Author: Phillip Zagotti

Rowland, Portability, and Why California Community Property Is Not a Reason to Skip Form 706

A widower’s estate lost about $3.7 million of federal exemption last summer because his late wife’s Form 706 listed her property and left every value blank. That is Estate of Rowland v. Commissioner, T.C. Memo. 2025-76 (July 15, 2025): a return filed for no reason except portability is still held to the completeness standard in Treas. Reg. § 20.2010-2(a)(7).

In California that runs into a common assumption. The state has no estate tax, and community property gets a full basis step-up at the first death under 26 U.S.C. § 1014(b)(6), the survivor’s own half included. Both true, and neither touches the exemption the survivor will need later.

Short answer: if a couple’s community estate approaches half the federal basic exclusion amount, $15,000,000 for deaths in 2026, file at the first death, and prepare the return as though the IRS will read every schedule.

What did the Tax Court actually hold in Estate of Rowland?

Fay Rowland died in April 2016, her husband Billy in January 2018. No return was required, but her executor filed one to elect portability, six months late, though inside the two-year window then allowed by Rev. Proc. 2017-34. The return listed real property, closely held stock, and bank accounts, entered “$0” for each category, reported $3 million as the estimated value of assets subject to the special rule, and claimed a DSUE amount of $3,712,562.

Her trust gave twenty percent to a family charitable foundation, gave Billy one-fourth of her gross estate, and poured the residue into trusts for grandchildren. Treas. Reg. § 20.2010-2(a)(7)(ii) lets an executor describe rather than value marital and charitable deduction property, but not where that value “relates to, affects, or is needed to determine, the value passing from the decedent to a recipient other than the recipient of the marital or charitable deduction property.”

The grandchildren took the residue, so those figures controlled. Chief Judge Urda granted partial summary judgment to the Commissioner and turned away both substantial compliance and equitable estoppel.

Doesn’t California community property already take care of this?

It takes care of a different tax. Section 1014(b)(6) gives a new basis to the surviving spouse’s half of the community, not just the decedent’s, so long as at least half the community interest was includible in the decedent’s gross estate. That is an income tax rule about a later sale. Portability is a transfer tax rule, and 26 U.S.C. § 2010(c)(5)(A) gives the survivor none of the DSUE amount defined in § 2010(c)(4) unless the executor “files an estate tax return on which such amount is computed and makes an election on such return.”

No state tax makes this worse. California’s estate tax at Rev. & Tax. Code § 13302 is a pick-up tax pegged to the federal credit for state death taxes, gone since January 1, 2005, and the State Controller says no California estate tax return has been required since. A gross estate under the exclusion means no federal return is required under § 6018(a). Not required and not worth filing are different things.

How long does a California surviving spouse have to fix a missed election?

Nine months from death, plus six more if a Form 4768 goes in on time. The automatic extension comes from Treas. Reg. § 20.6081-1(b) under 26 U.S.C. § 6081, and Treas. Reg. § 20.2010-2(a)(1) ties the election to that date.

After that, Rev. Proc. 2022-32 is the rescue. Effective July 8, 2022, it lets an executor file by the fifth anniversary of death if the decedent was a citizen or resident who died after December 31, 2010 survived by a spouse, the estate was not required to file under § 6018(a), and no timely return went in. The return must carry a statement at the top: “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).”

If the gross estate plus adjusted taxable gifts turns out to have exceeded the exclusion, the relief is null and void ab initio, leaving only a § 9100 letter ruling. Section 4.01 also demands a “complete and properly prepared Form 706” under Treas. Reg. § 20.2010-2(a)(7), the sentence the court applied in Rowland. A late return that is still wrong buys nothing.

Did your spouse die in the last five years with no Form 706 filed? The Rev. Proc. 2022-32 window is probably still open, it closes for good on the fifth anniversary, and having an attorney and CPA look at the trust and the asset values together now costs far less than a letter ruling later.

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What goes on a portability-only Form 706 when the estate is community property?

Only the decedent’s half. Cal. Fam. Code § 760 makes property acquired during marriage while domiciled here community property, and Cal. Prob. Code § 100(a) provides that on death “one-half of the community property belongs to the surviving spouse and the other one-half belongs to the decedent.” The survivor’s half stays outside the gross estate and still takes a new basis, so the return still has to show the property was community.

The estimate rule can apply here, and often does when everything pours into a survivor’s trust. Subparagraph (a)(7)(ii) lets the executor describe marital and charitable property without valuing it, so long as the executor uses due diligence to estimate the gross estate and reports the matching range from the Instructions for Form 706 under penalties of perjury.

The exceptions catch California trusts. The rule is off the table when a value affects what a non-spouse, non-charitable beneficiary receives, when it is needed for § 2032 or § 2032A or another estate or generation-skipping provision, when only a partial interest qualifies, or on a partial disclaimer or QTIP election. A formula bypass share, a disclaimer trust, a QTIP marital trust, or a carve-out for children of a prior marriage lands on the Rowland side of that line.

What does “complete” mean for a house and a closely held business?

Date-of-death fair market value, asset by asset, on the right schedule. The home goes on Schedule A with a real appraisal. S corporation stock goes on Schedule B with an actual valuation and discounts that are supported, not asserted. Where a value is genuinely hard to pin down, the answer is a defensible estimate with the methodology in the file, not a blank.

The return does two jobs: it elects portability, and it is the contemporaneous record behind the stepped-up basis the survivor claims on a later sale. There is a fiduciary dimension too: a trustee who lets the nine months lapse, or signs a return with zeros in the value column, hands the surviving spouse a claim to weigh against the preparer or the fiduciary.

What does this look like for a Redlands couple with a $9 million community estate?

Assume a Redlands couple, all community property: a home in the historic district at $1.4 million, a Riverside fourplex at $1.6 million, stock in their HVAC S corporation at $4.5 million, and $1.5 million in retirement, brokerage, and cash. He dies in March 2026 and it all stays in trust for her. The figures are illustrative; future indexing is unknown, so the example freezes the exclusion at 2026.

His gross estate is his half, $4.5 million, and the marital deduction takes his taxable estate to zero, so the DSUE is the full $15,000,000 and her applicable exclusion becomes $30,000,000. Separately, all $9 million takes a new basis under section 1014(b)(6).

Say she dies in 2036 and assets grew 7 percent a year, taking $9 million to roughly $17.7 million. With no return ever filed, her exclusion is $15 million, her taxable estate about $2.7 million, and the tax at the 40 percent top rate under 26 U.S.C. § 2001(c) runs about $1,080,000. A return filed but defective the way Fay Rowland’s was produces the identical number, found long after the Rev. Proc. 2022-32 window closed. With a complete return, the tax is zero.

Does remarriage change the DSUE amount?

Not by itself. Treas. Reg. § 20.2010-3 makes the available DSUE that of the surviving spouse’s last deceased spouse, and a decedent keeps that status “even if, on the date of the death of the surviving spouse, the surviving spouse is married to another (then-living) individual.” A Temecula widow who remarries in 2029 still has her first husband’s DSUE.

The new spouse dying first is what changes it. If his executor makes no election, the earlier DSUE is gone except to the extent it “was applied to one or more taxable gifts of the surviving spouse.” Where remarriage is likely, spend the DSUE on lifetime gifts. Divorce is not the danger: the later death of a divorced spouse does not end the prior spouse’s status.

