In a recent Court of Appeal case, the court upheld a refund of tax, assessed against and paid by corporate officers for a liability of their suspended corporation. The court also ruled that the amount paid by the corporation, $68,262, on behalf of the officers, was not refundable to the officers as they did not have standing as the persons who paid the tax. Likewise, the related liability assessed against the officers was illegal, as it was assessed against the wrong party. Accordingly, there was no remaining amount due for penalties and interest assessed against the officers for their related corporate liability.
The case, Ashok Parmar etal v. State Board of Equalization (SBE) had to do with a suspended corporation during the period it was conducting business by distributing cigarettes and other tobacco products. The SBE billed the officers directly for taxes owed for this activity. They reasoned that since the corporation was suspended during the audit period, it did not exist and the real sellers (or distributors) of these products were the corporate officers. Accordingly, they issued a Notice of Determination to the officers and never bothered to bill the corporation even though it was no longer suspended when the Determination was issued.
The lower court disagreed with the Board of Equalization (BOE) and stated that corporations do continue to exist while they are suspended. The Second District Court of Appeal upheld that ruling and emphasized that while R&TC Section 23301 suspends the corporation’s powers, the corporation continues to exist.
It has long been (for the past 45 years) the position and internal policy of the SBE to treat suspended corporations as non-existent. This SBE Policy was ruled illegal by the court. The SBE overextended their authority, as they went beyond the statutory provisions of the State of California (R&TC23301). They were ordered to refund the tax paid by the officers, but not the tax paid on the officers’ behalf by the corporation.
The SBE was also ordered to pay the attorney fees under the private attorney general doctrine. The fundamental objective of the doctrine is to encourage suits effectuating a strong public policy by awarding substantial attorney fees to those who successfully bring such suits and thereby benefit a broad class of citizens. The amount of attorney fees was also in dispute and the appeals court remanded the lower court to recalculate the fees based on comparable legal services in the community (aka the lodestar method). The appeals court agreed with the trial court that the termination of a long-standing and illegal internal Board policy would affect not only the Parmars, but also more than 240,000 closely-held corporations subject to the cigarette and tobacco products distribution tax and 24 other similar tax and fee programs.
As evidenced by the type of attorney fees awarded, this case has implications for any officers held personally liable solely due to their corporations being suspended. This would seemingly apply to any tax administered by the SBE including Sales and Use tax.
