Author: Phillip Zagotti

Foreign Owner of California Rental Property: U.S. Estate Tax, Form 706-NA and Probate

A daughter in Rancho Cucamonga gets the call from Osaka: her father has died, and his Fontana fourplex is still in his name. She finds a buyer, and escrow says title will not insure the sale until the IRS is dealt with. (The family is illustrative.)

That call is usually when I first hear about U.S. estate tax for a nonresident owner. Owners abroad, whether of an Inland Empire rental or a Palm Springs second home, rarely know the exemption in the news is not theirs.

When does a foreign owner of California real estate owe U.S. estate tax?

When the owner was neither a citizen nor domiciled here (a nonresident alien), IRC § 2101 taxes the part of the estate situated in the United States at the citizen rates in section 2001(c). The credit differs. A citizen dying in 2026 has a $15,000,000 basic exclusion under Rev. Proc. 2025-32; a nonresident alien gets a flat $13,000 credit under section 2102(b)(1), which is the tax on the first $60,000. “$60,000 exemption” is an approximation, and the rate hits 40 percent past $1 million. (A citizen married to a non-citizen has a different problem; see my post on QDOTs.)

Under Treas. Reg. § 20.2104-1(a), California land and buildings are U.S. property, as are furnishings kept here and stock of a U.S. corporation wherever the certificates sit. Section 2105 excludes insurance on the owner’s life, ordinary U.S. bank deposits not tied to a U.S. business, and portfolio debt.

Form 706-NA is required once U.S.-situs assets, plus certain lifetime gifts, exceed $60,000, due nine months after death (Form 4768 adds six months). Section 2002 makes the executor pay, and section 2203 says that if no one is appointed here, the executor is anyone “in actual or constructive possession” of the decedent’s property. That can be the daughter collecting rent. A representative who pays other debts first is personally liable under 31 U.S.C. § 3713(b), and IRC § 6324(a) imposes a 10-year lien and makes heirs who receive property liable up to its value, collected under section 6901.

Does a tax treaty lower the estate tax on a foreign owner’s California property?

Sometimes. The IRS treaty list has 15 countries. Australia, Austria, Denmark, France, Germany, Japan and the United Kingdom cover estate and gift tax; Canada, Finland, Greece, Ireland, Italy, the Netherlands, South Africa and Switzerland cover estate tax only (Canada’s through Article XXIX B of its income tax treaty). Mexico, China, India and Korea have none, so their residents get $13,000 and no more.

Where a treaty requires it, section 2102(b)(3)(A) replaces the $13,000 with a slice of the citizen credit: the applicable credit amount for the year of death times U.S.-situs assets over the worldwide gross estate. The 706-NA instructions name nine treaties, Japan’s among them, that trigger that rule. The price is disclosure of the worldwide estate, and section 2106(b) denies deductions for debts and expenses unless foreign assets appear on the return.

What would a Japanese owner’s estate owe on a Fontana fourplex?

Illustrative facts: Hiroshi lives in Japan and dies in 2026 owning a $900,000 Fontana fourplex outright and $300,000 of U.S. stocks at a U.S. broker. His worldwide estate is $6,000,000. He has no trust or LLC.

His U.S. gross estate is $1,200,000, and the tentative tax is $425,800 ($345,800 plus 40 percent of $200,000). Were he a Mexican resident, the $13,000 credit would leave $412,800 before deductions. Under the Japan treaty, the credit is $5,945,800 (the 2026 applicable credit amount, the tax on $15 million) times $1.2 million over $6 million, or $1,189,160. Section 2102(b)(4) caps it at the tax, so he owes nothing. On 2026 figures, U.S. tax appears only if his worldwide estate tops about $16.76 million.

Zero tax still means a 706-NA within nine months to claim the credit. If his two children, both in Japan, inherit and sell for $900,000 in 2027, the buyer withholds 15 percent, $135,000, under IRC § 1445(a), though section 1014(a) gave them a date-of-death basis and almost no gain. (For a buyer’s own home, it is 10 percent up to $1,000,000 and zero at $300,000 or less.) A Form 8288-B withholding certificate, normally acted on within 90 days, can reduce it. California’s R&TC § 18662 adds 3 1/3 percent of the price, about $30,000, unless the sellers certify a loss or zero gain, or elect withholding on actual gain, on Form 593. Individual sellers owe it whether or not they live here.

Why won’t a California title company close without an IRS transfer certificate?

Treas. Reg. § 20.6325-1 describes a transfer certificate as one “permitting the transfer of property of a nonresident decedent without liability,” and tells transfer agents and custodians to demand one. Hiroshi’s brokerage account stays frozen meanwhile. For land, the section 6324 lien drives it: a title insurer wants the certificate or proof nothing is owed. In my experience, that escrow demand is how most families learn Form 706-NA exists.

The IRS issues the certificate, commonly called Form 5173, once the tax “has been fully discharged or provided for.” Its transfer certificate page, updated May 5, 2026, asks for a faxed copy of the filed 706-NA and warns of 12 to 18 months of processing. No certificate is needed when the U.S.-situs estate is $60,000 or less, or for property handled by an executor “appointed, qualified and acting within the United States,” which makes ancillary probate less of a villain.

Does California probate apply when a foreign owner dies with property here?

Yes, if the deed is in the owner’s name. Ancillary administration, the proceeding for “a nondomiciliary decedent” (Cal. Prob. Code § 12501), starts with a petition under section 12510 in the county where the property sits (section 7052), San Bernardino for Fontana. If a foreign court admitted the will in a final ruling based on domicile and after notice, section 12523 has California admit it; otherwise section 12520(b) routes it through ordinary probate.

Section 8402 disqualifies a non-U.S. resident unless the will names that person executor, and section 8571 lets the court demand a bond from a nonresident. Statutory fees under sections 10800 and 10810 run on gross value: $21,000 each to the personal representative and attorney on Hiroshi’s fourplex.

A revocable trust or LLC holding title avoids ancillary probate, but neither escapes estate tax; for the trust, section 2104(b) reaches revocable transfers. Reassessment is separate. Proposition 19 (Cal. Const. art. XIII A, § 2.1) confines the parent-child exclusion to a family home or farm, and the Board of Equalization says a rental passing to a child does not qualify. In an LLC, R&TC § 64(c) reassesses when one person gains over 50 percent, and section 64(d) when “original coowners” who deeded the property in transfer over half cumulatively, which a death usually does.

Can a foreign owner give the property away or hold it through an LLC or foreign corporation?

Gifting the deed costs the most. IRC § 2511(a) taxes a nonresident alien’s gift “only if the property is situated within the United States,” and California land is. Section 2505 reserves the lifetime credit for citizens and residents, so everything over the $19,000 annual exclusion for 2026 is taxed: about $299,390 to deed the fourplex to one child, before treaty relief.

Section 2501(a)(2) exempts a nonresident alien’s gifts of intangibles, and an LLC interest is intangible. Interests held at death stay exposed. I would expect the IRS to look through a single-member LLC, disregarded for income tax, to the land, and the situs of a multi-member interest is unsettled. Deeding in and gifting the next week invites the argument that the gift was really land.

The classic blocker is a foreign corporation, since section 2104(a) treats stock as U.S. property only when the issuer is domestic. The cost is income tax: 21 percent federal tax under sections 11 and 882, California’s 8.84 percent franchise tax with an $800 minimum (R&TC § 23153), a 30 percent branch profits tax under section 884 unless an income tax treaty cuts it, and FIRPTA withholding when the corporation sells. An LLC owning California property owes the $800 tax under R&TC § 17941, plus the section 17942 fee from $250,000 of California income.

Structure	U.S. estate tax	Gift tax on lifetime transfer	FIRPTA on sale	California probate	Annual California cost	Prop 13 reassessment risk
Direct ownership	Yes; $13,000 or treaty credit	Yes; $19,000 exclusion (2026) only	15% of price; Form 593 too	Ancillary administration	Property tax only	At death; rentals get no Prop 19 exclusion
California or Delaware LLC	Likely yes	None on membership interests	Same as direct if single-member	None for the parcel	$800 plus fee at $250,000	§ 64(c) or (d) transfers over 50%
Foreign corporation	No	None on shares	15% on the corporation’s sale	None for the parcel	$800 minimum; 8.84% of income	§ 64(c) if one heir gains control

Frequently Asked Questions

Is the $60,000 estate tax figure for foreign owners adjusted for inflation?

No. The $13,000 credit is fixed by statute and did not move when the citizen exclusion rose to $15 million for 2026. Only a treaty can enlarge it.

Does the estate have to file Form 706-NA if a treaty wipes out the tax?

Yes, when U.S.-situs assets exceed $60,000. The treaty credit is claimed on the return, and the transfer certificate depends on it.

How long does an IRS transfer certificate take?

The IRS currently says 12 to 18 months after it receives everything it needs. A complete file with English translations keeps the clock from restarting.

Can a child who lives abroad be executor of a California estate?

Only if the will names that child. Probate Code section 8402 otherwise disqualifies anyone who is not a U.S. resident, and the court may require a nonresident executor to post a bond.

Will the buyer withhold 15 percent even if the heirs have no gain?

Yes, unless an exception applies or the IRS issues a withholding certificate first. Any excess is claimed as a credit on the heirs’ U.S. return for the year of sale.

How North Star Law Firm Can Help

North Star Law Firm prepares trust and estate tax returns, including Form 706-NA, and handles estate and trust administration for cross-border families who own California property. It also drafts revocable living trusts and reviews ownership structures through its real estate tax strategy work. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Tax Court.

If a parent abroad owns California property, or has just died owning it, contact North Star Law Firm or schedule a consultation before escrow opens.

October 26, 2026

Money in a Late Spouse’s Name: California Constructive Trusts and Probate Code 850

A husband dies, and the proceeds of a condo his wife owned before the wedding sit in his individual checking account. His trust leaves everything to his children from a first marriage, whose lawyer calls the account trust property. I see this more often than people would guess.

A New York surrogate sorted out similar facts last year in Matter of Mantia, where cottage sale proceeds landed in a dying husband’s sole account. California gets there by its own road, and the differences decide how fast the widow must move.

Does California require a promise or a confidential relationship for a constructive trust?

No. New York’s test from Sharp v. Kosmalski, 40 N.Y.2d 119 (1976), asks for a confidential relationship and a promise the transfer relied on, plus unjust enrichment. Under Cal. Civ. Code § 2223, “[o]ne who wrongfully detains a thing is an involuntary trustee thereof, for the benefit of the owner,” and section 2224 reaches anyone who gains a thing by “fraud, accident, mistake, undue influence, the violation of a trust, or other wrongful act.”