Path at the first death	What must be reported	Deadline	Risk under Rowland
No Form 706 filed	Nothing	None	DSUE is permanently $0, and no contemporaneous basis record exists
Portability-only 706, estimate rule available (all to spouse and/or charity)	Describe marital and charitable property; value everything else; report a best-estimate range for the gross estate	9 months, plus 6 months on Form 4768; otherwise 5 years under Rev. Proc. 2022-32	Estimate rule collapses if any value affects a non-spouse, non-charity share
Portability-only 706, estimate rule unavailable (bypass share, children, QTIP, partial disclaimer)	Date-of-death fair market value of every asset, schedule by schedule	Same	This is Rowland: blank or $0 values void the election entirely
Full 706 required under § 6018(a)	Full valuation, all schedules, tax computed	9 months plus 6-month extension only	Rev. Proc. 2022-32 relief is void ab initio; only remedy is a § 9100 letter ruling

Frequently Asked Questions

Do I have to file a Form 706 in California if there is no California estate tax?

Nothing at the state level: California has required no estate tax return for deaths on or after January 1, 2005. Federally, no return is required if the gross estate is under the basic exclusion amount, $15,000,000 for deaths in 2026. Filing anyway is the only way to capture the unused exclusion.

Does California’s community property step-up make portability unnecessary?

No. Section 1014(b)(6) gives both halves of community property a new income tax basis at the first death, which reduces capital gain on a later sale. Portability under section 2010(c) concerns the federal estate tax exemption at the second death. Only the basis adjustment happens without paperwork.

What did the Tax Court decide in Estate of Rowland?

In Estate of Rowland v. Commissioner, T.C. Memo. 2025-76 (July 15, 2025), the court held that a return filed purely to preserve a spouse’s exemption still must meet the completeness standard of Treasury Regulation section 20.2010-2(a)(7). It listed assets but reported zero values, and percentage gifts to a spouse, a foundation, and grandchildren put the reduced reporting rule out of reach, so about $3.7 million of exclusion was lost.

How long do I have if we missed the portability deadline?

Revenue Procedure 2022-32 allows an executor to file a complete and properly prepared Form 706 by the fifth anniversary of the decedent’s death, provided the estate was not required to file under section 6018(a) and no timely return went in. The return must say at the top that it is filed pursuant to that procedure. After that, the only route is a private letter ruling.

Does remarriage affect the DSUE?

Remarrying does not by itself cost the surviving spouse anything, because under Treasury Regulation section 20.2010-3 a decedent stays the last deceased spouse even if the survivor is married to someone else at death. The risk is the new spouse dying first, which wipes out the earlier DSUE except to the extent already applied to taxable gifts.

What if the estate has assets that are hard to value, like a closely held business?

Hard to value does not mean exempt from valuation. The executor must exercise due diligence and report a supportable date-of-death figure, or, where the reduced reporting rule applies, a good-faith estimate within the range in the Instructions for Form 706. An appraisal and a business valuation protect both the election and the later basis claim.

How North Star Law Firm Can Help

North Star Law Firm prepares and reviews portability returns for Inland Empire and Sacramento-area families, including late elections under Rev. Proc. 2022-32, and handles the trust side through trust administration, trust and estate tax returns, and revocable living trust planning. Phillip Zagotti is a California attorney and a CPA admitted to the United States Tax Court, so valuation and controversy exposure are weighed together.

If your spouse died within the last five years and no estate tax return was filed, or one was filed and you are not sure it was done right, contact North Star Law Firm or schedule a consultation.

September 20, 2026

Section 1031 Exchanges in California: The Form 3840 Clawback That Follows You Out of State

Listen to this analysis: North Star Tax and Legal Briefing (4 min 27 sec)

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Episode transcript

A landlord in Riverside sells a fourplex for two point four million dollars, rolls the money into an apartment building in Fort Worth, and moves to Texas a few years later. No state income tax, California in the rearview mirror. Then the Franchise Tax Board sends a notice proposing tax on one point eight million dollars of gain, plus penalties and interest. Not because the exchange failed. Because the owner stopped filing one information form. California has a long memory, and when you swap California property for out of state property, the deferred gain stays tethered to Sacramento until the day it is finally taxed.

Start with the federal side. A like kind exchange lets you sell investment real estate and buy replacement real estate without paying tax on the gain right away. The key word is defer. The old basis carries into the new property, so the tax bill is postponed, not erased. California mostly follows the federal rule, but the stakes are higher here, because California taxes capital gain as ordinary income, at rates up to twelve point three percent, plus another one percent on income over a million dollars. And California follows a sourcing principle: gain that built up on California real estate is California source income no matter where you live when you finally recognize it. That is the distinction to hold onto. Deferral is federal and state, but the state’s claim never moves.

The delayed exchange traces to a decision called the Starker case, where a court blessed selling first and buying later. Congress then wrote in the deadlines: identify your replacement property within forty five days of closing, and receive it within one hundred eighty days, with a qualified intermediary holding the money so you never touch it. California adds two layers. First, withholding. Escrow generally holds back three and a third percent of the sales price unless you certify the sale is part of an exchange: on a two point four million dollar sale, that is eighty thousand dollars. If the exchange fails, or you take out cash above fifteen hundred dollars, the intermediary has to withhold anyway. Second, the annual leash. Buy your replacement property outside California, and you must file Form 3840 with the state every single year until the deferred gain is recognized. Stop filing, and the Franchise Tax Board may estimate the gain from any available information and assess it the way it handles a nonfiler. To be fair, the rule cuts both ways: when you eventually sell, California taxes only the California source portion. Appreciation earned in Texas belongs to Texas.

Run the numbers on that Riverside fourplex. Adjusted basis, six hundred thousand dollars. Sale price, two point four million. That is a one point eight million dollar gain, a quarter million of it depreciation recapture. Sell outright, and the combined federal and California bill lands near six hundred sixty thousand dollars. Exchange properly, and that entire bill is deferred, maybe forever. Keep swapping until death, and the basis resets. With the federal estate exclusion at fifteen million dollars per person, a family can pass the whole portfolio with the deferred gain wiped out for income tax purposes. But the compounding risk runs the other way. Miss the annual filing, and the state can assess the full deferred gain early, with penalties and interest stacked on top.

Three things to do this week. If you have exchanged out of California in any year since twenty fourteen, pull your returns and confirm that Form 3840 went in every single year; catching up quietly beats a proposed assessment. If you are planning a sale, get the qualified intermediary and the withholding certification lined up before escrow opens, not after. And if this is your retirement exit, look at the whole board: the exchange, the nonresident return, and the estate plan all have to line up, because the step up at death is where deferral becomes forgiveness. That’s what we do at North Star Law Firm. The initial consultation is free, and the full written analysis with citations is at ca-legal.net.

Every fall Inland Empire landlords get the same call from a broker: the Riverside fourplex or the Fontana industrial building is worth more than ever, and a buyer is ready. The like-kind exchange under 26 U.S.C. § 1031 is the usual way to defer the tax. What owners rarely hear about is the California piece that follows them out of the state: sell here, buy in Texas, and the Franchise Tax Board expects a return from you every year until the deferred gain is finally taxed.

How does a § 1031 exchange work under federal law?

Under 26 U.S.C. § 1031(a)(1), no gain or loss is recognized when real property held for investment or business use is exchanged solely for real property of like kind. Since 2018 only real property qualifies, and any domestic real estate is like kind to any other.

The sell-first, buy-later exchange traces to the Ninth Circuit. In Starker v. United States, 602 F.2d 1341 (9th Cir. 1979), the court approved an exchange for a promise to deliver like-kind property later. Congress then wrote the limits into § 1031(a)(3): identify replacement property within 45 days after the sale and receive it within 180 days. Treas. Reg. § 1.1031(k)-1 adds the identification rules and the qualified intermediary safe harbor that keeps you out of constructive receipt of the proceeds. Full deferral requires trading equal or up and replacing any debt paid off; cash or debt relief you keep is boot, taxed under § 1031(b). The old basis carries into the new property, so the gain is deferred, not erased.

