In October 2015, Jeff Jansen of the Jansen Law Firm obtained a complete dismissal with prejudice of a lawsuit filed in 2014 by the Texas Attorney General and Comptroller of Public Accounts against the President of a corporation that had operated a nightclub in central Texas.

For a number of years, our client had operated a nightclub in central Texas.  As happens to a lot of nightclubs, eventually the bar stopped being profitable and the corporation closed the nightclub.  The Texas Comptroller of Public Accounts then conducted an audit of the nightclub’s sales for the 4 years before the nightclub was closed, and determined that the corporation owed more than $160,000 in unpaid state taxes, penalties, and interest.

Because the nightclub was closed, the Texas Comptroller began attempting to collect the amount owed by the corporation directly from its owner and President.  That’s when Jansen Law Firm was hired.  Eventually, the Texas Attorney General filed a lawsuit against the individual, claiming that he was personally liable for the unpaid taxes, penalties, and interest of the corporation and nightclub.  After about a year of fighting on behalf of our client, Jeff Jansen and the Jansen Law Firm were able to convince the State of Texas that, under the applicable law and facts of this case, there was no basis to impose personal liability against the owner-President of the corporation.  Therefore, the State of Texas dismissed the lawsuit, zeroed out the liability assessment, and released the tax liens it had previously filed against the individual.

LESSONS TO BE LEARNED:  (1) Just because the State of Texas, the Texas Comptroller, or the Texas Attorney General asserts that an individual is personally liable for the tax debts of another person or entity, the facts may actually show that the State is wrong and the individual is not personally liable.  (2) If a person receives a Notification of Individual Tax Liability or a Jeopardy Determination from the Texas Comptroller, it is very important to not ignore those notices and to contact an experienced attorney as soon as possible to determine one’s legal options.

Please understand that all of these cases are different and depend on the facts involved.  Many times, a person can properly be held personally responsible for unpaid tax debts of another person or entity depending on what events have already taken place.  But the only way to really know for sure what, if any, legal options might be available is to consult with a qualified attorney.  Ignoring the issue will never make the problem go away.  Do not hesitate to contact us by email at [email protected] or (713) 388-6150 if you would like to discuss your particular situation.  We represent taxpayers throughout the State of Texas who may be having issues dealing with the Texas Comptroller or Texas Attorney General.

I have found over the years that many people do not understand the importance of avoiding forfeiture of their company's right to do business in the State of Texas for failing to comply with their state tax obligations.  People do not understand how they can lose their charter or right to do business, or the significance of having lost their corporate privileges.  It's a big deal that is easy to avoid but which has tremendously bad consequences if one fails to keep their business entity in good standing.

Forfeiture of a corporation, limited liability company, limited partnership, or other filing entity’s corporate privileges in Texas occurs when (1) the filing entity does not file the report required by Chapter 171 of the Texas Tax Code; (2) the filing entity fails to pay its franchise taxes within 45 days after the notice of forfeiture is mailed to the filing entity; or (3) when the filing entity does not permit the Texas comptroller to examine the filing entity’s records pursuant to Section 171.211 of the Texas Tax Code.  Unfortunately, for business owners, forfeiture is extremely common in Texas.

What’s the Significance of a Business Entity Forfeiting its Right to do Business in Texas?

While forfeiture of corporate privileges is an all-too-common occurrence, few business people in Texas realize the significance of forfeiture and its potential impact on not only the business but a corporation’s officers and directors as well.  Tex. Tax Code § 171.152 states that if a corporation’s privileges are forfeited, the corporation is denied the right to sue or to defend a lawsuit in a Texas court (although courts have subsequently decided that the forfeited entity is entitled to defend a lawsuit; it just is not allowed to assert any claims it may have).  Additionally, and equally important, § 171.252 states that each officer and director of a forfeited corporation is liable for the debts and obligations of the forfeited corporation (subject to § 171.255).  Given that the liability shield and the shield from suits on company obligations are two very important primary purposes for forming a corporation or other limited liability entity, one would think that this would be enough to get people to pay attention.  Sadly, this is not the case.

Why Does Forfeiture of Corporate Privileges Occur So Frequently in Texas?

First, many businesses simply don’t keep up with their mail.  The Comptroller contacts businesses via mail to give them advance warning of forfeiture.  The Comptroller gives a number of notices prior to requiring the Secretary of State to forfeit the filing entity. Despite this, many of these notices are not seen or dealt with in a responsible or timely manner.

A second contributing factor to forfeiture in Texas is simply a lack of understanding of a business’ obligations.  The repeated modifications to the Texas Franchise Tax have caused confusion about when reports are due and who must report.  Generally, all taxable entities must now report except for some narrow exceptions.  Nevertheless, many businesses believe that if do not owe franchise taxes, they do not need to file anything.

The third contributing factor to forfeiture is a business simply failing to file the its annual information report along with its franchise tax return.  Many businesses fail to file a complete return (including the annual report) which prevents the Comptroller from accepting the filing.  Thus, despite filing its proper form for indicating whether or not it owes taxes, the business simply failed to attach the information report which the Comptroller requires.

Lastly, many business owners in Texas use forfeiture to “wind down” their business.  Rather than go through the process of winding down the business through filing a certificate of termination, the owners simply let the business go into forfeiture.  Given the potential liability issues inherent in forfeiture, this is obviously a terrible way to end a business, particularly given that if a business is properly wound up, it can keep its liability shield.  Further discussion of the forfeiture/termination issue as it relates to winding up a business will be reserved for future discussion.

Conclusion

Just as Texas grants the owners of filing entities a liability shield via the Texas Business Organizations Code (or predecessor statute), so can Texas remove that shield via the Tax Code.  The bottom line is that business owners in Texas rarely give forfeiture the consideration it merits.  More often than not, forfeiture of corporate privileges is discovered during some crucial moment (purchase/sale of a business, filing of a lawsuit, etc.), resulting in owners and attorneys scrambling to reinstate the business entity’s privileges.

Please contact us at 713-388-6150 or by email at [email protected] if you have any questions about forfeiture issues.