Suspension for Failure to Pay Taxes Can Prevent Legal Action

January 5, 2015

California's tax code includes a provision that makes it so a domestic corporation that fails to pay certain taxes can have its corporate rights suspended. If your corporation's rights are suspended under this provision, it can affect both the corporation's ability to bring legal actions and to appeal the outcomes of legal actions.

When a corporation is suspended there is a straightforward way for it to revive its corporate rights. According to the tax code, the corporation can revive its rights by:

1. Filing all required tax returns
2. Paying the necessary taxes, penalties, and fees, and
3. Applying to the Franchise Tax Board for a "certificate of revivor"

Notably, reviving corporate rights does not prejudice any action or defense acquired because of the suspension. However, failing to revive corporate rights can ultimately affect a corporation's right to bring a legal action at all. This comes up when the statute of limitations is in play. If the time period for bringing an action according to a statute of limitations runs before a corporation gets around to reviving itself, then a later revival does not prevent the running of the statute of limitations.

All is not lost if your notice of appeal comes due and you have not yet been able to revive your corporate rights, according to a California Supreme Court Case, Bourhis v. Lord. If you eventually get around to accomplishing the revival while the appeal is pending then the revival will retroactively render the notice of appeal valid. However, as demonstrated in Tabarrejo v. Superior Court, if you do not revive the corporation's rights quickly then you may be out of luck.

In Tabarrejo, Manuel Tabarrejo was employed by Princess Retirement Homes (PRH). When Tabarrejo left his job, he filed a claim with the Labor Commissioner for, amongst other things, unpaid wages. The Labor Commissioner awarded Tabarrejo a six-figure sum. PRH appealed and posted the undertaking required by the Labor Code. Tabarrejo filed a motion to dismiss the appeal because PRH was suspended. The trial court granted the motion to dismiss, and PRH then failed to pay the amount ordered by the Labor Commissioner within ten days.

Tabarrejo asked the court to release the undertaking to him. PRH argued that the court could not release the undertaking to Tabarejo because it did not have the right to accept it in the first place, since it lacked jurisdiction over the matter ab initio due to PRH being suspended. The trial court accepted this argument and released the undertaking to PRH's owners. The appellate court held that this was wrong because the issue is one of legal capacity, not standing. The trial court had personal and subject matter jurisdiction over PRH. When PRH filed its notice of appeal there was a possibility that it would cure its incapacity by reviving its corporate rights. However, the notice of appeal was invalid when filed and was never validated by a revival of corporate powers.