Does California follow the federal rules?

Mostly. Revenue and Taxation Code § 18031 adopts the federal gain-and-loss provisions, including § 1031, “except as otherwise provided,” and for taxable years beginning on or after January 1, 2025, California limits exchanges to real property just as federal law does. The stakes are higher here because California has no preferential capital gains rate: gain is ordinary income taxed at rates reaching 12.3 percent, plus the 1 percent mental health services tax above $1 million. Add the federal rates and a top-bracket landlord faces a combined bite near 37 percent.

What is the Form 3840 clawback when you exchange out of California?

Revenue and Taxation Code § 18032 applies to exchanges in taxable years beginning on or after January 1, 2014. When gain on property “in this state” is deferred under § 1031 and the property acquired “is located outside of this state,” the taxpayer must file an information return “for the taxable year of the exchange and for each subsequent taxable year in which the gain or loss from that exchange has not been recognized.” That return is FTB Form 3840.

The logic is sourcing. Gain built up on California real estate stays California-source income no matter where the owner lives when it is recognized. Section 18032(b) supplies the teeth: if the taxpayer files neither the information return nor a California return, the FTB “may make an estimate of the net income, from any available information, including the amount of gain” and propose tax, interest, and penalties as in a nonfiler case under § 19087.

What happens to the 3.33 percent withholding at closing?

Under Revenue and Taxation Code § 18662(e), the buyer of California real property must withhold 3 1/3 percent of the sales price from an individual or trust seller unless an exemption applies. On Form 593 the seller can certify under penalty of perjury that the transfer is part of a § 1031 exchange, which excuses withholding to the extent gain is not recognized. Two traps follow. Boot above $1,500 must be withheld on by the qualified intermediary. And if the exchange fails within the 180-day window, the intermediary must notify the FTB within 10 days and withhold 3 1/3 percent of the sales price from the funds it still holds. On a $2.4 million sale that is $80,000.

What does the Riverside fourplex example look like from sale to year six?

A Riverside landlord bought a fourplex near the University neighborhood in 2009 and sells it on October 15, 2026 for $2.4 million. Adjusted basis is $600,000, so the gain is $1.8 million, $250,000 of it unrecaptured § 1250 depreciation. An outright sale in the top brackets would cost roughly $62,500 of federal tax on the recapture, about $310,000 on the remaining $1.55 million, around $68,400 of net investment income tax, and California tax approaching $220,000, about $660,000 in all.

Instead the owner hires a qualified intermediary, signs the Form 593 certification so nothing is withheld, identifies a $3 million apartment building in Fort Worth by November 29, 2026 (day 45), and closes by April 13, 2027 (day 180) with $600,000 of new financing. The Texas building takes a basis of roughly $1.2 million, and the 2026 California return includes Form 3840, refiled each year through 2031.

In 2032 the owner, now living in Fort Worth, sells for $3.6 million. Federally the gain is roughly $2.5 million after five years of depreciation on the carried basis. California gets a final Form 3840 and a nonresident return reporting $1.8 million of California-source gain at 2032 rates; the Texas appreciation is not California income. Had the owner stopped filing in 2029, the FTB could have assessed the $1.8 million then, with penalties and interest.

Item	Outright sale (2026)	Exchange to Texas	Year-six sale (2032)
Sale price	$2,400,000	$2,400,000	$3,600,000
Gain recognized federally	$1,800,000	$0	About $2,500,000
Form 593 withholding	$80,000	$0 (exemption certified)	Not applicable
Form 3840 filed	No	Yes, 2026 return	Yes, final year
California-source gain taxed	$1,800,000	$0	$1,800,000
Texas income tax	None	None	None

Does an exchange avoid Prop 13 reassessment, and what about Prop 19?

No. Proposition 13, article XIII A of the California Constitution, reassesses property on a change in ownership, and an exchange is one on both ends. An Ontario warehouse bought as replacement property gets a new base-year value equal to its price. Proposition 19, codified at Revenue and Taxation Code § 69.6, lets homeowners 55 or older, severely disabled, or displaced by disaster carry their base-year value to a replacement primary residence anywhere in California. It is a residence tool only; § 1031 never applies to a personal residence, so a retiree selling a Temecula home and a Corona rental runs two separate playbooks.

Can a retiring landlord exchange into a Delaware statutory trust or a vacation rental?

In Rev. Rul. 2004-86, the IRS treated a beneficial interest in a Delaware statutory trust holding rental real estate as an undivided interest in the property itself, so it works as replacement property. The price is a passive trustee: no renegotiating loans, no new leases outside narrow exceptions, no reinvesting proceeds. An out-of-state DST still triggers Form 3840.

Is a Palm Springs house the family uses a few weeks a year held for investment? Rev. Proc. 2008-16 offers a safe harbor. The IRS will not challenge a dwelling’s investment character if, in each of the two 12-month periods before the exchange (or after it, for replacement property), the owner rents it at fair rental for at least 14 days and personal use stays within the greater of 14 days or 10 percent of rental days.

How does swap till you drop work with the 2026 estate exemption?

A landlord who exchanges repeatedly and never sells is playing for the step-up. At death, 26 U.S.C. § 1014 resets the basis of the last replacement property to fair market value, and the accumulated deferred gain, Form 3840 balance included, disappears for income tax purposes. For 2026, 26 U.S.C. § 2010(c)(3) as amended by the 2025 reconciliation act sets the federal exclusion at $15 million per person, indexed after 2026, and California has no estate tax, so a married couple with $20 million of exchanged real estate and a well-drafted trust can pass it estate-tax free with a fresh basis for the children.

Frequently Asked Questions

Do I have to file California Form 3840 if I moved to Texas after my exchange?

Yes. Revenue and Taxation Code § 18032 requires the return every year until the California-source deferred gain is recognized, regardless of where you live. Stop filing and the FTB may estimate the deferred gain and issue a Notice of Proposed Assessment with penalties and interest.

Does California tax the gain when I finally sell my out-of-state replacement property?

It taxes the California-source portion, meaning the gain deferred when you sold the California property, at the rates in effect in the year of recognition. Appreciation on the replacement property in another state is not California income for a nonresident.

How do I avoid the 3.33 percent withholding when I sell California property in a 1031 exchange?

Complete Form 593 and certify under penalty of perjury that the transfer is part of a § 1031 exchange, and escrow will not withhold on the exchanged amount. If you receive boot over $1,500 or the exchange fails, the qualified intermediary must withhold 3 1/3 percent, which you recover as a credit on your California return.

Can I use a 1031 exchange on my primary residence in California?

No. Section 1031 covers only property held for investment or used in a business. A residence has its own tools, the federal § 121 exclusion of up to $250,000 of gain ($500,000 for a married couple) and the Prop 19 base-year transfer for homeowners 55 and older.

Will a 1031 exchange keep my Prop 13 property tax base on the new California property?

No. The replacement property is reassessed to its purchase price on the change in ownership, and the assessed value of the property you gave up does not carry over.

Is a Delaware statutory trust a good replacement property for a California landlord who wants to retire?

It can be. Rev. Rul. 2004-86 treats a DST interest as an undivided interest in the underlying real estate, so it qualifies as replacement property. The trade-offs are frozen trustee powers, illiquidity, and sponsor fees.