Courts reduce that to a res (specific property), the claimant’s right to it, and a wrongful acquisition or detention (Communist Party v. 522 Valencia, Inc., 35 Cal. App. 4th 980 (1995)). A constructive trust is a remedy riding on a wrong such as conversion, mistake or undue influence; in Burlesci v. Petersen, 68 Cal. App. 4th 1062 (1998), the constructive trust claim survived because the conversion claim did. The res must be identifiable, too: in Campbell v. Superior Court, 132 Cal. App. 4th 904 (2005), trust money spent remodeling another person’s house could not support a lis pendens.

Does community property law change who owns money in a late spouse’s account?

Yes. What a spouse owned before marriage stays separate (Cal. Fam. Code § 770), and a transmutation between spouses is invalid unless made “in writing by an express declaration” by the spouse giving something up (§ 852(a)). A deposit slip is not that writing. Separate funds in a mixed account keep their character if traced (In re Marriage of Mix, 14 Cal. 3d 604 (1975)); my post on trusts in a California divorce also covers tracing.

California’s default standard is a preponderance of the evidence (Evid. Code § 115), even for civil fraud (Liodas v. Sahadi, 19 Cal. 3d 278 (1977)). The obstacle is Evid. Code § 662: the titleholder is presumed the owner, rebuttable “only by clear and convincing proof.” But Fam. Code § 721(b) makes spouses fiduciaries, and a spouse who gains an advantage from an interspousal transaction faces a presumption of undue influence, which In re Marriage of Haines, 33 Cal. App. 4th 277 (1995), held prevails over section 662. Haines was a divorce; expect the children to argue it ends at death.

If the money is community after all, Prob. Code § 100(a) gives the survivor half, which a spousal property petition under § 13650 can confirm.

How does a Probate Code 850 petition get the money back, and when does section 859 double it?

Prob. Code § 850 covers a decedent who “died in possession of, or holding title to,” property “claimed to belong to another,” and a trustee in that position. Section 851 requires notice at least 30 days before the hearing, served like a summons on the fiduciary and whoever holds the property. A win brings an order under section 856 directing the transfer. People call these “Heggstad petitions,” but Estate of Heggstad, 16 Cal. App. 4th 943 (1993), is a funding case (a signed declaration put listed property in a trust without a deed). Section 850 is broader.

Section 859 is the penalty. A person who “in bad faith wrongfully” took property of an elder, a trust or an estate, or took it by undue influence in bad faith or through elder financial abuse under Welf. & Inst. Code § 15610.30, owes twice the value recovered, plus possible fees. Asaro v. Maniscalco (Cal. Ct. App. July 12, 2024, No. D080874) treated the penalty as separate from the return, affirming $547,370 restored plus $1,094,740.

Bad faith keeps honest tracing disputes out, but the elder-abuse route reaches anyone who “retains” an elder’s property and “knew or should have known” that would harm her.

Are the proceeds of your house sale sitting in a late spouse’s account or trust? If your claim is treated as a debt of the person who died, California can bar it one year after the death.

How long do you have to file after a spouse dies in California?

Code Civ. Proc. § 366.2 allows one year from death for an action “on a liability of the person” who died, but the theory matters. In Estate of Yool, 151 Cal. App. 4th 867 (2007), a mother held title to a house only as an accommodation; the section 850 resulting trust claim did not rest on her personal liability and had not accrued. In Stoltenberg v. Newman, 179 Cal. App. 4th 287 (2009), fraud claims built on the decedent’s statements were barred after a year, though brought against his successor trustee.

“He held it for me” sounds like Yool. “He promised” sounds like Stoltenberg. I file inside the year rather than test the line. Otherwise, fraud or mistake gets three years from discovery under § 338(d), and claims with no specific period get four under § 343.

The trustee’s notice under Prob. Code § 16061.7 starts another clock: section 16061.8 bars an action “to contest the trust” after 120 days. A contest attacks the instrument (§ 21310(b)). A section 850 claim says the money was never his to leave, so the 120 days does not control it.

Why does Medi-Cal planning leave money in the wrong spouse’s name?

Couples move money to fit a Medicaid plan, as the Mantia couple did, then one dies before it is finished. In California, since SB 833, for deaths on or after January 1, 2017, Medi-Cal estate recovery reaches only the probate estate, and none is claimed while a spouse survives (Welf. & Inst. Code § 14009.5). A funded revocable trust stays outside that estate.

Eligibility is the newer pressure: Medi-Cal’s asset test returned January 1, 2026, at $130,000 for one person plus $65,000 per additional household member in aged, blind and disabled programs (DHCS ACWDL 25-20). Hurried retitling without a section 852 writing does not change ownership, and it leaves money outside the trust you meant to fund.

How would a Rancho Cucamonga widow trace and recover her condo money?

Illustrative facts: Lorena, 71, of Rancho Cucamonga, bought a condo in 2011 and married her second husband in 2018. In June 2024 they sold it and wired the $410,000 proceeds to his account “for convenience” while planning a joint trust. He died March 9, 2026; his older trust leaves everything to his children, whose section 16061.7 notice arrived April 20, 2026.

The proceeds start as her separate property, with no signed transmutation. The account held $22,000 before the wire, fell to $361,500 by September 2025 on household spending, and recovered to $388,000 with pension deposits. Under the lowest intermediate balance rule, the usual convention for mixed accounts, later deposits do not replace what was spent, so she can trace at most $361,500. The other $48,500 is a money claim that section 366.2 can cut off a year after death.

Her section 850 petition in San Bernardino County Superior Court asks the court to declare the $361,500 her separate property and order it transferred, pleading mistake under section 2224 and the section 721 presumption. She files months before March 9, 2027. The 120-day window closed August 18, 2026, but she is not contesting the trust. The proof is paper: the escrow statement, bank statements and the planning attorney’s file. If the trustees hold on after seeing it, she seeks the section 859 penalty, another $723,000.

Question	New York (Sharp)	California (Civ. Code §§ 2223, 2224)	Prob. Code §§ 850, 859
What must be shown	Confidential relationship, promise, reliance, unjust enrichment	Specific property, right to it, wrongful acquisition or detention	Decedent or trustee holds the petitioner’s property, plus a wrong
Standard of proof	Clear and convincing, as applied in Mantia	Preponderance; clear and convincing against title (§ 662) absent the spousal presumption	Same; the penalty needs bad faith or elder financial abuse
Forum	Surrogate’s Court or civil action	Superior Court civil action	Probate court, 30 days’ notice
Time limit	Six years (CPLR 213(1))	Three or four years; one year from death if based on the decedent’s liability	Same; Yool and Stoltenberg sort which applies
Penalty exposure	Return of the property	Depends on the underlying claim	Twice the value on top of return, plus discretionary fees

Frequently Asked Questions

Do I need a written agreement to prove money in my husband’s account was mine?

No. California requires an express written declaration to change ownership between spouses, so the lack of one usually helps you. What you need is tracing from sale to account.

Is a Probate Code 850 petition a trust contest?

No. A contest attacks the trust’s validity, while a section 850 petition says specific property belongs to someone else. The 120-day deadline does not control it, but the one-year rule in section 366.2 may.

Will a section 850 petition trigger a no-contest clause?

Usually not. Under Probate Code section 21311(a)(2), a no-contest clause reaches a claim that property was not the transferor’s only if the clause expressly says so. Beneficiaries should read the clause before filing.

What if the money has already been spent?

Spent money can only be followed into what it bought. The rest becomes a money claim against the estate or trust, subject to the one-year limit.

Can the trustee be ordered to pay double?

Only on a section 859 finding of bad faith, undue influence in bad faith, or elder financial abuse. The penalty is then twice the value recovered, on top of returning it, and fees may follow.

How North Star Law Firm Can Help

North Star Law Firm handles section 850 disputes in trust administration, drafts revocable living trusts funded at signing, and coordinates titles with special needs and Medi-Cal planning. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Tax Court, with forensic accounting experience tracing commingled funds.

If your money is sitting in a late spouse’s account or trust, contact North Star Law Firm or schedule a consultation before the first anniversary of the death.

October 25, 2026

Company Paid the Owner’s Taxes Before Chapter 7? California Clawbacks After Miller

Picture a Fontana trucking company three months into Chapter 7. A letter from the trustee’s lawyer lists two April 2023 company wires, to the IRS and the Franchise Tax Board, that paid the owner’s personal taxes. It wants the money back.

Until March 2025, a California trustee could also have sued the IRS for the federal share. United States v. Miller ended that. It did nothing for the owner.

What did the Supreme Court decide in United States v. Miller?

In Miller, 604 U.S. 518 (2025), decided March 26, 2025, an 8-1 Court (Justice Jackson writing, Justice Gorsuch dissenting) held that the waiver of sovereign immunity in 11 U.S.C. § 106(a) “applies only to the §544(b) claim itself,” not to the state-law claim nested inside it. Section 106(a) is jurisdictional. It does not change what section 544(b)(1) requires: a transfer “voidable under applicable law by a creditor holding an unsecured claim.” No creditor of the Utah debtor, which paid about $145,000 of two shareholders’ taxes, could have sued the IRS on a Utah-law claim outside bankruptcy, so neither could the trustee.

That ended the rule California courts had followed since In re DBSI, Inc., 869 F.3d 1004 (9th Cir. 2017), which let a trustee recover about $13.4 million of shareholder taxes from the IRS. The Seventh Circuit had sided with the government in In re Equipment Acquisition Resources, Inc., 742 F.3d 743 (7th Cir. 2014).

The Court declined to decide the trustee’s fallback argument, that a creditor could have voided the payments by suing the shareholders, and the Tenth Circuit remanded on May 1, 2025. As of October 2026, I have found no published ruling on that theory.

How far back can a California bankruptcy trustee reach?

Under 11 U.S.C. § 548(a)(1), the trustee can undo transfers made “on or within 2 years before the date of the filing of the petition,” either with actual intent to hinder, delay or defraud, or for “less than a reasonably equivalent value” while insolvent or thinly capitalized. Section 548 borrows no state law, so Miller leaves it alone.

For older transfers the trustee uses section 544(b) and California’s Uniform Voidable Transactions Act: Cal. Civ. Code § 3439.04 for actual intent (a transfer “to an insider” heads its badges of fraud), and section 3439.05 for a transfer without reasonably equivalent value by an insolvent debtor, with section 3439.02 presuming insolvency when debts generally go unpaid as they come due. Remedies are in section 3439.07. Under section 3439.09, constructive fraud claims run four years, actual intent four years or one year after discovery, and nothing survives seven. Section 546(a) generally gives the trustee two years after the order for relief to sue; section 551 preserves what is avoided for the estate.

Can the trustee sue the owner whose personal taxes the company paid?

Yes. Collection runs through 11 U.S.C. § 550(a)(1), which reaches “the initial transferee of such transfer or the entity for whose benefit such transfer was made.” The owner whose tax bill was paid is that entity.

