayer “shall become reinstated but the reinstatement shall be without prejudice to any action, defense or right which has accrued by reason of the original suspension or forfeiture.”[11] In most situations, the reinstatement is given retroactive effect so as to “validate otherwise invalid prior action.”[12] This rule applies to matters occurring both before and after judgment, such as the filing of a notice of appeal while the entity was suspended.[13] There is, however, an important exception as to the statute of limitations, which is considered a substantive defense that, if it accrued by its running during the period of the entity’s suspension, “cannot be prejudiced by revival of the suspended corporation.”[14] In other words, if the entity had an otherwise viable cause of action but the statute of limitations ran while its powers, rights, and privileges were suspended or forfeited, then the claim is gone forever.
[1]See Cal. Rev. & Tax. Code §§ 17941 (limited liability companies), 23151 (corporations).
[2]See id. §§ 23301, 23301.5, 23302, 23375.
[3]See Cal. Corp. Code §§ 207 (corporations), 17701.05 (limited liability companies); Cal. Rev. Tax Code § 23302(d) (specifically providing that, without limiting any of the other consequences of forfeiture or suspension, a taxpayer whose powers, rights, and privileges are forfeited or suspended “shall not be entitled to sell, transfer, or exchange real property in California during the period of forfeiture or suspension“); Bourhis v. Lord, 56 Cal. 4th 320, 324, 295 P.3d 895, 897 (2013) (“A corporation may not prosecute or defend an action, nor appeal from an adverse judgment in an action while its corporate rights are suspended for failure to pay taxes.” (internal quotation marks omitted)).
[4]See Cal. Rev. & Tax. Code §§ 23304.1 , 23304.5; Rubinstein v. Fakheri, 49 Cal. App. 5th 797, 805-06, 263 Cal. Rptr. 3d 344, 350 (2020), review denied (Aug. 12, 2020); Performance Plastering v. Richmond Am. Homes of Cal., Inc., 153 Cal. App. 4th 659, 669, 63 Cal. Rptr. 3d 537, 545 (2007). The court may not order the contract rescinded “unless the taxpayer is allowed a reasonable opportunity to cure the voidability” by applying to the Franchise Tax Board for such relief. Cal. Rev. & Tax. Code §§ 23304.5, 23305.1. In addition, rescission may not be ordered “unless the taxpayer receives full restitution of the benefits provided by the taxpayer under the contract” to the other party. Id. § 23304.5.
[5]See Cal. Rev. & Tax. Code § 23305.
[6]See Franchise Tax Board, My business is suspended: Revive my business.
[7]See Cal. Rev. & Tax. Code § 23305 (“Application for the certificate on behalf of any taxpayer which has suffered suspension or forfeiture may be made by any stockholder or creditor, by a majority of the surviving trustees or directors thereof, by an officer, or by any other person who has interest in the relief from suspension or forfeiture.”).
[9]Id. § 23305b; see also Bozzio v. EMI Grp. Ltd., 811 F.3d 1144, 1154 (9th Cir. 2016) (discussing this provision).
[10]Cal. Rev. & Tax. Code § 23305b.
[11]Id. § 23305a.
[12]Bourhis, 56 Cal. 4th at 324, 295 P.3d at 897 (quoting Peacock Hill Ass’n v. Peacock Lagoon Constr. Co., 8 Cal. 3d 369, 371, 503 P.2d 285, 286 (1972) (in bank) (the purpose of the statutory scheme is “to put pressure on the delinquent corporation to pay its taxes, and that purpose is satisfied by a rule which views a corporation’s tax delinquencies, after correction, as mere irregularities”)).
[13]Id. at 325, 295 P.3d at 898; see also Schwartz v. Magyar House, Inc., 168 Cal. App. 2d 182, 187-88, 335 P.2d 487, 490 (1959) (a corporate defendant that is not permitted to defend an action may move for a continuance so that it may be reinstated and thereafter participate in the trial).
[14]Bourhis, 56 Cal. 4th at 328, 295 P.3d at 900.