How North Star Law Firm Can Help

North Star Law Firm advises Inland Empire and Sacramento-area property owners on real estate tax strategy for § 1031 exchanges, Form 3840 compliance after an exchange out of state, Form 593 withholding, and FTB audit and assessment defense when a deferred gain is challenged. Phillip Zagotti is a California attorney and a CPA, which matters here because the exchange, the nonresident return, and the estate plan all have to line up. The firm coordinates exchange planning with revocable living trust design, and owners weighing a move should read the firm’s post on FTB residency audits after moving to Texas or Nevada.

If you are planning a sale this year or are unsure whether your Form 3840 filings are current, contact North Star Law Firm or schedule a consultation.

September 19, 2026

The IRS Is Rewriting Voluntary Disclosure. What California Taxpayers Still Owe the FTB, CDTFA, and EDD

The IRS says it is weeks away from replacing its Voluntary Disclosure Practice with a faster and cheaper version. For an Ontario restaurant owner with years of unreported cash, or a Rancho Cucamonga engineer with an unreported account in Hyderabad, that sounds like the moment to act. But the federal program is only half the problem in California. The other half is the Franchise Tax Board, the CDTFA, and the EDD, which IRS Criminal Investigation cannot bind.

What is the IRS changing in its Voluntary Disclosure Practice?

The Voluntary Disclosure Practice is IRS Criminal Investigation’s bargain: come forward before the government finds you, file corrected returns, pay, and CI will not recommend prosecution. The process runs through Form 14457: Part I is a preclearance request, and Part II, due within 45 days of the preclearance letter, tells the full story.

The civil price has been steep: six years of returns, a 75 percent civil fraud penalty under 26 U.S.C. § 6663 on the worst year, and, for foreign accounts, a willful FBAR penalty under 31 U.S.C. § 5321(a)(5) of 50 percent of the highest aggregate balance. The National Taxpayer Advocate counted only 161 closed cases in six years.

On December 22, 2025, in IR-2025-124, the IRS proposed a redesign that keeps the six-year lookback but replaces the fraud penalty with a 20 percent accuracy-related penalty on each amended year, charges only failure-to-file penalties on delinquent returns, caps international information return penalties at $10,000 per return per year, and computes FBAR penalties per year. Approved taxpayers would have three months to file, pay, and sign.

Has the new program been released, and should a Californian wait for it?

Not as of September 12, 2026. CI Chief Jarod Koopman said in late August that the revised program would be public within roughly 60 days, with a 120-day resolution target, upfront screening instead of full examinations, and digital assets folded in. Practitioners at the same conference reported the willful FBAR penalty dropping into the 20 to 30 percent range. Treat that as a preview; nothing is final yet.

A disclosure is timely only if it arrives before the IRS opens an examination, receives a third-party tip, or obtains the taxpayer’s information from an enforcement action. A foreign bank’s FATCA report can close that window any day. The practical move is to file Part I now, which preserves eligibility, and time Part II so the case closes under the better framework.

Unreported Income or Foreign Accounts? The first response usually frames everything that follows. Talk it through with an attorney and CPA before you act.

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Does California have its own voluntary disclosure program?

The FTB does, but it is narrower than most people assume. Under Rev. & Tax. Code § 19191, the Franchise Tax Board may sign a voluntary disclosure agreement with a “qualified entity” and its nonresident owners and trust beneficiaries. The definitions in § 19192 exclude any entity organized in California, registered with the Secretary of State, or staffing a permanent facility here, and require that the applicant has never filed or been contacted by the FTB. It fits a Nevada corporation that has sold into Sacramento for years without filing, not a Corona sole proprietor who left cash off every return.

Where it applies, the terms are a six-year lookback, waiver of anything older, and waiver of late-filing, late-payment, and estimated tax penalties, applied for anonymously on Form FTB 4925, with the FTB required by § 19191(b)(5) to act within 120 days.

What happens to a California resident who amends six years of returns?

A resident individual has no state disclosure program, so the state side is amended Forms 540, full payment, and a penalty fight over what the FTB asserts. The accuracy-related penalty under Rev. & Tax. Code § 19164 conforms to federal § 6662 at 20 percent, and subdivision (d) conforms to the 75 percent fraud penalty. Sections 19131 and 19132 add up to 25 percent each for late filing and late payment.

Under § 19058 the FTB has six years, not four, when more than 25 percent of gross income was omitted, and under § 19087 there is no limit if no return or a fraudulent return was filed. The FTB has its own Criminal Investigation Bureau, § 19706 makes a willful false return punishable by jail or prison, and a federal closing agreement does not bind that bureau.

If the receipts were taxable sales, the CDTFA is owed sales tax on the same dollars, and its disclosure provisions in Rev. & Tax. Code §§ 6487.05 and 6487.06 (a three-year lookback for unregistered out-of-state retailers and use tax purchasers) do nothing for a permitted retailer that underreported deliberately. That retailer amends and faces a 10 percent negligence or 25 percent fraud penalty. The EDD has no statutory disclosure program at all; an employer that paid cash wages registers, files the missing DE 9 and DE 9C returns, pays, and asks for good-cause relief from penalties such as the 15 percent late-payment penalty in Unemp. Ins. Code § 1112.

How does a federal closing agreement trigger a California reporting duty?

Rev. & Tax. Code § 18622 requires a taxpayer whose federal return is “changed or corrected by the Commissioner of Internal Revenue” to report the change to the FTB within six months of the final federal determination, and subdivision (b) imposes the same six-month duty on anyone who files an amended federal return that increases California tax. Each amended Form 1040 starts its own clock, so file the state returns alongside them.

California also departs from federal rules for licensed cannabis operators: Rev. & Tax. Code § 17209 switches off 26 U.S.C. § 280E for state purposes through 2029, so the state amended returns can claim deductions the federal returns cannot. Because the federal program excludes illegal-source income, a cannabis disclosure also raises a threshold question counsel must resolve before any preclearance request goes out.

What would a Chino restaurant owner with $1.1 million unreported actually owe?

Take a Chino couple who own a sit-down restaurant and skimmed $1.1 million of cash across the 2020 through 2025 tax years, roughly $183,000 a year, with the largest year at $250,000. Assume a 32 percent federal rate and a 9.3 percent California rate.

Federal tax on the omitted income is about $352,000. Under the existing framework the fraud penalty hits only the worst year: 75 percent of that year’s $80,000 tax, or $60,000. Under the proposal it is 20 percent of each year’s understatement, about $70,400. California adds roughly $102,000 of tax, plus about $20,500 at the 20 percent rate or about $76,700 if the FTB asserts fraud. Sales tax on those meals at Chino’s 7.75 percent combined rate adds about $85,000 before penalty, and if skimmed cash paid kitchen staff off the books, the EDD assessment follows. Interest runs on each layer.

Layer	Existing IRS framework	Proposed IRS framework	California treatment
Income tax on $1.1 million	About $352,000	About $352,000	About $102,000 (FTB)
Civil penalty	75% of worst year, about $60,000	20% every year, about $70,400	20% to 75%, FTB discretion
Lookback	Six years	Six years	Six years if 25% omitted; unlimited if fraud
Deadline to file and pay	Set by examiner	Three months from approval	Six months after each federal change
Sales tax on receipts	Not addressed	Not addressed	About $85,000 plus CDTFA penalty

The numbers flip if the same $1.1 million sat in a foreign account. There, the current 50 percent willful FBAR penalty alone is $550,000, and the August preview alone could cut that by hundreds of thousands of dollars. Roseville tech workers with accounts abroad and Chinese-American and Indian-American families in the Inland Empire collecting rent on property overseas have the strongest reason to preserve eligibility now and close under the new rules. Where the failure was careless rather than deliberate, Bittner v. United States, 598 U.S. 85 (2023), which capped the non-willful FBAR penalty at $10,000 per report, points toward the streamlined procedures instead.