Under the Ninth Circuit’s dominion test, a transferee needs “dominion over the money or other asset, the right to put the money to one’s own purposes” (In re Bullion Reserve of North America, 922 F.2d 544 (9th Cir. 1991)), and In re Incomnet, Inc., 463 F.3d 1064 (9th Cir. 2006), noted that agencies including the IRS have been held initial transferees. A wire straight to the IRS or FTB makes the agency the initial transferee and the owner the beneficiary; money routed through the owner’s own account makes him the initial transferee. Either way he is in the first tier, and section 550(b)’s good-faith protection covers only later transferees.

California law supplies the actual creditor Miller demands. Civ. Code § 3439.08(b)(1) allows a judgment against “the first transferee of the asset or the person for whose benefit the transfer was made,” and no immunity protects the owner. The trustee usually pleads constructive fraud: the company was insolvent, and paying the owner’s personal tax gave it nothing, because value under section 3439.03 means property or satisfying the debtor’s own debt.

Did a Chapter 7 trustee’s demand letter just arrive about taxes your company paid for you? Those letters often set a response date only weeks out, and California’s four-year window reaches 2023 payments in a 2026 case.

What defenses does a California owner have to a tax payment clawback?

Solvency is the best one: the trustee must prove insolvency, though a company behind on its bills faces the section 3439.02 presumption.

Calling the payment an authorized tax distribution usually backfires. A distribution is paid on the owner’s equity, so the company gets nothing for it. Corp. Code § 17704.05(a) also bars an LLC distribution that leaves the company unable to pay debts as they come due or with liabilities above assets, and section 17704.06 makes a consenting member, or one who knowingly received it, personally liable to the LLC for four years.

Two defenses need paper. Repaying a documented loan from the owner satisfies the company’s own debt, which is value, and the insider preference window in section 547(b)(4)(B) is one year. Reasonable pay for work is value too, if payroll records and a W-2 from that year back it up. Section 3439.08(a)’s good-faith defense covers only actual-intent claims, and only for reasonably equivalent value.

Does Miller also protect the Franchise Tax Board, CDTFA and EDD?

This is unsettled; I found no post-Miller decision involving a state tax agency. Within section 548’s two years, the better answer is that the agency can be sued. Central Virginia Community College v. Katz, 546 U.S. 356 (2006), held that the states “agreed in the plan of the Convention not to assert any sovereign immunity defense they might have had” in bankruptcy, so a 2025 payment to the FTB is recoverable in a 2026 case.

Past two years, the agency reading follows Miller’s method. Section 544(b) asks what a creditor could have done outside bankruptcy, where Katz does not apply. That creditor would face claim presentation under Gov. Code §§ 905.2 and 945.4, the bar on “legal or equitable process” against tax collection in Rev. & Tax. Code § 19381, and a refund suit that belongs to “any taxpayer” under section 19382. Miller’s examples of consenting states (Illinois, New York, Ohio) did not include California, which joined the 23-state brief backing the United States.

The trustee reading answers that Miller construed a federal waiver, while the states surrendered bankruptcy immunity at the founding. And Gov. Code § 945 says “A public entity may sue and be sued,” so a creditor who presented a claim could have sued.

My view, and it is only that: a Central District bankruptcy judge is more likely to protect the FTB under section 544(b), because I found no California consent to UVTA suits over tax paid on someone else’s account. CDTFA and EDD disputes are rarer, since a company’s sales and payroll taxes are usually its own debts.

How would this play out for a Fontana trucking LLC?

An illustrative case: a single-member Fontana trucking LLC, behind on fuel and repair vendors, wires $85,000 to the IRS and $22,000 to the FTB in April 2023 for its member’s 2022 personal income tax. It files Chapter 7 in the Riverside Division in September 2026.

At 41 months, the wires are outside section 548. The IRS claim fails under Miller, and the FTB claim is the open question many trustees will skip. The member faces all $107,000. Section 3439.09’s four years had not run at filing, and section 546(a) generally gives the trustee until September 2028. With no loan to repay and no payroll in a disregarded LLC, his defenses are thin. Repaying does not reopen his tax accounts; he just pays his own 2022 tax with his own money, years late.

The planning point: in the year or two before a possible filing, pay personal taxes from personal funds. Make any tax distribution only after a written finding, backed by current financial statements as section 17704.05(b) allows, that the LLC passes both tests. I see this most where the company always paid the owner’s estimates and nobody stopped when business turned.

Trustee target	§ 548 (2 years)	§ 544(b) plus UVTA (4 years)	Sovereign immunity issue	Likely result
IRS	Avoidable; § 106(a) lists § 548	Barred by Miller	Waiver skips the nested state claim	Recent payments only
FTB, CDTFA, EDD	Avoidable under Katz	Unsettled	Could a creditor sue it outside bankruptcy?	Recent yes; older open
Insider who benefited	Yes, § 550(a)(1)	Yes, § 3439.08(b)(1)	None	Main target
Vendor paid for the company’s own debt	Usually not; value given	Usually not	None	Safe, apart from preference rules

Frequently Asked Questions

Can a bankruptcy trustee make the IRS return taxes my company paid for me?

Only for payments made within two years before the filing, under section 548. For older payments, United States v. Miller bars the claim against the IRS, but the trustee can still pursue you.

How far back can a California trustee go to recover a payment made for an owner?

Usually four years, under California’s Uniform Voidable Transactions Act as applied through section 544(b). Actual-intent claims can sometimes run one year from discovery, never past seven years.

Is a tax distribution under my LLC operating agreement safe from a trustee?

Not if the LLC was insolvent. A distribution gives the company nothing back, and Corporations Code section 17704.05 bars distributions that leave an LLC unable to pay its debts.

Can the trustee collect the same payment from both the IRS and me?

No. Section 550(d) allows only one satisfaction. After Miller, the IRS is out of reach for payments older than two years, so the claim usually lands on the owner.

Does Miller protect the Franchise Tax Board from a trustee’s lawsuit?

Not for payments within two years, because Katz held the states gave up sovereign immunity in bankruptcy. For older payments the question is open, and I have found no decision on it.

How North Star Law Firm Can Help

North Star Law Firm defends California owners against trustee demands over pre-filing payments through its preference and clawback defense practice and advises companies weighing a Chapter 7 filing. Its tax defense work covers the IRS and FTB side. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Bankruptcy Court for the Central District of California and the U.S. Tax Court.

If a trustee has written about payments your company made for you, contact North Star Law Firm or schedule a consultation before the response date passes.

October 24, 2026

Filing a Tax Court Petition in California: Trial City, S Case and Ninth Circuit Law

A notice of deficiency lands in a Redlands mailbox in early October, and in the corner is a date: the last day to petition the Tax Court. The petition asks whether you want a small tax case and which city you want for trial. Most people answer in seconds, and neither answer is easy to take back.

In September the Court added Sacramento as a trial city. That is a convenience, not new tax law. The decisions around it are what count, and they start with whose law applies.

Why does Ninth Circuit law control a California Tax Court case?

Since Golsen v. Commissioner, 54 T.C. 742 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971), the Tax Court has followed “a Court of Appeals decision which is squarely in point where appeal from our decision lies to that Court of Appeals and to that court alone.” For Californians, that is the Ninth Circuit.

Under 26 U.S.C. § 7482(b)(1)(A), an individual appeals to the circuit of legal residence when the petition is filed, so the trial city you pick does not change it.

The filing deadline is the sharpest example. Organic Cannabis Foundation, LLC v. Commissioner, 962 F.3d 1082 (9th Cir. 2020), held the 90 days in 26 U.S.C. § 6213(a) jurisdictional, so no equitable tolling. The Third Circuit disagreed in Culp v. Commissioner, 75 F.4th 196 (3d Cir. 2023), and the Second, Sixth and Eighth Circuits have since joined it (Buller, Oquendo, Maniktala). A late Pennsylvania filer may get a tolling hearing; a Californian should assume none (my post on missing the 90-day deadline covers what still works).

Two unmarried co-owners argued the mortgage interest debt limits applied to each of them. The Tax Court said no in Sophy v. Commissioner, 138 T.C. 204 (2012); the Ninth Circuit reversed in Voss v. Commissioner, 796 F.3d 1051 (9th Cir. 2015), and the IRS later said in AOD 2016-02 it would follow Voss. On the small-case track, which allows no appeal, they would have lost for good.

A regular-case appeal is noticed within 90 days after decision under 26 U.S.C. § 7483 and argued at a Ninth Circuit courthouse such as San Francisco or Pasadena. To stop collection meanwhile, section 7485(a) requires a bond of up to double the deficiency appealed.

Should I check the small tax case box on my Tax Court petition?

26 U.S.C. § 7463 allows S status when the deficiency in dispute is $50,000 or less for any one year, and section 7463(e) counts penalties in that figure. A $42,000 deficiency with an $8,400 penalty misses. In a collection due process case, section 7463(f)(2) tests the unpaid tax instead.

The Court must concur. Rule 171 lets the IRS oppose with its answer and lets the Court remove the designation before trial, and section 7463(d) allows discontinuance if the amount proves too large. One benefit is easy to overlook. Section 6214(a) lets the IRS seek a bigger deficiency than its notice stated “Except as provided by section 7463,” and section 7463(c) caps an S decision at the limit.

The cost is finality. An S decision “shall not be reviewed in any other court and shall not be treated as a precedent for any other case” under section 7463(b). In exchange, Rule 174(b) admits “any evidence deemed by the Court to have probative value,” and a special trial judge may decide the case under 26 U.S.C. § 7443A(c). For a shoebox-of-receipts case, that informality is worth a lot.

So I turn down S status when a legal question turns on Ninth Circuit authority that helps, since only an appeal fixes a misreading. I also hesitate when a year sits near $50,000 and more adjustments are possible.

Is a notice of deficiency sitting on your desk with the 90-day date circled? The trial city and the small-case election are both made on the petition itself, and undoing either later takes a motion the Court can refuse.

Which California city should I request for a Tax Court trial now that Sacramento is on the list?

The Court’s September 8 announcement brought the national total to 79. The revised Form 5 lists five California cities: Fresno, Los Angeles, Sacramento, San Diego and San Francisco. The Court also stopped reserving cities for small cases. Fresno carried that limit on the Court’s older request form, so a regular case can now be set there too.

The request is a separate paper filed with the petition under Tax Court Rule 140(a). Changing it later takes a Rule 140(b) motion, which may be denied as dilatory once the trial notice is out.

From Riverside or San Bernardino, Los Angeles is usually right. The Court has permanent courtrooms in the Roybal Federal Building, and in mid-October its public list showed Los Angeles sessions every month or two into 2027. Sacramento and Fresno have no permanent courtroom and no session posted yet. I look first at where the witnesses and records are. The Court also holds trials by Zoomgov and now posts standalone remote sessions.

Will my Tax Court case go to trial, and what is the new reporting calendar?

