The California Franchise Tax Board can dissolve inactive companies and forgive their delinquent taxes under legislation signed by Gov. Jerry Brown (D).
A.B. 2503 gives the board the ability to formally dissolve domestic corporations and limited liability companies that have ceased operating in the state for at least 60 continuous months. The process would also abate “the corporation’s liabilities for qualified taxes, interest and penalties accrued while it was not doing business,” according to an August 18 legislative analysis of the bill.
The legislation is intended to allow the tax board to more easily eliminate entities that weren’t formally dissolved after ceasing to operate in the state. Those companies remain on the FTB’s books, and thus continue to accumulate liability for the state’s minimum franchise tax, as well as penalties and interest for nonpayment of that tax liability, even though they have no actual activity or assets in the state.
“Years may pass before its owners become aware that tax, interest, and penalties have been accruing,” according to the analysis. “At that point, dissolution may be financially disadvantageous, and the taxpayers may simply opt to let the entity remain moribund,” making A.B. 2503 a means by which the tax board can clear away its backlogs of inactive domestic corporations and LLCs.
The bill was approved 77 to 0 by the State Assembly on May 29, and by a 39–0 vote in the Senate on August 24. It was signed into law September 22. The bill was backed by the FTB and the California Society of Enrolled Agents (CSEA), as well as business groups such as the California Chamber of Commerce. The FTB’s support was due to its desire to avoid wasting resources tracking numerous defunct companies, according to spokesman Chris Smith.
“The enactment of A.B. 2503 enables the Franchise Tax Board to efficiently direct departmental staff away from non-value-added activities to work that more efficiently achieves the mission of the department,” Smith told Tax Notes September 25.
Under the bill, company owners who want to challenge the FTB's dissolution of an inactive company can file an objection; pay any accrued taxes, penalties, and interest; and move to revive the company. Alternatively, owners of an inactive company can request the tax board to abate all taxes the company accrued during the inactive period, as well as the related penalties and interest, on condition that the inactive company then be dissolved.
A.B. 2503 doesn’t forgive companies any delinquent taxes and penalties they owe from before they ceased operating in the state. It also imposes a penalty on a company that was dissolved and had its taxes abated, but continued to operate in California, specifically by restoring the companies’ previously abated taxes, interest, and penalties, and imposing an additional penalty worth 50 percent of that liability, plus interest.
According to Jenny Wettemann, chair of the CSEA’s Legislative Affairs Committee, inactive corporations are “a long-standing problem” caused by taxpayers forming business entities and failing to properly close them, “either because the entity was never launched or because they have closed the entity and filed final returns with the Franchise Tax Board, but failed to dissolve properly with the Secretary of State.”
Providing a process to dissolve those companies, remove them from the state’s tax rolls, and abate their minimum franchise tax liability “makes our tax system more efficient, which is great for taxpayers and great for the state,” according to Wettemann.
A.B. 2503 follows legislation signed in 2015 (A.B. 557), which allowed similar provisions for dissolution and abatement of inactive nonprofit corporations.