Frequently Asked Questions

Can a California resident use the FTB Voluntary Disclosure Program?

Generally no. Rev. & Tax. Code § 19192 limits it to entities not organized, registered, or staffed in California that have never filed or been contacted by the FTB, plus their nonresident owners. A resident individual files amended Forms 540 and pays tax, interest, and any penalty the FTB asserts.

Does an IRS voluntary disclosure protect me from the Franchise Tax Board?

No. IRS Criminal Investigation’s promise not to recommend prosecution binds only the federal government. The FTB, CDTFA, and EDD each decide separately whether to assess penalties or refer a case, so state filings belong alongside the federal disclosure.

How long do I have to tell California about amended federal returns?

Six months. Rev. & Tax. Code § 18622 requires anyone who files an amended federal return that increases California tax, or whose return the IRS adjusts, to report the change to the FTB within six months. Missing it keeps the FTB’s assessment period open on those items.

Should I file my IRS preclearance request now or wait for the new program?

For most taxpayers, file Part I of Form 14457 now. Eligibility ends the moment the IRS opens an exam, gets a tip, or receives third-party data about you, and the redesign will not revive it. Preclearance holds your place while counsel times Part II.

Will the new IRS program lower penalties for a cash business with no foreign accounts?

Not necessarily. The proposal swaps a 75 percent fraud penalty on the single worst year for a 20 percent penalty on every year in the six-year window, which for steady domestic omissions can add up to more. The savings are largest for FBAR and international information return cases.

Does a licensed California cannabis business face the same tax on unreported income as a restaurant?

Federally it is worse, because 26 U.S.C. § 280E denies most deductions. Rev. & Tax. Code § 17209 turns off § 280E for California licensees through 2029, so state amended returns can claim ordinary expenses. The federal program’s exclusion of illegal-source income must also be analyzed before a cannabis operator applies.

How North Star Law Firm Can Help

North Star Law Firm represents Inland Empire, Sacramento, and other California individuals and businesses who need to correct unfiled returns, unreported income, or undisclosed foreign accounts before the government finds them first. Phillip Zagotti is a California attorney and a CPA, which matters here because the choice between the criminal Voluntary Disclosure Practice, the streamlined procedures, and a plain amended return turns on both the legal exposure and the numbers. The firm prepares the federal and California submissions together and handles the follow-on tax defense, penalty abatement, and unfiled return work with the FTB, CDTFA, and EDD.

If you are deciding whether to come forward now or wait for the redesigned program, the eligibility clock comes first. Contact North Star Law Firm or schedule a consultation to review your exposure under both frameworks.

September 18, 2026

TaxAct’s $275,000 Pixel Settlement: Who Can See Your Tax Return Data in California?

On August 19, 2026, the Connecticut Attorney General took $275,000 from TaxAct to resolve claims that tracking code on the company’s website sent customer data to Meta and Google from January 2018 through December 2022. The data covered adjusted gross income and refund or balance-due figures (both rounded), number of dependents, and flags for charitable gifts, investment income, mortgage interest, and student loan interest. Advertising code sent them automatically while people filled in their returns.

That is a Connecticut case, but the law that matters most is federal, and California layers its own privacy statutes and an aggressive wiretap law on top.

What did Connecticut find TaxAct was doing with taxpayer data?

According to the state, TaxAct’s contract with Meta placed no limit on what Meta could do with the data, despite a privacy notice promising to bar third parties from sharing it. TaxAct must create a review committee for tracking technology, inventory every data point each tag collects, scan the live site for unapproved tags, and submit to two independent audits.

TaxAct had already paid once. A nationwide class action, Smith-Washington v. TaxAct, Inc., No. 3:23-cv-00830 (N.D. Cal.), received final settlement approval on December 30, 2024, with a larger share for a California subclass. And in September 2023 the Federal Trade Commission warned five tax preparation companies that pixel-based sharing of tax data for advertising without express consent could draw civil penalties of up to $50,120 per violation.

Does federal law already forbid a preparer from sharing your return data?

Yes. 26 U.S.C. § 7216 makes it a misdemeanor for anyone who prepares returns, or provides services connected to preparing them, to knowingly or recklessly disclose return information or use it for any purpose other than preparing the return. The penalty is a fine of up to $1,000 ($100,000 where identity theft is involved) and up to one year in prison. The civil companion, 26 U.S.C. § 6713, imposes $250 per improper disclosure, capped at $10,000 per calendar year, and requires no intent.

The regulations reach software companies. Treas. Reg. § 301.7216-1 defines a tax return preparer to include “a person who develops software that is used to prepare or file a tax return,” and tax return information as anything furnished in connection with a return. Treas. Reg. § 301.7216-2 lists the disclosures that need no consent: to the IRS, under a court order, within the same U.S. firm, to a processing vendor, and for software maintenance. Advertising partners are not on the list.

What does a valid § 7216 consent look like, and how is it different from Form 8879?

Form 8879 is the e-file signature authorization and says nothing about marketing. A § 7216 consent is a separate document, and Treas. Reg. § 301.7216-3 requires it to be knowing and voluntary, signed before any disclosure, and never a condition of getting your return prepared. If silent on duration, it lasts one year. For Form 1040 filers, Rev. Proc. 2013-14 adds mandatory formatting: 12-point type, a statement that federal law requires the form, a statement that you need not sign it to receive services, and contact information for the Treasury Inspector General for Tax Administration. An electronic consent requires a typed name or PIN, not a clicked box.

How does California’s own law reach tax preparers and their websites?

Under Bus. & Prof. Code § 22250 et seq., a paid preparer who is not a California CPA, an active State Bar member, or an enrolled agent (the § 22258 exemptions) must register with the California Tax Education Council and post a bond, and § 22253 requires preparers to return client records on demand.

The California Consumer Privacy Act, Civ. Code § 1798.100 et seq., applies only to a business with annual gross revenue above $26,625,000 (the 2025 adjusted figure), personal information of 100,000 or more consumers, or half its revenue from selling or sharing data. TaxAct clears that bar; a Rancho Cucamonga CPA firm does not. For covered businesses, § 1798.140 treats Social Security numbers and financial account credentials as “sensitive personal information,” and § 1798.121 lets consumers limit its use to what the service requires. Watch § 1798.145(e), which exempts information handled subject to the Gramm-Leach-Bliley Act. It covers the data, not the company, so website analytics stay in play.

Enforcement is active: on July 1, 2025, the Attorney General collected $1.55 million from Healthline for sharing data with advertising partners after users opted out.

Why should an Inland Empire business with a Meta Pixel care about CIPA?

Because the California Invasion of Privacy Act is privately enforced. Penal Code § 631 penalizes reading a communication in transit without all-party consent, and § 637.2 allows $5,000 per violation without proof of actual damages. The Ninth Circuit held in Javier v. Assurance IQ, LLC, No. 21-16351 (9th Cir. May 31, 2022) (unpublished), that § 631 requires consent before recording starts, so a banner that appears after the pixel fires does not cure the problem.

A second theory used § 638.51, the pen register statute. SB 690, passed by the Legislature on August 28, 2026 and awaiting the Governor’s action by September 30, would end private § 638.51 suits over website tracking, retroactive to actions filed on or after January 1, 2025. Section 631 claims are untouched.

What happened to the Sacramento dental practice whose bookkeeper’s portal used a pixel?