Usually not. Under Rev. Proc. 2016-22, IRS Chief Counsel refers a docketed case to Appeals within 30 days after it is at issue, unless Appeals issued the notice, the taxpayer opts out, or Counsel designated it for litigation. In an S case or a regular case at $50,000 or less a year, Counsel may recall it after six months. Unsettled cases get a standing pretrial order; the Court’s small-case sample orders settlement talks and a stipulation of facts as soon as possible.

The pilot starts no earlier than the Fall 2027 term. The Court may place cases on a “reporting calendar” that assigns a judge and a standing scheduling order instead of a trial date, with trial set only if needed. Traditional calendars continue and details are promised later. I expect an assigned judge to push for narrowed issues sooner, which moves preparation earlier.

What does the Franchise Tax Board do after my Tax Court case ends?

Cal. Rev. & Tax. Code § 18622(a) requires you to report a federal change within six months after the final federal determination and “concede the accuracy of the determination or state wherein it is erroneous.” Individuals report only changes that raise California tax. Section 18622(d) dates the final determination from the IRS assessment, not the court decision.

A timely report gives the FTB two years from the report, or its ordinary period if later, under section 19059(a). With no report, section 19060(a) lets it assess “at any time.” The Office of Tax Appeals presumes an assessment built on a federal adjustment correct, as in Appeal of Gorin, 2020-OTA-018P.

The work is in the California differences: state conformity on each adjusted item and California’s own accuracy penalty under section 19164. If the FTB proposes tax from its own audit, you protest within 60 days under section 19041, then appeal to the Office of Tax Appeals within 30 days of the FTB’s action under section 19045. Those clocks run on their own, so both tracks can be open at once.

How would a Redlands couple handle a two-year notice of deficiency?

An illustrative case. A Redlands couple’s notice, mailed October 2, 2026, proposes $38,000 of 2023 tax plus a $7,600 accuracy penalty ($45,600), and $14,000 for 2024. Ninety days runs to Thursday, December 31, 2026, and a petition filed by the date printed on the notice is timely under section 6213(a).

Each year is under $50,000, and since the designation attaches to the case, both years move together. If the dispute is receipts and mileage for her consulting business, I would probably check the box; section 7463(c) also keeps 2023 from growing past the cap. If 2023 turns on a legal question with helpful Ninth Circuit authority, I would leave it unchecked.

Los Angeles, roughly 65 miles away, is the natural trial city. Sacramento would make sense only if a key witness lived up north, and even then a remote appearance may be easier.

Suppose Appeals settles it in spring 2027: 2023 drops to $22,000, the penalty is conceded, and 2024 stays at $14,000. If the IRS assesses on May 10, 2027, the couple must report to the FTB by November 10, 2027, and the state computes its own tax and penalty, with two years from the report to propose more.

Feature	Regular case	Small (S) case
Amount limit	None	$50,000 per year, penalties included (§ 7463(a), (e))
Evidence rules	Formal	Any evidence with probative value (Rule 174(b))
Who decides	Judge; special trial judge if $50,000 or less	Judge or special trial judge (§ 7443A)
Appeal	Ninth Circuit, notice within 90 days (§ 7483)	None for either side (§ 7463(b))
Precedent	Yes	None
IRS increase	Allowed (§ 6214(a))	Capped at the limit (§ 7463(c))
Time to trial	Same calendars; Appeals keeps the file until settlement fails or 10 days after calendaring	Same calendars; Counsel may recall from Appeals after six months
Best for	Legal issues, Ninth Circuit authority, big years	Fact fights well under the cap

Frequently Asked Questions

Can I change my Tax Court trial city after I file?

Yes, by a Rule 140(b) motion stating the reasons. After the trial notice is served, the Court may deny it as dilatory.

Does choosing Sacramento instead of Los Angeles change which law applies?

No. Your legal residence when you file sets the appeals court, so California individuals are in the Ninth Circuit.

Can I appeal a small tax case decision?

No. Section 7463(b) bars review in any other court, for the IRS too. The decision is also not precedent.

Do penalties count toward the $50,000 small case limit?

Yes. Section 7463(e) includes penalties and additions to tax, measured year by year in a deficiency case.

Do I have to tell the Franchise Tax Board about my Tax Court result?

If it raises your California tax, yes, within six months after the IRS assesses it. Without a report, the FTB can assess at any time.

How North Star Law Firm Can Help

North Star Law Firm prepares Tax Court petitions and handles the Appeals and FTB follow-up through its Tax Court and Office of Tax Appeals, tax defense and penalty abatement practices. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Tax Court.

If your notice has a date circled on it, contact North Star Law Firm or schedule a consultation before you fill out the petition.

October 23, 2026

California Business Sale Earnouts: Effort Clauses, Damages and the Tax Bill

A Rancho Cucamonga dentist sells her practice to a dental group for $1 million plus up to $400,000 more if collections hold for two years, and stays on as an associate. Eighteen months later the group has moved a hygienist to Ontario and dropped Saturday hours, and the earnout statement says she missed by four percent. Delaware has spent years on a far bigger version; California has its own rules and a tax side.

What does a buyer owe a California seller while the earnout runs?

Less than most sellers assume. Carma Developers (Cal.), Inc. v. Marathon Development California, Inc., 2 Cal. 4th 342 (1992), requires good faith when one party holds “a discretionary power affecting the rights of another” (at 372), but “implied terms should never be read to vary express terms” (at 374). If the agreement gives the buyer sole discretion over staffing or hours, using it usually is not a breach. I see that clause in most buyer-side first drafts.

The rule is sharper when the buyer makes payment impossible. In Pacific Venture Corp. v. Huey, 15 Cal. 2d 711, 717 (1940), buyers owing a $2,500 balance payable from mining royalties transferred the claims and still owed it, because “a person cannot avoid liability for the nonperformance of an obligation by placing such performance beyond his control.” Cal. Civ. Code § 1511 and § 1512 state a cousin of that rule. Delaware just tested how far that idea reaches.

What did the Delaware court decide in the Alexion earnout case?

Alexion bought Syntimmune in 2018 with up to $800 million in milestone payments and efforts measured against “biopharmaceutical companies similar in size and scope.” The September 5, 2024 liability opinion treated that as an objective test measured by a hypothetical comparable and held that killing the program, a decision “driven by AstraZeneca’s pursuit of merger synergies” after AstraZeneca bought Alexion, breached it. A sole-discretion clause did not help; it “was cabined by” the efforts promise.

The June 11, 2025 damages opinion awarded $180,944,915.32 plus interest, weighting each unpaid milestone by its probability (from Alexion’s own pre-breach estimates) and discounting to present value. The sellers sought every payment, about $755 million with interest, under the prevention doctrine, which the court held “does not provide a plaintiff a back door to damages in excess of proven expectation damages.”

Alexion later won about $12 million on an indemnification claim, and an August 3, 2026 letter cleared the way for final judgment. I find no Delaware Supreme Court decision as of mid-October 2026; any appeal would follow that judgment. Mid-2025 commentary predates all of this.

How would a California court value a lost earnout, and whose law applies?

Cal. Civ. Code § 3300 compensates “all the detriment proximately caused,” and § 3301 bars damages “not clearly ascertainable in both their nature and origin.” Sargon Enterprises, Inc. v. University of Southern California, 55 Cal. 4th 747 (2012), upheld excluding an expert’s market-share projections for a small dental implant company; lost profits “must also not be unduly speculative.” So the seller’s proof is the business’s own record. I expect California would land near Delaware’s answer, though I have found no published California earnout case on point.

Many deals pick Delaware law. Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459, 466 (1992), enforces the choice if there is a substantial relationship or other reasonable basis, unless it offends a fundamental California policy and California has a materially greater interest. The implied covenant is no such policy. 6 Del. C. § 2708 presumes a Delaware choice reasonable in contracts of $100,000 or more. A Riverside seller who signs it should treat Alexion as the rulebook.

What should a seller insist on before signing an earnout?

First, define the effort. Alexion’s peer-company test took a trial to give it meaning. In a small deal I tie effort to the buyer’s conduct at similar locations, or to checkable numbers such as minimum office hours and a marketing budget. Then strike or narrow sole-discretion language, which under Carma can defeat the implied covenant.

Measure gross revenue or collections, not EBITDA, which moves whenever the buyer charges management fees or overhead to the location. The business should stay a separate reporting unit with unchanged accounting methods, and monthly reports plus an audit right let the seller’s accountant test the statement while objections still matter.

I also want acceleration if the buyer sells the business or fires the seller without cause; Alexion’s program died after its own buyer arrived. Calculation fights belong with an independent accountant on a short clock, effort fights in court. Follow notice clauses exactly, too; the Alexion sellers’ fee claim stalled for lack of a shown indemnification notice.

How are earnout payments taxed for a California seller?

Usually as installment sale proceeds. A sale whose price cannot be fixed by year-end is a contingent payment sale under IRC § 453 and Treas. Reg. § 15a.453-1(c). With a cap, basis is allocated as if every contingency is met; with only a fixed term, evenly over the term; with neither, over 15 years. Equipment recapture is taxed in the year of sale under § 453(i). Under IRC § 483 and Treas. Reg. § 1.483-4 (or § 1.1275-4(c) if § 1274 applies), each contingent payment is discounted to the sale date at the applicable federal rate, and the excess is ordinary interest.

If the earnout vanishes when the seller stops working there, the IRS can call it wages, and buyers may not object, since wages are deducted at once and goodwill over 15 years under IRC § 197. California adopts the installment rules through Cal. Rev. & Tax. Code § 17551 but taxes capital gain in the same 9.3 to 12.3 percent brackets as wages, plus 1 percent over $1 million (§ 17043). So the label barely moves California income tax; the swing is federal, plus payroll tax, including State Disability Insurance at 1.3 percent of all 2026 wages. For any real estate in the deal, § 18662(e) generally requires 3 1/3 percent withholding.

Illustrative numbers for the opening dentist, Dr. Ortiz: she closes in November 2026 for $1,000,000 plus $200,000 for each of 2027 and 2028 if collections reach $1.1 million. Say $100,000 of the closing cash goes to fully depreciated equipment and the rest to zero-basis goodwill. Her 2026 return shows $100,000 of ordinary recapture and $900,000 of capital gain. At an assumed 4 percent federal rate, the 2027 payment is about $192,300 of gain and $7,700 of interest; the 2028 payment, about $184,900 and $15,100.

As price, the $400,000 costs roughly $65,000 to $84,000 of federal income tax at 15 or 20 percent. As wages, about $140,000 to $148,000 at 35 to 37 percent, plus roughly $9,400 of Medicare tax and $5,200 of SDI at the 2026 rate, assuming her salary already tops the additional Medicare threshold and the Social Security wage base ($192,300 for 2027). California income tax, around $37,000 to $49,000, does not change. The label is worth roughly $80,000 to $90,000, so I tie the earnout to practice numbers, not to her staying.

