Legal ruling 395

Franchise Tax - Protests and Petitions for Reassessment by Transferees

The transferee of a suspended taxpayer can file a protest or petition for reassessment contesting any of the elements of transferee liability except the liability of the transferor. The transferee of a taxpayer which is not suspended can file a protest or petition for reassessment contesting the liability of the transferor. The transferee of a suspended taxpayer cannot file a protest or petition for reassessment contesting the liability of the transferor.

Advice has been requested concerning the right of a transferee to file a protest against a proposed assessment or a petition for reassessment against a jeopardy assessment.

The transferee may contest any of the elements of transferee liability except the liability of the transferor, even if the transferor is suspended. 

Sections 23301 and 23301.5 of the Revenue and Taxation Code provide that a suspended corporation loses all of its powers except the power to amend its articles of incorporation in order to acquire a new name. A suspended corporation therefore may not file a protest or petition for reassessment.

Section 25701a of the Revenue and Taxation Code provides for the assessment of transferee liability. The section states that, with certain exceptions not applicable here, transferee liability is to be assessed in the same manner as the tax. Thus the protest and petition for reassessment provisions of the law are applicable to transferee liability.

The nature of transferee liability is discussed in Appeal of A. Brigham and Zelletta M. Rose, Cal. St. Bd. of Equal., August 1, 1966, CCH 203-361, P-H 48,417. That case held that Section 25701a is similar to Internal Revenue Code Section 6901(a)(1)(A); ". . . the existence and extent of a transferee's liability" under the federal statute must be based on local law; local substantive law is also determinative with respect to Section 25701a; and that Section 3439.04 of the Civil Code is the applicable law in California.

That Civil Code Section requires a conveyance to be made without the receipt of fair consideration by a debtor ". . . who is or will thereby be rendered insolvent . . . ." These same elements are also necessary to establish transferee liability under the federal transferee liability section. In addition, under the federal statute the government must exhaust all reasonable remedies against the taxpayer before proceeding against the transferee.

Clearly the suspended status of the corporation has no bearing on the existence of any of the elements of transferee liability, with the exception of the liability of the transferor, which will be discussed below. Therefore, a transferee of a suspended transferor may file a protest or petition for reassessment with respect to any of the elements of transferee liability except the liability of the transferor.

If the transferor has not been suspended, the transferee may file a protest or petition for reassessment contesting the liability of the transferor. Under the provisions of Section 3439.04 of the Civil Code only existing creditors can qualify for relief. TWM Homes, Inc. v. Atherwood Realty and Investment Co., 214 Cal.App.2d 826 (1963). Also, under the federal transferee liability section, it is a requirement that the transferor be liable for the tax. Five Star Dresses, Inc., 17 TCM 190, 202 (1958). Therefore, since the transferee has the right to protest or petition for reassessment as discussed above, the transferee may include the liability of the transferor in the protest or petition if the transferor is not suspended.

If the transferor has been suspended, the transferee may not contest the liability of the transferor. A suspended corporation cannot file a protest or petition for reassessment. The assignee of a suspended corporation has the same disabilities as its assignor. Cleveland v. Gore Bros. Inc., 14 Cal.App.2d 681 (1936). The transferee of a suspended corporation should also be subject to the same disabilities as an assignee.

Transferee liability in equity, which appears to be the nature of the liability established in Appeal of A. Brigham and Zelletta M. Rose, supra, is based upon the transferee receiving from the transferor property or funds and is a proceeding in rem. United States v. Floersch, 276 Fed.2d 714 (CA 10, 1960) The recipient should be in no better position than the transferor.

Therefore, the transferee should not be able to protest or petition for reassessment with respect to the liability of the transferor when the suspension of the transferor occurs prior to the transfer of the assets. To hold otherwise would encourage avoidance of the suspension provisions of the law. For example, a suspended corporation could transfer its assets and the transferee would then acquire powers not held by the transferor, even though the suspended transferor does not have the power to make a valid transfer of its assets.

Even if the suspension of the transferor occurs subsequent to the transfer of the assets, the transferee should not be able to protest or petition for reassessment. To allow the transferee to do so would permit a taxpayer to transfer its assets and then allow itself to become suspended. The suspension provisions of the law could be avoided by simply transferring the assets before suspension occurred. Such a result could not have been intended by the Legislature.