Consider a two-dentist practice in Sacramento’s Pocket neighborhood with $1.9 million in annual collections. Its outside bookkeeper hosts a portal, live since February 2024, where the practice uploads its Form 1120-S workpapers and the bookkeeper posts a projected balance due each March. In August 2026 the office manager noticed that every portal page fired a Meta Pixel whose transmitted URLs included the form type and a rounded balance-due figure.

The bookkeeper serves 320 business clients on the same portal. Under § 6713 the penalty is $250 per disclosure but capped at $10,000 per year, so three filing seasons produce a $30,000 ceiling. Criminal exposure under § 7216 turns on whether installing the pixel blind was reckless. The bigger number is CIPA: 320 clients at $5,000 each is $1.6 million, and the practice is a potential plaintiff, not a defendant. The CCPA is irrelevant at the bookkeeper’s revenue. The practice should demand its records, stop uploading until the tag is gone, and check its own website.

Authority	Who enforces it	Who it reaches	Exposure
26 U.S.C. § 7216	Department of Justice	Preparers and software providers	Misdemeanor, up to 1 year
26 U.S.C. § 6713	IRS	Preparers and software providers	$250 per disclosure, $10,000 yearly cap
CCPA, Civ. Code § 1798.100 et seq.	California AG and CPPA	Businesses over $26.6 million revenue or 100,000 consumers	Up to $7,988 per intentional violation
CIPA, Penal Code § 631	Private plaintiffs	Any website operator	$5,000 per violation, no actual damages needed
Bus. & Prof. Code § 22250 et seq.	CTEC and the Attorney General	Non-exempt paid preparers	Registration, bond, records duties

What can a California taxpayer do if a preparer or software company leaked their data?

Preserve the evidence first: the privacy notice as it read, any consent you signed, and the browser report showing the tag. Then file Form 14157, the IRS return preparer complaint, now routed through the IRS online tip portal, and report the disclosure to TIGTA. If the company is a CCPA business, complain to the Attorney General or the Privacy Protection Agency and exercise your deletion and limit rights in writing. Then ask counsel whether a CIPA claim fits your facts. On prevention, read the consent screens in tax software, decline sharing with partners, and ask your preparer in writing whether any pixel runs on the portal where your documents live.

Frequently Asked Questions

Is it illegal for a tax preparer to share my tax return information with advertisers?

Not without a valid written consent. 26 U.S.C. § 7216 makes knowing or reckless disclosure of return information a federal misdemeanor, and § 6713 adds a $250 civil penalty per disclosure. Both rules reach companies that develop tax software.

Does signing Form 8879 give my preparer permission to use my data for marketing?

No. Form 8879 only authorizes electronic filing. Any other use or disclosure of your information requires a separate consent under Treas. Reg. § 301.7216-3, signed before the disclosure happens, and a preparer cannot make it a condition of doing your return.

Does the CCPA protect my tax data in California?

Only partly. The CCPA applies to businesses with more than about $26.6 million in annual revenue or data on 100,000 or more consumers, so large software companies are covered but most local preparers are not. It also exempts information handled under the Gramm-Leach-Bliley Act, though website analytics usually fall outside that exemption.

Can my business be sued for having a Meta Pixel on its website in California?

It can. Plaintiffs have filed thousands of suits under Penal Code § 631 alleging that a pixel intercepts visitor communications without prior consent, and § 637.2 allows $5,000 per violation without proof of harm. SB 690, passed in August 2026, would end private pen register suits but leaves § 631 claims in place.

How do I report a tax preparer who disclosed my information without consent?

File Form 14157, the return preparer complaint, through the IRS online tip portal, and report the disclosure to the Treasury Inspector General for Tax Administration. A registered preparer can also be reported to CTEC, and a large software company to the California Attorney General or the Privacy Protection Agency.

Do CPAs and attorneys in California have to register with CTEC?

No. Bus. & Prof. Code § 22258 exempts CPAs licensed by the California Board of Accountancy, active State Bar members, IRS enrolled agents, and certain regulated financial institutions. Everyone else who prepares returns for a fee must register with CTEC, post a bond, and complete annual education.

How North Star Law Firm Can Help

North Star Law Firm advises California taxpayers and business owners on who may see their tax information, including § 7216 consent reviews, disputes with preparers and software vendors over unauthorized disclosures, and the exposure a company website or client portal creates under the CCPA and the California Invasion of Privacy Act. Phillip Zagotti is a California attorney and a CPA, and he sees these questions from both sides: what a preparer must do and what a client may demand. The firm’s tax law and tax defense practices cover IRS and FTB matters, and its contract drafting and review work handles vendor agreements with bookkeepers and marketing agencies that touch client data.

If you have found tracking code on a preparer’s portal, received a consent form you do not understand, or want your own website checked before a demand letter arrives, contact North Star Law Firm or schedule a consultation.

September 17, 2026

In re Kossoff PLLC: When a California Merchant Cash Advance Is Really a Usurious Loan

On July 27, 2026, a New York bankruptcy judge examined nineteen contracts that each declared in capital letters that they were NOT A LOAN, and ruled that every one was a loan. The funder had advanced roughly $10.88 million to a law firm and expected roughly $14.88 million back through fixed daily bank sweeps.

That ruling, In re Kossoff PLLC, Adv. Pro. No. 23-01109 (DSJ) (Bankr. S.D.N.Y. July 27, 2026), applied New York law. But the same contracts sit in the desk drawers of trucking companies in Fontana and warehouse operators in Ontario, and California law gives those businesses a different and in some ways sharper set of tools.

What did the bankruptcy court decide in Kossoff?

In the Chapter 7 case of Kossoff PLLC, a real estate law firm whose managing member diverted client funds, the trustee sued its funder, Capital Stack, LLC, over nineteen “Agreements for the Purchase and Sale of Future Receipts” signed between 2016 and 2020. In one contract, Capital Stack paid $300,000 and swept $2,190.48 from the firm’s operating account every business day until it had collected $414,000, 38 percent on top of the advance over 189 days.

Judge David S. Jones granted the trustee partial summary judgment, holding the agreements were loans as a matter of law. He called them “well drafted attempts to characterize high-return financing as asset sales,” drafted that way “at least in part because the rate of return under the agreements almost surely would violate New York usury law if the agreements were loans.”

Why did the “not a loan” label fail?

New York courts weigh three factors from LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 A.D.3d 664 (2d Dep’t 2020): whether the contract has a genuine reconciliation clause, whether it has a finite term, and whether the funder keeps recourse if the merchant goes bankrupt.

All three cut against Capital Stack. The reconciliation clause said the merchant “may request” a lower daily amount and the funder “may adjust” it, with no duty to refund over-collections. The fixed daily sweep plus a default trigger after four missed payments in a month meant the payoff date could be computed with a calculator, which is a term. And the bankruptcy carve-out applied only if the merchant was not already in default, which, given the breadth of the default provisions, would almost never be true. Seven reconciliations actually granted did not matter, because later conduct cannot rewrite an unambiguous contract.

How does California’s usury law apply to a merchant cash advance?

Article XV, § 1 of the California Constitution lets parties to a written business loan agree to interest at the higher of 10 percent per year or 5 percent over the Federal Reserve Bank of San Francisco discount rate.

The catch is the exemption list. The constitution exempts banks, credit unions, and “personal property brokers,” and Fin. Code § 22002 carries that last exemption to lenders licensed under the California Financing Law, Fin. Code § 22000 et seq. Many MCA funders hold no California license because they insist they are not lending, so a Kossoff-style ruling leaves them with a usury problem and a licensing problem at once.