What closing steps keep old tax debts from eating the earnout?

An unpaid earnout is the easiest money to hold back. Cal. Rev. & Tax. Code § 6811 requires a buyer to withhold enough of the price for the seller’s sales and use tax until CDTFA issues a receipt or certificate, and under § 6812 a buyer who skips it is liable up to the price. Cal. Unemp. Ins. Code §§ 1731 and 1732 work the same way for EDD. Inventory sellers and restaurants (most franchise food units and e-commerce brands) also face the bulk sale rules (Cal. Com. Code § 6103): notice 12 business days before closing under § 6105 and, at $2 million or less, payment of timely claims from the cash under § 6106.2. A dental practice usually falls outside them. Clear all of it before closing so the earnout is not later offset. (See my post on what a section 363 sale order does not cut off.)

Design choice	Seller risk	Buyer risk	What the Delaware case shows
Effort: undefined vs. defined	Undefined: implied covenant only	Defined: duties it can breach	An objective definition beat sole discretion
Metric: EBITDA vs. revenue vs. units	EBITDA: allocations erase payment	Revenue: pays on thin margins	Each milestone’s probability set damages
Control: none vs. separate reporting unit	None: folded into the parent	Separate unit: slower integration	A new parent’s synergy push ended the program
Acceleration: none vs. on sale or termination	None: earnout dies in a later deal	Pays before targets are met	Without it, expected value, not face amount
Disputes: litigation vs. accountant	Litigation: years and fees	Accountant: fast, narrow review	Filed in 2020, no final judgment by August 2026

Frequently Asked Questions

Is an earnout taxed at closing or when it is paid in California?

Usually when it is paid. California follows the federal installment rules, so gain on each payment is reported in the year it arrives, with part of it treated as interest.

Can a buyer close the business and owe nothing on the earnout?

Not if the contract has an effort clause, and California law also stops a party from escaping a payment by making its condition impossible. Expect the fight to be over the amount, usually the earnout’s realistic value rather than its face amount.

Does California give a lower tax rate on earnout gain?

No. California taxes capital gain at the same rates as wages, generally 9.3 to 12.3 percent at these income levels, plus 1 percent above $1 million, so the real difference is federal.

Should a California seller agree to Delaware law in the purchase agreement?

Usually California courts enforce the choice, and Delaware presumes it reasonable for contracts of $100,000 or more. A seller who accepts it should expect Delaware’s earnout cases to decide the dispute.

What happens to my earnout if the buyer sells the business?

Without an acceleration clause, it rides along and depends on how the next owner runs things. With one, the unpaid amount comes due at an agreed figure on a sale or a termination without cause.

How North Star Law Firm Can Help

North Star Law Firm represents California sellers and buyers in buying and selling a business, negotiates earnout terms through contract drafting and review, and models the tax through business sale tax structuring. Phillip Zagotti is a California attorney and a CPA, admitted to the U.S. Tax Court.

If a buyer has sent you an earnout term sheet, contact North Star Law Firm or schedule a consultation before the effort clause is final.

October 22, 2026

California Nonprofit Insider Loans: Section 5236, Self-Dealing and the IRS 200% Tax

A treasurer at a small Inland Empire nonprofit finds $150,000 sent to an LLC the president owns. The memo says “loan,” and the one-page note bears his signature twice, for the charity and for his company. Nobody recalls a vote.

A September 24 opinion shows what that note can cost. In Jagannath v. Commissioner, T.C. Memo. 2026-92, a charity president owed $1,327,500 in excise taxes over $590,000 he never returned. That was a Tennessee charity. California law reaches the same transfer first, and the other directors with it.

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North Star Tax and Legal Briefing: California Nonprofit Insider Loans and the 200% IRS Tax

How a charity president's unapproved loan to his own LLC became more than $1.3 million in excise taxes, and what California's self-dealing rules and the IRS correction window mean for your board.

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A treasurer at a small Inland Empire nonprofit opens the bank statements and finds one hundred fifty thousand dollars sent to a limited liability company the president owns. The memo line says loan. The one page note carries his signature twice, once for the charity and once for his own company. Nobody remembers a vote. A Tax Court decision from this September shows what it can cost. A charity president ended up owing one million three hundred twenty-seven thousand five hundred dollars in excise taxes over five hundred ninety thousand dollars he never gave back. And California law reaches that same transfer first, and the other directors with it.

Start with California. A public benefit corporation cannot lend money to, or guarantee the debts of, a director or officer unless the Attorney General approves. The exceptions are narrow: advances for job expenses the charity would reimburse anyway, certain life insurance arrangements, and a home loan the board finds necessary to keep an officer, secured by California real estate. Directors who approve a prohibited loan are jointly and severally liable for the charity’s loss, and abstaining at the meeting counts as approving. A separate self dealing rule covers any transaction where a director has a material financial interest, unless the Attorney General, a court, or the disinterested directors clear it. Then there is the federal side. The I R S taxes the insider who took the benefit, not the charity. That tax has two tiers, and the second tier is where the numbers turn ugly.

In the case decided this September, the president of a Tennessee charity controlled the books, with family on the board. In April of twenty sixteen, five hundred ninety thousand dollars left the charity’s money market account. Eleven days later he signed an interest free note, as president of the lender and as owner of the borrower, his own single member L L C. Nothing was ever repaid. By trial he had dropped the loan story and claimed a six hundred thousand dollar wire that December paid it back, but the charity had reported that wire as a gift from a donor he could not name. The court sustained the twenty-five percent first tier tax, one hundred forty-seven thousand five hundred dollars, and the two hundred percent second tier tax, one million one hundred eighty thousand dollars. One point cuts the other way. The two hundred percent tax can still be abated if the insider repays in cash, with interest, within ninety days after the deficiency notice, a window that stays open while a Tax Court case is pending. On our reading, he could still shed that second tier by repaying. This is a memorandum opinion. It illustrates the rules. It does not change them.

Why does this matter to an ordinary California charity? Because the twenty-five percent tax attaches the moment the money moves, and it does not go away when the money comes back. Repayment only heads off the two hundred percent tier. Correction means cash, not a new note, equal to the benefit plus interest at no less than the applicable federal rate for the month of the transfer. The insider files his own excise tax return, Form forty-seven twenty, and late filing additions run from its due date. Directors who saw the transfer and said nothing can share a manager tax of their own. Silence counts as participation when there is a duty to speak. On the state side, the Attorney General has ten years to sue over self dealing. The usual trigger is the annual registration renewal, Form R R F one, which asks under penalty of perjury about loans to officers and directors, including through their entities.

Picture a Riverside youth soccer league whose president wires one hundred fifty thousand dollars to his property L L C. His first tier tax is thirty-seven thousand five hundred dollars. Correcting before any I R S contact costs the principal plus roughly twenty thousand dollars of interest, in cash. Waiting for a deficiency notice adds three hundred thousand dollars. So this week: pull the bank records and stop further payments. Have the board demand correction in writing, through counsel independent of the insider, and get the cash back before anyone official asks. Then check last year’s R R F one, and amend it if it said no. That’s what we do at North Star Law Firm. The initial consultation is free, and the full written analysis with citations is at C A dash legal dot net.

Can a California nonprofit lend money to its president or a director?

Not without the Attorney General’s approval. Cal. Corp. Code § 5236(a) says a public benefit corporation “shall not make any loan of money or property to or guarantee the obligation of any director or officer, unless approved by the Attorney General.” The exceptions cover advances for reimbursable job expenses, secured life insurance premium arrangements, and a home loan the board deems necessary to keep an officer, secured by California real estate.

Under section 5237, directors who approve a prohibited loan are jointly and severally liable for the corporation’s loss, and abstaining at the meeting counts as approval. Routing the money through the president’s LLC does not clearly avoid section 5236, and section 5233 plainly reaches it.

When is a deal with a board member “self-dealing” in California?

Section 5233 reaches any transaction with the corporation in which a director “has a material financial interest,” unless the Attorney General or a court approves it (before or after closing) or a majority of directors in office, not counting the interested one, approves it in advance knowing the material facts, the deal is fair to the charity, and a reasonable investigation shows it could not do better.

Without clearance, the court can order the director to disgorge profits and restore losses “together with any income or appreciation lost,” with legal-rate interest and, for fraud, exemplary damages. The Attorney General can sue alone; the corporation, a director, an officer or a member suing derivatively (as in California LLC squeeze-outs) needs the Attorney General joined. Private suits generally have three years; the Attorney General has ten.

What did the Tax Court decide in Jagannath v. Commissioner?

In 2016 Sitaraman Jagannath was Senecura’s president; his father was a director and his daughter treasurer. That April, $590,000 left its money market account in an over-the-counter withdrawal. Eleven days later he signed an interest-free note as president of the lender and as owner of the borrower, his single-member LLC. The charity’s 2016 and 2017 returns listed the balance as a loan receivable from officers, with no Schedule L. Nothing was repaid.

The LLC’s statements showed no matching deposit, yet Judge Weiler found the transfer from the note, the returns and his control of the books. By trial he had dropped the loan defense and claimed a $600,000 wire that December repaid it, though Senecura reported that wire as a contribution from a donor he could not name. The burden stayed on him, because section 7491 does not reach excise taxes.

The court sustained $147,500 under section 4958(a)(1), $1,180,000 under section 4958(b), and section 6651(a)(1) and (2) additions for never filing Form 4720 or paying. The IRS had conceded the $20,000 manager tax before trial. Computations under Tax Court Rule 155 are due December 27, 2026, so no decision has been entered; any appeal goes to the Sixth Circuit.

How do the 25 percent and 200 percent excess benefit taxes work?

26 U.S.C. § 4958 taxes the insider, not the charity. A disqualified person is anyone with substantial influence in the prior five years, plus family and entities they own more than 35 percent of, and benefits provided “directly or indirectly” count (Treas. Reg. § 53.4958-4(a)(2)). The presumption of reasonableness in § 53.4958-6 needs advance approval by people without a conflict, comparability data and contemporaneous minutes. A note the insider signed on both sides fails at step one, as would his relatives’ approval.

The 25 percent tax attaches at once. The 200 percent tax follows unless the benefit is corrected before the IRS mails a deficiency notice or assesses. Correction under § 53.4958-7 means cash (not a new note) equal to the benefit plus interest compounded annually at no less than the applicable federal rate (AFR) for the month of the transfer.

Section 4961(a) abates the second-tier tax if correction comes within the correction period, which section 4963(e) runs to 90 days after the deficiency notice, extended while a Tax Court case blocks assessment. On my reading, Mr. Jagannath could still shed the 200 percent tax by repaying.

The insider files Form 4720 (Treas. Reg. § 53.6011-1(b)), due the 15th day of the fifth month after his tax year ends (§ 53.6071-1(f)). Yet the IRS’s three-year clock runs from the charity’s Form 990 for that year (section 6501(l)(1)), or six under section 6501(e)(3) if the return omits the tax without adequately disclosing the deal. Jagannath never mentions limitations.

