Failure To File Texas Franchise Tax Form Voids Lawsuit

This post was originally published on Forbes Jun 3, 2015

Everybody knows that bad things can happen if you don't file tax returns that you are supposed to file. Interest and penalties, seizure of property and in the most extreme cases losing your liberty.  Although loss of liberty for simply not filing is not very likely.  When you are talking about corporations, there is another consequence.  They can lose their charters.  In some ways  you could view that as a death sentence for a corporation. It can no longer do anything.  Unlike people, as far as we know, it is not that hard to bring a corporation back from the dead.  You catch up the delinquent taxes and do some paperwork, which will vary from state to state, and presto the corporation is back from the dead.  Cohen Acquisition Corp learned from the Fourteenth Court of Appeals in Texas that even though it can be revived, that kind of zombie phase that it went through has consequence.

Cohen Acquisition Corp was suing EEPB PC.  EEPB PC is one of the largest local accounting firms in Houston.  Accounting Today ranks EEPB among the best places to work in the medium firm category, in case you are looking. Anyway, according to this story, the lawsuit, claiming $4 million in damages for negligent misrepresentation, breach of contract and accounting malpractice related to EEPB's failure to uncover defalcations by the CEO of one of CAC's subsidiaries.  That's not quite the kid who killed his parents asking for mercy because he is an orphan, but it approaches it.

But EEPB got lucky, as it turns out.  The trial court had granted EEPB's motion for summary judgment that the malpractice claim was extinguished three years after CAC's charter was forfeited  and that reinstatement did not breathe life back into the claim.

The dates are important. CAC became a "terminated filing entity" on February 8, 2008 for not filing franchise tax forms.  A terminated filing entity stays in existence for three years for the limited purpose of "prosecuting or defending in the terminated entity's name an action or proceeding brought by or against the terminated entity". So CAC had to bring its suit against EEPB by February 8, 2011.  The suit was filed on February 15, 2013,  The forfeiture of CAC's charter had been set aside on March 29, 2011, presumably by catching up on the franchise tax.  But that catch up did not revive the claim that was extinguished on February 8, 2011.

Like the plaintiff in Emmett Properties, Cohen filed suit against EEPB more than three years after the Secretary of State forfeited Cohen's charter for delinquent franchise taxes. As discussed above, Cohen's claims were extinguished on February 8, 2011. Because setting aside the forfeiture of a corporate charter pursuant to the Tax Code does not revive a corporation's extinguished claims, the March 29, 2011 reinstatement of Cohen's charter did not revive its extinguished claims against EEPB. See Emmett Props., 167 S.W.3d at 370 . Cohen raises additional arguments with regard to the issue in question. 

However, we need not consider these arguments because we are bound by our prior decision in Emmett Properties. Accordingly, we overrule Cohen's sole issue on appeal.

Now I bet if you talked to the attorneys representing EEPB, they would give you a long story about how frivolous the claim against their client was and what great defenses they had and how fantastic EEPB did on peer review.  I also bet that if you could get them off the record, they would say it is better to be lucky than good.

I have sometimes heard of people, not anybody I really know or have worked with of course, talking about "nothing returns".  And that is what those Texas Franchise returns for CAC probably were.  The Texas Franchise Tax has a high threshold and no minimum tax, but the filing requirement is not waived when there is not a tax due.  If there is no tax due, the late pay penalty is fifty bucks, so what is there to worry about? Well now you know.