A corporation that dissolves will still owe California franchise taxes in the year of its dissolution. However, if a corporation fails in its attempt to dissolve it could owe minimum franchise taxes for even longer.
Penoe, Inc., a case released by the California State Board of Equalization in July 2015, held that even though an error on a form prevented an S corporation from dissolving it was still required to pay the minimum franchise tax with late fees and interest for an additional year.
The S corporation sent a dissolution request in January 2011. The Secretary of State (SOS) returned the request for a correction and did not grant the dissolution. An additional request was accepted in January 2012 and the SOS dissolved the S corporation in March 2013.
After filing untimely California tax returns, the California Franchise Tax Board assessed minimum franchise tax assessments for 2010 and 2011 along with late fees and interest. The S corporation sought a reasonable cause waiver arguing that the business ceased all activity in 2009 and closed in 2010 even though an unintentional mistake postponed the dissolution.
The request was denied and S corporation remained liable for 2010 and 2011 taxes, penalties and interest. This was because California law does not provide reasonable cause waivers of the minimum franchise tax.
Carefully follow these requirements to limit tax liability for additional years
To avoid the minimum franchise tax, a corporation must do the following:
- File a timely final franchise return with the Franchise Tax Board
- Cease business in the state after the tax year for which the final return was filed
- File a certificate of dissolution with the SOS within 12 months of filing the final franchise return.
Seeking individualized guidance from a tax attorney will also ensure your company does not continue to owe taxes.