Did an IRS exam letter or a board member’s question surface a payment to an insider? Repaying in cash with AFR interest before a deficiency notice keeps a 25 percent tax from becoming 225 percent.

What can the California Attorney General do about an insider loan?

Section 5250 opens a public benefit corporation to examination “at all times.” Gov. Code § 12588, part of the Supervision of Trustees and Fundraisers for Charitable Purposes Act (Gov. Code § 12580 et seq.), adds sworn testimony and production of the books. In court the office can seek an injunction, receiver or restitution under section 12591.1(f), recover fees under section 12598(b), or sue to remove a director under Corp. Code § 5223.

The usual trigger is the annual Form RRF-1, filed with the Form 990. Part B, Question 1 (Rev. 01/2024) asks about “contracts, loans, leases or other financial transactions” with an officer, director or trustee, “either directly or with an entity” they have an interest in, signed under penalty of perjury. The state exemption under R&TC § 23701d already bars private inurement, and the Franchise Tax Board can revoke it for not filing with the Registry (section 23703) or for a missed Form 199 (section 23777).

How would this play out for a Riverside youth sports nonprofit?

Illustrative facts: a Riverside youth soccer league has a $900,000 budget. On March 12, 2024, its president, a voting director, wires $150,000 to his property LLC as a “loan” nobody else signs. Two directors see it on a statement that summer and say nothing.

His first-tier tax is $37,500, and his Form 4720 was due May 15, 2025, so late-filing additions are accruing. Correcting on December 1, 2026, before any IRS contact, takes $150,000 plus interest at no less than March 2024’s short-term AFR of 4.71 percent (Rev. Rul. 2024-4), roughly $20,000, in cash. Waiting for a deficiency notice adds $300,000. The quiet directors are organization managers; if they meet the knowing test they share one $15,000 tax, and Treas. Reg. § 53.4958-1(d)(3) counts silence as participation when there is a duty to speak.

In California this is unapproved self-dealing the Attorney General can pursue until March 2034, and any director who voted for the “loan” would face section 5237. Under $2 million in revenue, the league needs no audit under Gov. Code § 12586(e), so RRF-1 Question 1 may be the first alarm. If the 2024 report said “no,” amend it.

What should a California board do after finding an insider transfer?

Stop payments, pull the bank records and hire counsel independent of the insider. I see the best results when the board demands correction in writing and the cash returns before anyone official asks. Then disclose, since Form 990 Part IV, lines 25a, 25b and 26, will ask about it anyway.

Next, adopt and enforce the conflict of interest policy Form 990 Part VI, line 12 asks about. Set pay with disinterested directors, outside data and same-day minutes; under $1 million in gross receipts, figures from three comparable local organizations suffice. Put it in the bylaws: no loans to directors or officers.

Rule	Who is liable	Who enforces	Remedy or rate	Cure
IRC § 4958	Insider; knowing managers	IRS, Tax Court	25%; 200% if uncorrected; managers 10% (max $20,000)	Cash plus AFR interest
Corp. Code §§ 5236, 5237	Approving directors	Attorney General; prior creditors	Corporation’s loss	Attorney General approval
Corp. Code § 5233	Interested director	Attorney General; others, with the Attorney General joined	Profits, lost property and income, interest, exemplary damages	Approval by Attorney General, court or disinterested board
Attorney General supervision	Charity, directors, officers	Attorney General, Registry	Subpoenas, receiver, restitution, removal, fees	Repayment and accurate RRF-1

Frequently Asked Questions

Can a California nonprofit give its executive director a salary advance?

If the executive director is an officer, probably not without Attorney General approval. Section 5236 allows advances only for job expenses the corporation would otherwise reimburse, and a pay advance is a loan of money.

Does repaying the money make the 25 percent excise tax go away?

No. Timely repayment avoids or abates the 200 percent tax, but the 25 percent tax stays unless section 4962 applies. That requires reasonable cause, which is hard to show when the insider moved the money himself.

Are volunteer directors personally liable for an insider’s loan?

They can be. Knowing participation brings the 10 percent manager tax, capped at $20,000 per transaction, though relying on a reasoned written opinion from counsel or a CPA ordinarily defeats it.

Does the California RRF-1 really ask about loans to officers?

Yes. Part B, Question 1 asks about loans and other transactions with officers, directors and trustees, including through their entities. A yes answer needs an attachment with the terms and the authorizing board minutes.

What if the IRS has already mailed a deficiency notice?

Correcting within 90 days, or while a timely Tax Court case is pending, can still get the second-tier tax abated under sections 4961 and 4963(e). Petition on time and have the correction amount calculated immediately.

How North Star Law Firm Can Help

North Star Law Firm drafts nonprofit bylaws and conflict rules through its entity formation and governance agreement work and represents insiders and managers before the IRS and Tax Court through its tax defense practice. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Tax Court.

If your board found an insider transfer, contact North Star Law Firm or schedule a consultation before the next Form 990 or RRF-1 is signed.

October 21, 2026

IRS Form 872 in California: Fine v. Commissioner and the FTB’s Extra Six Months

You own a small company in the Inland Empire, and an IRS revenue agent has spent most of a year on your 2022 return. She emailed a Form 872 and wants it signed within fourteen days, or she closes the exam on what she has. Your CPA says everyone signs.

Usually that is right, but on Sept. 30, 2026 the Tax Court held that a taxpayer cannot cut a fixed-date Form 872 short, so the version matters. And the IRS letter will not say that your signature also holds open the Franchise Tax Board’s window.

Does a federal Form 872 also extend the California FTB’s deadline?

Yes, automatically. California starts with four years from filing, one more than the IRS gets. Cal. Rev. & Tax. Code § 19057(a). A 25 percent omission gets six years under section 19058, and fraud or a missing return has no limit under section 19087. Under section 19065, once you extend the federal period, the FTB may assess until four years after filing or “six months after the date of the expiration of the agreed period,” whichever is later. No FTB request is needed.

It may ask anyway. Section 19067 authorizes state waivers, and the FTB’s audit manual prefers one even though the FTB “can and will” assess on an open federal consent. The state notice right in section 19067(b) covers refusing or limiting the time, but unlike the federal rule below, not limiting issues.

What does IRS Form 872 do to my audit statute of limitations?

Federally, the IRS normally gets three years from the filing date to assess more tax. 26 U.S.C. § 6501(a). Omitting over 25 percent of stated gross income makes it six years under section 6501(e)(1)(A), and fraud or a missing return leaves the year open indefinitely under section 6501(c)(1) and (c)(3). I check for those first; a consent cannot shorten them.

Section 6501(c)(4)(A) lets both sides agree in writing, before the period expires, to a later deadline. Since the 1998 Restructuring and Reform Act, section 6501(c)(4)(B) has required the IRS to tell you, each time it asks, that you may refuse or “limit such extension to particular issues or to a particular period of time.” IRS Publication 1035 repeats those rights.

Form 872 names a date. Form 872-A names none; under IRM 25.6.22.7.1 and Rev. Proc. 79-22 it ends 90 days after your Form 872-T reaches the IRS, 90 days from the IRS mailing one to you, or following a notice of deficiency. Nothing else ends it, so an 872-A holder needs a calendar entry for that decision.

Can I end a Form 872 early with Form 872-T after Fine v. Commissioner?

No. Barry Fine and Monica Dias signed Forms 872 carrying 2015 to Dec. 31, 2021 and 2016 to June 30, 2021. After Appeals talks failed, their lawyer sent Forms 872-T by fax on Sept. 11, 2020, checking the only box offered, the one for Form 872-A. Notices dated April 15, 2021 proposed $405,943 and $210,003 of tax, seven months after the fax but before the 872 dates.

Judge Ashford held that “Form 872-T does not terminate a properly executed Form 872.” Fine v. Commissioner, 167 T.C. No. 13 (Sept. 30, 2026). The court took from Stange v. United States, 282 U.S. 270 (1931), that a consent is a “voluntary, unilateral waiver of a defense,” not a contract, yet applied contract rules to mutual assent, citing Kronish v. Commissioner, 90 T.C. 684 (1988), and Piarulle v. Commissioner, 80 T.C. 1035 (1983). Open-ended deals end at will; a bargained date binds. Hence “only the passage of time can terminate Form 872.”

California cases appeal to the Ninth Circuit, which is just as strict. Kinsey v. Commissioner, 859 F.2d 1361 (9th Cir. 1988), rejected an implied termination of an 872-A. Kelley v. Commissioner, 45 F.3d 348 (9th Cir. 1995), upheld reforming two 872-A forms to the years the parties meant. A Kelley footnote does describe Form 872-T ending a consent given “by an IRS Form 872 or 872-A”; Fine called it a passing recital of facts. Because Golsen v. Commissioner, 54 T.C. 742 (1970), has the Tax Court follow the circuit of appeal, a Californian could press that footnote. I would not build a case on it.

If you already signed, plan around the date. You can refuse the next extension; the opinion says the Fines could have negotiated “a shorter timeframe or limited the IRS’s examination to certain issues.”

Did an IRS examiner just hand you a Form 872 with a two-week deadline? Its terms can only be negotiated before you sign and before the current statute date passes; after that, Fine says the date on the form controls.

When can the FTB assess after an IRS audit change, and what if I never report it?

Section 18622(a) requires an individual to report a federal change that raises California tax within six months after the “final federal determination,” meaning the date the IRS assesses it under subdivision (d). Report on time, and section 19059(a) gives the FTB two years from the report, or the section 19057, 19058 or 19065 period if later. Report late, and section 19060(b) allows four years from the report. Never report, and section 19060(a) permits an assessment “at any time.”

You can protest a proposed FTB assessment within 60 days under section 19041, and appeal the FTB’s protest decision within 30 days under section 19045 to the Office of Tax Appeals, which inherited that role from the Board of Equalization under Gov. Code § 15672.

How would a Form 872 play out for a Temecula S corporation owner?

An illustrative case: Priya owns an S corporation in Temecula and files a joint 2022 Form 1040 on Oct. 16, 2023. In summer 2026, before the Oct. 16, 2026 federal deadline, Priya signs a Form 872 extending 2022 to Dec. 31, 2027. The 1040 is the return that counts: Bufferd v. Commissioner, 506 U.S. 523 (1993), held that a shareholder’s period runs from the shareholder’s own return.

In spring 2027 the IRS disallows $170,000 of flow-through corporate deductions and proposes about $60,000 of tax. Priya agrees, and the IRS assesses on Aug. 2, 2027. California’s ordinary deadline was Oct. 16, 2027; section 19065 moves it to June 30, 2028. Priya must report by Feb. 2, 2028. At an assumed 9.3 percent rate, California wants about $15,810, plus interest under section 19101 from the original due date. The corporation’s 1.5 percent tax under section 23802 could add $2,550 if its own California year is still open.

