$125,000 State Tax Problem Fixed by Correcting Previous Years’ Tax Returns

A Moskowitz LLP Success Story

A business owner came to us after receiving a Franchise Tax Board (FTB) Notice. The Notice stated that the FTB was disallowing a $1,204,541 million corporate loan to shareholder, and consequently assessed $125,197 in additional state income taxes.

There is a long history of IRS and state suspicion that loans between shareholders and their corporations are taxable transactions rather than non-taxable loans. In this case, our client had in fact been making payments on a company loan for many years. We discovered, however, that instead of reporting the payments as loan payments to the company, his previous tax return preparer had listed those payments as loans from a shareholder to the company. We corrected the erroneous returns, and properly re-characterized the payments.

The FTB Appeals Division agreed with us that the loan was legitimate and was being repaid, and declared that the client owed no additional taxes. The IRS commenced a similar audit and also conceded on this loan-to-shareholder issue.