The interest provision of a usurious loan is void, so the borrower owes principal only, and Civil Code § 1916-3 lets the borrower recover treble the interest paid in the twelve months before suit. California courts have looked past labels in usury cases since at least Boerner v. Colwell Co., 21 Cal. 3d 37 (1978). No published California appellate decision has yet applied the LG Funding factors to an MCA, so a judge here would draw on that principle, on In re Shoot the Moon, LLC, 635 B.R. 797 (Bankr. D. Mont. 2021), a Ninth Circuit-district case that treated eighteen advances as usurious loans, and on Kossoff.

Drowning in MCA Daily Debits? The first response usually frames everything that follows. Talk it through with an attorney and CPA before you act.

Schedule a Free Consultation

What California rules already treat MCAs like credit?

SB 1235, codified at Fin. Code § 22800 et seq., defines “commercial financing” to include an “accounts receivable purchase transaction,” the label every MCA wears. For offers of $500,000 or less, the recipient must sign a disclosure that states, under Fin. Code § 22802(b)(6), the total cost “expressed as an annualized rate,” computed under 10 CCR § 900 et seq.. The funders’ trade group challenged the rule and lost in Small Business Finance Ass’n v. Mohseni, No. 24-50 (9th Cir. Apr. 15, 2025) (unpublished). SB 666 added Civil Code §§ 1799.300 to 1799.303, effective January 1, 2024, which bar non-bank providers from charging small businesses ACH processing fees, payoff statement fees, or “platform” fees with no service behind them, at $500 or more in statutory damages per violation.

What happens to a stacked MCA in an Inland Empire bankruptcy?

Take a hypothetical cross-dock logistics company in Ontario that took three advances over eight months in 2025. Funder A paid $120,000 for $168,000 of “future receipts” at $1,400 per business day over 120 days. Funder B paid $90,000 for $124,200 at $1,150 per day over 108 days. Funder C paid $50,000 for $71,500 at $1,100 per day over 65 days. Total funded: $260,000. Total owed: $363,700. Combined daily debit: $3,650, roughly $76,000 a month, against monthly revenue that has slipped to $310,000. Under the DFPI formula the annualized rates are near 149, 158, and 293 percent.

If the company files under Subchapter V in the Riverside Division of the Central District of California, the automatic stay under 11 U.S.C. § 362 stops the sweeps immediately. The debtor can then use § 544(b) to borrow California’s Uniform Voidable Transactions Act, Civil Code § 3439.04, and attack each advance taken while insolvent as an obligation incurred without reasonably equivalent value to the extent of the usurious premium. Payments in the prior 90 days, roughly $180,000 here (63 business days of Funder A and B debits plus about 20 days of Funder C), are preference candidates under § 547. If the advances are loans, each claim can be objected to under § 502(b) and cut to unpaid principal; Funder C, paid for only about 20 days, would drop from $71,500 to near $28,000. The books need restating too, since an advance recorded as a sale hides interest expense.

California tool	Authority	Who it reaches	Practical effect
Usury ceiling	Cal. Const. art. XV, § 1	Unlicensed non-bank funders	Interest void; principal only
Treble recovery	Civ. Code § 1916-3	Borrower who paid interest	Treble interest paid in prior year
APR disclosure	Fin. Code § 22802; 10 CCR § 900	Offers of $500,000 or less	Signed annualized rate in the file
Fee limits	Civ. Code § 1799.302	Small businesses	$500 or more per prohibited fee
Confession of judgment ban	CCP § 1132	Judgments after Jan. 1, 2023	Unenforceable in superior court
Avoidance powers	11 U.S.C. §§ 544, 547, 548	Debtor in C.D. Cal.	Recover payments; shrink claims

Can a funder still use a confession of judgment in California?

Since January 1, 2023, Code of Civil Procedure § 1132 provides that a judgment by confession “is unenforceable and may not be entered in any superior court.” A funder holding a New York confession may still try to enter it there and domesticate it here, so object fast. A UCC-1 filing proves nothing either way, since Commercial Code § 9109(a)(3) covers sales of accounts as well as security interests.

What should a California owner check before the next daily debit clears?

Start with the reconciliation clause. If the funder “may” adjust the daily amount and nothing requires a refund of over-collections, the contract has the flaw the Kossoff court found fatal. Pull the SB 1235 disclosure; if none was given, or the stated APR bears no resemblance to what you are paying, that is a violation and an admission. Then count the days: the 90-day preference window and the one-year treble recovery period under § 1916-3 both run against you. What goes wrong in practice is the fourth advance taken to cover the first three.

Frequently Asked Questions

Is a merchant cash advance a loan in California?

It depends on the substance of the contract, not its title. If daily debits are fixed, reconciliation is discretionary, and default remedies are broad, the funder never really bears receivables risk, and a court can treat the advance as a loan subject to California’s usury limit and licensing rules.

What is the maximum interest rate on a business loan in California?

Article XV, section 1 of the California Constitution caps interest on a written business loan at the higher of 10 percent per year or 5 percent over the Federal Reserve Bank of San Francisco discount rate, unless the lender is exempt, as banks, credit unions, and California Financing Law licensees are.

Can I get my money back if an MCA is found to be usurious?

Under Civil Code section 1916-3, a borrower who paid usurious interest can sue within one year of payment to recover three times the interest paid, and the interest provision itself is void so only principal is owed. The funder must be unlicensed and the transaction must be a loan.

Are confessions of judgment enforceable in California?

No. Code of Civil Procedure section 1132, as amended effective January 1, 2023, makes a judgment by confession unenforceable and bars superior courts from entering one, though a funder holding a New York confession may still try to enter it there and domesticate it.

Do MCA companies have to disclose an APR in California?

Yes, for commercial financing offers of $500,000 or less. Financial Code section 22802 and the DFPI regulations at 10 CCR section 900 et seq. require a signed disclosure stating the total cost as an annualized rate.

Does filing bankruptcy stop MCA daily debits?

Yes. The automatic stay under 11 U.S.C. section 362 takes effect the moment the petition is filed and stops ACH sweeps, bank levies, and collection calls. In a Subchapter V case the debtor can then object to the funder’s claim and pursue preference and fraudulent transfer recoveries.

How North Star Law Firm Can Help

North Star Law Firm represents Inland Empire and Sacramento-area businesses carrying merchant cash advances, whether the goal is to challenge the contract, restructure the debt, or stop the daily debits. Phillip Zagotti is a California attorney and a CPA, which matters because the recharacterization question turns as much on the numbers (annualized cost, preference math, how the advances were booked) as on contract language. The firm handles contract review of MCA agreements, Subchapter V reorganizations in the Riverside Division, and business debt negotiations with funders and SBA lenders. An earlier post on defendants who file Subchapter V covers the creditor side.

If daily sweeps are outrunning receipts, review the contracts before the next default notice. Reach the firm through its contact page or book a consultation at calendly.com/pzagotti-ca-legal/30min.

September 16, 2026

Is Your California Estate Plan Out of Date? Prop 19, Unfunded Trusts, and the Ten-Year IRA Rule

A living trust signed in 2012 was drafted for a world with a $5.12 million federal estate tax exemption, a parent-child property tax exclusion that covered rentals, and an IRA “stretch” that let a child draw an inherited account down over a lifetime. If you own a home in Redlands, Temecula, or Roseville and your trust binder has not been opened in a decade, the plan inside is still valid, but it no longer does what you think it does.

Is the property actually in the trust?

The most common failure in California trust administration is an unfunded trust. A trust only controls assets titled in the trustee’s name, and title drifts, usually at a refinance: the lender requires the house to be deeded out of the trust to close, and nobody deeds it back.