File the amended California return in January 2028 and the FTB has until January 2030 under section 19059. Never file it, and 2022 never closes.

Should I sign Form 872, ask for a restricted consent, or refuse?

Refusing is lawful, and Publication 1035 says it carries no penalty and does not shift the burden of proof. But the examiner then closes on her file, and the notice of deficiency rests on it. You get 90 days to petition the Tax Court (a hard deadline, as my post on Kings Road explains), and once the case is docketed, 26 U.S.C. § 6503(a) suspends the statute until the decision is final plus 60 days. Refusing does not run out the clock.

A restricted consent extends the period for named issues and lets the rest expire (IRM 25.6.22.8). The IRS treats this as a right to ask and agrees mainly when few issues remain open and the rest are settled.

I sign when the agent needs time and a notice built on half a record would be worse. I decline when the statute is weeks away and the issues are fully developed, since more time would only invite new ones. The CPA’s workpapers often decide it. If they tie each deduction to an invoice, I want a short restricted consent, because the answers already exist. Thin workpapers mean you need time to rebuild support, yet time lets the agent wander, so I press for issue limits. Then I calendar the federal date and the date six months later, which belongs to the FTB.

Choice	How long the IRS gets	Can you end it early?	Effect on the FTB clock	When it makes sense
Refuse to sign	Current statute date, then § 6503(a) suspension	Nothing to end	Normal four years (§ 19057)	Statute near, issues fully developed
Form 872, fixed date	To the agreed date	No (Fine)	Open six months past the agreed date (§ 19065)	Agent needs time; records can answer
Form 872, restricted consent	Agreed date, listed issues only	No, for the listed issues	Same; state-only issues untested	Few open issues, the rest agreed
Form 872-A with 872-T	Until 90 days after an 872-T or notice	Yes, by Form 872-T	Open while it is, plus six months	Appeals cases, with the 872-T calendared

Frequently Asked Questions

Do I have to sign Form 872 if the IRS asks?

No. The IRS must tell you that you may refuse or limit it, and refusing carries no penalty. Expect a notice of deficiency soon afterward.

Can Form 872-T cancel a Form 872 I already signed?

Not under Fine v. Commissioner. Form 872-T ends only an open-ended Form 872-A, and a fixed-date Form 872 lasts until its date. You can still decline any further extension.

Does signing a federal Form 872 give the California FTB more time?

Yes. Revenue and Taxation Code section 19065 keeps California’s period open until six months after the federal agreed period expires, if that is later than the normal four years.

How long do I have to tell the FTB about an IRS audit change?

Six months after the IRS assesses the change, under section 18622. If you never report it, section 19060 lets the FTB assess at any time.

Can I limit a Form 872 to certain audit issues?

You can ask for a restricted consent. The IRS usually agrees when the open issues are few and clearly described and the rest are settled, and IRS Counsel must approve the wording.

How North Star Law Firm Can Help

North Star Law Firm represents California taxpayers in IRS and FTB examinations through its tax defense practice, and handles the disputes that follow in the Tax Court and the Office of Tax Appeals. It also seeks penalty abatement when a federal change brings California penalties. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Tax Court.

If an examiner wants a statute extension, contact North Star Law Firm or schedule a consultation before the current date runs out.

October 20, 2026

Vacating an Old Default Judgment in California After Hoehn and Coney Island

Escrow on a Murrieta house is two weeks from closing when the title officer calls. An abstract of judgment is recorded against the seller, from a Riverside County case brought by a former supplier of her tile company. The default was entered in 2017. Nobody remembers a summons.

Is it too late? In 2026 that depends on the court. The nation’s highest court tightened the federal rule in January; California’s Supreme Court loosened the state rule in late 2024.

Why do California companies end up with default judgments they never knew about?

Usually the papers went where state records pointed. A corporation is served through its designated agent or an officer under Cal. Code Civ. Proc. § 416.10, and it names that agent on the annual statement required by Cal. Corp. Code § 1502. LLCs file every two years under section 17702.09, and section 17701.16(b) says a new agent address is not “effective until” the statement is amended.

If the server cannot find the agent at the listed address, the court can order service on the Secretary of State under Corp. Code § 1702(a) (section 17701.16(c) for LLCs). That office then mails the papers to whatever principal office its records show. The most common cause of a surprise judgment I see is a registered-agent address nobody updated after the business moved.

How does an old default judgment surface, and how long can a creditor enforce it in California?

Late, through a bank levy, a garnished paycheck or a title report. Recording an abstract of judgment creates a real property lien under Code Civ. Proc. § 697.310 that lasts until ten years from entry of the judgment, not from recording. The abstract must show where the summons was served or mailed (§ 674(a)(3)), often the first clue.

A money judgment is enforceable for ten years (§ 683.020), renewable for ten more by an application filed before that period ends (§§ 683.120, 683.130), and a recorded renewal extends the lien (§ 683.180). Interest runs at 10 percent under section 685.010; the 5 percent rate added in 2023 covers certain medical and consumer judgments, not business debts.

Did a bank levy or a title report just show you a judgment you never knew about? The 180-day deadline in section 473.5 can start the day you are served with notice of the judgment, and courts now ask how fast you moved once you knew.

Is a California default judgment void if the company was never properly served?

Often. A default entered without statutory service “is void,” said Dill v. Berquist Construction Co., 24 Cal. App. 4th 1426, 1444 (1994), quoted in California Capital Ins. Co. v. Hoehn, 17 Cal. 5th 207 (2024).

Void on its face means the defect appears in the judgment roll, the default file itself (§ 670(a)), with no outside evidence. A proof of service under section 415.20(a) reciting no mailing is, in my reading, facially defective. A regular-looking proof naming a “person in charge” at a suite you had already left is void only once a lease and declarations prove the move. Most business cases are that second kind, and a proper section 1702 order may mean no defect at all.

How late is too late to set aside a default judgment in California state court?

Section 473(b) covers excusable neglect, “in no case exceeding six months.” Section 473.5 helps a validly served defendant who got no actual notice: file by the earlier of two years after entry or 180 days after written notice, swearing the lapse “was not caused by the party’s avoidance of service or inexcusable neglect.”

Section 473(d) reaches “any void judgment.” Facially void ones were always open to attack. For the rest, Rogers v. Silverman, 216 Cal. App. 3d 1114 (1989), and cases such as Trackman v. Kenney, 187 Cal. App. 4th 175 (2010), borrowed a two-year cap. Hoehn ended that. On a 2011 Placer County default the defendant said he first learned of through a 2020 wage garnishment, the Court held that “a section 473(d) motion to vacate a judgment that is void for lack of proper service is not subject to the judicially imposed two-year limitation,” disapproving Rogers “and its progeny.” Footnote 11 left open whether diligence after discovery is required; Kramer v. Traditional Escrow, Inc., 56 Cal. App. 5th 13, 37 (2020), measures it “from when a party discovers the default.” Hoehn moved within three months.

AB 747 (Stats. 2025, ch. 563) adds section 473.2 on January 1, 2027, making the plaintiff prove lawful service “by a preponderance of the evidence,” but AB 2042 (Stats. 2026, ch. 379) limits it to service attempted or completed from that date on. For a 2017 judgment, Evid. Code § 647 still presumes a registered server’s return accurate until you produce contrary evidence.

What did the Supreme Court decide in Coney Island, and does it reach federal judgments in California?

On January 20, 2026, a unanimous Court affirmed the Sixth Circuit in Coney Island Auto Parts Unlimited, Inc. v. Burton, No. 24-808, a bankruptcy default attacked only after a 2021 seizure. Justice Alito wrote: “We hold that this time limit applies to a motion alleging that a judgment is void.” Rule 60(c)(1)‘s reasonable-time requirement now governs voidness motions in federal court. Justice Sotomayor concurred only in the judgment.

The holding is narrow. The Court expressed “no view” on whether the service voided the judgment, left a reasonable time undefined, and reserved Rule 60(d) independent actions. It added that “it might be reasonable for a defendant not to seek relief before learning about a plaintiff’s attempted enforcement.” There was no remand.

This displaces Ninth Circuit law. Meadows v. Dominican Republic, 817 F.2d 517 (9th Cir. 1987), said “[t]here is no time limit on a Rule 60(b)(4) motion,” and SEC v. Internet Solutions for Business Inc., 509 F.3d 1161 (9th Cir. 2007), agreed, while holding that a defendant who knew of the suit must prove non-service and can overcome a signed return only by “strong and convincing evidence.” Through Fed. R. Bankr. P. 9024, the limit reaches bankruptcy court defaults too (creditors facing a filing should see my post on judgment creditors in Chapter 11). One irony: Hoehn’s footnote 10 leaned on the federal rule having no time limit. Expect creditors to cite Coney Island when pressing for a diligence rule.

What should a Murrieta owner do when escrow turns up a 2017 Riverside County judgment?

An illustrative case. Dana’s tile corporation moved from Riverside to Temecula in 2015 without updating its statement of information. In 2016 a supplier sued the company and Dana, as guarantor, in Riverside County Superior Court, serving the company through the Secretary of State and Dana by substituted service at the old suite. A $48,000 default was entered against both on March 14, 2017.

At 10 percent simple interest that is about $13.15 a day, roughly $46,000 by October 16, 2026 (payoff near $94,000 before costs). Enforceability ends in March 2027 unless renewed, and section 683.170 gives Dana 60 days after service of a renewal notice to challenge it.

The company’s realistic remedy was section 473.5, which closed in 2019. Dana has a Hoehn motion if she proves the suite was no longer her place of business and that no diligent personal-delivery attempts came first, as section 415.20(b) requires. Otherwise she can negotiate a payoff with escrow holding the disputed sum, or consider bankruptcy, where 11 U.S.C. § 522(f)(1)(A) lets a debtor avoid a judicial lien that impairs an exemption.

The week a judgment appears, I order the court file and read the proof of service line by line, then gather the Secretary of State history, the lease and declarations from whoever occupied the old suite. Each week after discovery is one a creditor will call unreasonable.

Route	Time limit	What you must show	Burden	Typical proof
Federal court, Rule 60(b)(4)	Reasonable time (Coney Island)	Judgment void, usually for bad service	Movant, if it knew of the suit	Docket, return, enforcement dates
§ 473(d), void on its face	Any time	Defect visible in the judgment roll	Movant, record only	Summons, proof of service
§ 473(d), void by outside evidence	No two-year cap (Hoehn); diligence unsettled	Service not made as statute requires	Movant rebuts § 647 presumption (pre-2027 service)	SOS history, lease, declarations
§ 473.5, no actual notice	Earlier of 2 years or 180 days after notice	No notice, not your neglect or avoidance	Movant, sworn affidavit	Affidavit, proposed answer
§ 473(b), excusable neglect	Six months at most	Mistake or excusable neglect	Movant	Declaration, proposed answer

Frequently Asked Questions

Can a California default judgment be set aside after two years?

Yes, if improper service made it void. California Capital Ins. Co. v. Hoehn held that a section 473(d) motion is not subject to the two-year cap courts had borrowed from section 473.5. If you were validly served but never saw the papers, the section 473.5 deadlines still apply.

Does Coney Island apply to California superior court judgments?

No. It interprets Federal Rule of Civil Procedure 60, so it governs federal district and bankruptcy court judgments. State judgments fall under the Code of Civil Procedure and Hoehn.

What if the summons was served on the California Secretary of State?

Court-ordered service there is valid if the plaintiff could not find your agent with reasonable diligence. The papers go to the principal office on file, so an outdated address means you may never see them, and the usual remedy is a section 473.5 motion.

How long does a judgment lien last on a California home?

Until ten years from the date the judgment was entered. If the creditor renews and records the renewal before the lien expires, it runs ten years from the renewal application.

Will the new SPARE Act help with an old judgment?

Probably not directly. AB 2042 limits the burden-shifting procedure in section 473.2 to service attempted or completed on or after January 1, 2027. Older judgments are decided under current law and Hoehn.

How North Star Law Firm Can Help

North Star Law Firm brings motions to vacate surprise judgments through its business and contract law practice, keeps agent records current through entity formation work, and handles cases where bankruptcy fits better. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. District and Bankruptcy Courts for the Central District of California.

If a levy or title report just surfaced a surprise judgment, contact North Star Law Firm or schedule a consultation before the creditor renews it.

October 19, 2026

Lending Your Child a California Down Payment: AFR Notes, Galli and the Family Trust

Linda and Ray live in Redlands. Their daughter Maya is in escrow on a $700,000 house in Riverside with $35,000 saved and an 80 percent first mortgage lined up. Her parents can cover the other $105,000 from savings built during their marriage, and want it repaid so her two brothers come out even. (The family and numbers here are illustrative.)

It is the family loan I see most in California, where starter homes in Riverside, Temecula, Roseville or Rancho Cucamonga run $600,000 to $800,000.

How much interest does a California parent have to charge on a loan to a child?

At least the applicable federal rate (AFR) for the month the loan is made. IRC § 1274(d) sets three tiers: short-term up to three years, mid-term over three and up to nine, long-term beyond nine. For October 2026, Rev. Rul. 2026-19 puts them at 4.25, 4.61 and 5.22 percent compounded annually, or 4.17, 4.52 and 5.10 percent compounded monthly.

Maya’s 15-year amortizing note is long-term. At 5.10 percent, $105,000 costs her $835.81 a month, about $5,244 of it interest in year one. A nine-year mid-term note would cost $1,185.15 a month.

When does the IRS treat money from a parent as a gift?

First, on price. Dickman v. Commissioner, 465 U.S. 330 (1984), held that interest-free family loans “resulted in taxable gifts of the reasonable value of the use of the money lent,” and Congress answered with IRC § 7872. For a below-AFR gift term loan, section 7872(d)(2) fixes the gift on day one: the amount lent minus the present value of the payments. Section 7872(c)(2) ignores gift loans totaling $10,000 or less, and up to $100,000, section 7872(d)(1) caps imputed income at the borrower’s net investment income, treating $1,000 or less as zero. Married parents count as one lender under section 7872(f)(7).

Second, on substance. The Tax Court weighs the nine factors of Miller v. Commissioner, T.C. Memo. 1996-3, aff’d, 113 F.3d 1241 (9th Cir. 1997): paperwork, payments, ability to repay and tax reporting. In Estate of Bolles v. Commissioner, T.C. Memo. 2020-71, tried in San Francisco, a mother’s advances to her son were loans through 1989 and gifts once she accepted he could not repay, and the Ninth Circuit affirmed in an unpublished 2024 memorandum.

What did the Tax Court actually decide in Estate of Galli?

Barbara Galli lent her son Stephen $2.3 million in February 2013 on an unsecured note at 1.01 percent, which the note called that month’s mid-term AFR. He paid interest three times before she died on March 7, 2016. No gift tax return was filed, the estate reported the note at $1,624,000, and the IRS called the shortfall from face an unreported gift.

Judge Mark V. Holmes’s March 5, 2025 order in Docket Nos. 7003-20 and 7005-20 granted the estate summary judgment on the gift question. The IRS did not concede; it met the estate’s bank records, note and income tax returns with one declaration and lost. Under section 7872, the court said, the transfer “was not a gift at all.” Valuation was “not the subject of this motion.” The gift case closed with a stipulated no-deficiency decision on April 3, 2025, and the estate case settled with one on March 25, 2026. No judge ruled on the discount, and the order is not precedent.

Do California community property and usury rules change a family loan?

Community property does. Marital savings are community property, so both spouses are the lender, and Cal. Fam. Code § 1100(b) bars one spouse from giving community personal property away without the other’s written consent. I have both sign. The Form 709 instructions treat a community-property gift as made half by each spouse, so each parent’s $19,000 exclusion for 2026 applies with no section 2513 election. California has no gift tax on post-1982 gifts and, per the State Controller, no estate tax for deaths after 2004, so the only ceiling is the $15 million federal exclusion in Rev. Proc. 2025-32.

At the first death, Cal. Prob. Code § 100 gives the survivor half, so IRC § 2033 reaches only the decedent’s half of the note. Section 1014(b)(6) resets basis in both halves to date-of-death value. That helps with a house and hurts with a discounted note: when the survivor collects full principal, IRC § 1271(a)(1) makes the excess over basis gain. (My post on A/B trusts covers where that half goes.)

Usury is a non-issue at the AFR. Cal. Const. art. XV, § 1 caps a loan made primarily for personal, family or household purposes, which a child’s home purchase is, at 10 percent (other loans get the higher of 10 percent or 5 percent over the San Francisco Fed’s rate on advances to member banks), and parents are not exempt lenders. A 5.10 percent note is nowhere close. The risk is “fixing” an old interest-free loan with a steep rate or years of back interest, which does not undo the interest section 7872 already imputed and can cross the cap, risking forfeited interest and treble damages under Cal. Civ. Code § 1916-3.

What paperwork should a California family home loan include?

Both parents and Maya sign a written note with a fixed maturity and the rate stated as a number from that month’s ruling. Payments go from her account to theirs on schedule; in Galli, that bank trail won the motion. A deed of trust on the house gets recorded with the Riverside County Recorder, because Treas. Reg. § 1.163-10T(o) treats interest as deductible under IRC § 163(h)(3) only on debt secured by an instrument “recorded, where permitted.”

Her lender will ask where the $105,000 came from. A Fannie Mae gift letter must state “that no repayment is expected,” so it cannot cover money the family means to collect, and lying in a mortgage file violates 18 U.S.C. § 1014. Disclose the loan. The recorded deed of trust shows the lender the $105,000 is secured debt, not a disguised gift. Her parents report the interest on Schedule B, and Maya lists her parents on Schedule A, line 8b, since family lenders issue no Form 1098.

What happens to a family loan when the lending parent dies?

Treas. Reg. § 20.2031-4 presumes a note is worth unpaid principal plus accrued interest unless the executor proves the rate, maturity or another cause makes it worth less. Galli’s estate made that argument for its 1.01 percent note, and the settlement left it untested.

The rule runs both ways. The mid-term AFR was 0.38 percent in October 2020 (Rev. Rul. 2020-20) and 4.43 percent in October 2023 (Rev. Rul. 2023-18); it is 4.61 percent now. A 2020 note is worth less than face today; Maya’s is the reverse bet. If the surviving parent dies in 2031 with about $78,440 owed and similar loans priced at 3.5 percent, her 120 remaining payments are worth roughly $84,500. At 7.5 percent, about $70,400. That value matters more for equalizing siblings than for estate tax.

Parents who would rather forgive the note while alive can forgive up to $38,000 a year under the annual exclusion. The risk is a prearranged plan: under Rev. Rul. 77-299, the IRS treats a note the lender always meant to forgive as a gift of the full amount on day one. Make each forgiveness a separate written decision after the payment comes due.

Otherwise the note sits in the parents’ revocable trust, and the trust should carry instructions. Cal. Prob. Code § 21135 charges a lifetime gift against an at-death share only if the instrument or a writing by the parent or child says so, and section 6409 sets the same rule for advancements in intestacy. A loan is not a gift, so absent a clause the trustee simply holds a receivable from a beneficiary. Section 16000 binds the trustee to the instrument, and sections 16003 and 16010 add impartiality between Maya and her brothers and a duty to take reasonable steps to collect. I draft the trust to say whether the balance is forgiven or offset against her share, and at balance or appraised value, much as Mary Bolles’s trust reduced each child’s share by loans plus interest.

Approach	Gift tax result	Parent income tax	Child income tax	At parent’s death	What goes wrong
Outright gift	Half from each spouse; Forms 709 above $38,000	None	Nothing to deduct	Nothing to collect	Siblings shorted absent a § 21135 writing
Documented AFR loan	No gift (§ 7872)	Interest on Schedule B	Deductible under § 163(h)(3) if itemizing	Note at fair market value, above or below face	Skipped payments or planned forgiveness
Undocumented “loan”	Likely a gift under Miller or Bolles	Possible imputed interest	No deduction	Disputed claim against a beneficiary	False gift letter, missing Forms 709, sibling litigation

Frequently Asked Questions

Can I lend my child money interest-free in California?

Yes, but federal law imputes interest at the AFR unless an exception applies. Gift loans totaling $10,000 or less are ignored, and up to $100,000 the imputed income is limited to the child’s net investment income.

Is the October 2026 AFR locked in for the whole loan?

For a term loan, yes. A 15-year note signed in October 2026 keeps the 5.22 percent long-term rate, or its monthly equivalent, for its life. A demand loan floats with the short-term rate.

Can my child deduct interest paid on a family home loan?

Only if a recorded deed of trust secures the note and your child itemizes. The interest goes on Schedule A, line 8b, with your name, Social Security number and address.

Do we have to tell the mortgage lender that part of the down payment is a loan?

Yes. A gift letter must say no repayment is expected, so it cannot cover money you plan to collect. Disclose the loan and expect the lender to count the payment.

What happens to the loan if I die before my child repays it?

The balance is an asset of your estate or trust at fair market value, and with community property only your half is in your estate. Your trust should say whether the balance is forgiven or charged against that child’s share.

How North Star Law Firm Can Help

North Star Law Firm drafts family notes and matching revocable living trust clauses, and it advises trustees on collecting or offsetting family loans in trust administration and on the trust and estate tax returns that follow. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Tax Court.

If you are about to fund a child’s down payment, contact North Star Law Firm or schedule a consultation before escrow closes.

October 18, 2026