Under Probate Code § 850, a trustee or interested person can petition the probate court for an order that property held in the decedent’s individual name belongs to the trust. The petition takes its nickname from Estate of Heggstad, 16 Cal.App.4th 943 (1993), where the First District held that a settlor’s written declaration that he held listed property as trustee brought it into the trust without a deed: “a declaration by the settlor that he holds the property in trust for another, alone, is sufficient.”

The petition works best when the trust’s asset schedule lists the property, and it still means months in the Riverside or San Bernardino probate court.

What if the estate is small enough to skip probate anyway?

For deaths on or after April 1, 2025, Probate Code § 13100 lets successors collect property by affidavit when the probate estate is $208,850 or less, next adjusted April 1, 2028. AB 2016 also rewrote Probate Code § 13151 so a decedent’s California primary residence worth up to $750,000 can pass by a simplified petition rather than a full probate.

The $750,000 is gross value with no deduction for the mortgage, it covers only the primary residence, and median prices in Rancho Cucamonga and Corona already exceed it.

How did Prop 19 change what your children inherit?

Before February 16, 2021, a parent could pass any California real property to a child without reassessment. Proposition 19, implemented in Revenue and Taxation Code § 63.2, limits the exclusion to the family home (and family farm), and only if the child moves in and claims the homeowners’ exemption within one year. Even then, it covers the parent’s taxable value plus a cap the Board of Equalization sets at $1,044,586 for transfers from February 16, 2025 through February 15, 2027.

So a 2012 plan’s assumption that “the kids will keep the rental” now carries a reassessment to full market value at the parent’s death, and a review is the moment to decide whether to sell, restructure, or budget for it.

Why does an attorney-CPA care how the deed reads?

Under 26 U.S.C. § 1014(b)(6), when one spouse dies, both halves of community property receive a new basis equal to fair market value. Joint tenancy property, or one spouse’s separate property, gets a step-up on only the decedent’s share. A Yucaipa rental bought for $280,000 in 2005 and worth $620,000 today carries a $340,000 built-in gain. As community property, the survivor can sell it the next year with almost no taxable gain; as joint tenancy, roughly $170,000 of gain survives.

California lets spouses hold title as community property with right of survivorship under Civil Code § 682.1, which passes the property to the survivor without administration while preserving community character for basis.

Does the $15 million exemption mean the estate tax is over?

Pub. L. 119-21 amended 26 U.S.C. § 2010(c) to set the basic exclusion at $15,000,000 for decedents dying after 2025, indexed thereafter, and the IRS confirmed the figure in its tax year 2026 inflation adjustments. There is no sunset, and California has no estate tax.

Two cautions. Many trusts from the 2000s contain a mandatory “A-B” split written when the exemption was $1 or $2 million. At the first death that formula locks the survivor’s half into an irrevocable subtrust with its own Form 1041 and no second basis step-up, all cost and no benefit for a family under the exemption. And portability is not automatic: the survivor keeps the deceased spouse’s unused exclusion only if an executor files Form 706 and elects it. Rev. Proc. 2022-32 allows a late election up to five years after death for estates not otherwise required to file.

Are the beneficiary forms still consistent with the plan?

Retirement accounts pass by beneficiary form, and the rules changed in 2020. Under 26 U.S.C. § 401(a)(9)(H), most non-spouse beneficiaries must empty an inherited IRA within ten years. Treasury’s final regulations, effective January 1, 2025, add annual distributions in years one through nine if the owner had reached required beginning date. A 2012 “conduit” trust meant to stretch payouts over a child’s lifetime now forces the whole account out within a decade.

Divorce is the other trap. Probate Code § 6122 revokes will provisions favoring a former spouse once the marriage is dissolved, and Probate Code § 5040 does the same for revocable nonprobate transfers such as trust gifts and pay-on-death accounts. Neither reaches life insurance or a 401(k) form, and a legal separation triggers neither.

What should a Redlands couple with a 2012 trust actually do?

Take a hypothetical Redlands couple, both 72, with a June 2012 joint trust. They own their home (about $780,000), the Yucaipa rental above (assessed at roughly $340,000), and a $900,000 IRA in the husband’s name payable to the trust. Their only child lives in Dallas, and the wife’s sister, 81, is successor trustee. A 2019 refinance took the rental out of the trust and it never went back.

If the husband dies in 2027 with nothing updated, the rental sits outside the trust, so the wife needs a Heggstad petition before she can sell or refinance. The A-B split diverts half the estate into an irrevocable subtrust for no tax reason. The IRA must be emptied within ten years, if the trust even qualifies as a see-through trust. At the wife’s later death the rental is reassessed from $340,000 to $620,000 or more, nearly doubling the property tax the Dallas child pays to keep it, and the sister, then in her mid-80s, is asked to administer everything. If she declines and no one else is named, Probate Code § 15660 sends the beneficiaries to court for an appointed trustee.

A 2026 restatement fixes each item: a deed returning the rental to the trust, a disclaimer option instead of the mandatory split, an IRA form naming the child directly, retitling as community property with right of survivorship, the child as successor trustee with a professional backup, and a fresh advance health care directive on the current Probate Code § 4701 form plus a durable power of attorney naming an agent still willing to serve. Couples who moved from a common-law state such as Colorado or Oregon should add a community property agreement, since property earned there does not automatically get the double step-up.

Life event	What to review	Timing
Refinance or new real property	Deed into trust; asset schedule	At closing
Divorce or legal separation	Trust, will, POD accounts, insurance, 401(k) forms	Immediately
Death of first spouse	Form 706 portability, A-B funding, basis records	Nine months; late relief to five years
Child moves out of state	Successor trustee, Prop 19 plan for rentals	Next review
Named fiduciary turns 75	Successor and backup trustees and agents	Next review
Move to California	Property characterization, community property agreement	First year of residency

Frequently Asked Questions

How often should a California living trust be reviewed?

Every three to five years, and immediately after a marriage, divorce, death of a beneficiary or fiduciary, a real estate purchase or refinance, a move into or out of California, or a major federal tax change. Trusts signed before 2021 should be reviewed now because Prop 19, the ten-year IRA rule, and the $15 million federal exemption all postdate them.

What is a Heggstad petition and when do I need one?

A Heggstad petition is a request under Probate Code § 850 asking the probate court to declare that an asset titled in a decedent’s individual name actually belongs to the decedent’s trust. It is used when property was never deeded into the trust or was deeded out during a refinance and not returned. Success usually depends on the trust’s asset schedule or a general assignment listing the property.

Does Prop 19 apply to a rental property I leave to my kids?

Yes. Since February 16, 2021, the parent-child reassessment exclusion in Revenue and Taxation Code § 63.2 covers only a family home that the child occupies as a principal residence (and a family farm). A rental, commercial building, or vacant lot is reassessed to market value when it passes to a child, however the transfer happens.

Is portability of the estate tax exemption automatic in California?

No. The surviving spouse receives the deceased spouse’s unused federal exclusion only if an executor files Form 706 and elects it, normally within nine months of death. Rev. Proc. 2022-32 permits a late election up to five years after death for estates not otherwise required to file.

Does divorce automatically remove my ex-spouse from my trust?

In most cases, yes. Probate Code § 5040 causes a revocable nonprobate transfer to a former spouse to fail once the marriage is dissolved, and Probate Code § 6122 does the same for will provisions. The statutes do not reach life insurance, federally governed retirement plans, or irrevocable transfers, and a legal separation does not trigger them, so those designations must be changed by hand.

What happens to an IRA that names an old trust as beneficiary?

If the trust qualifies as a see-through trust, the account must generally be emptied within ten years of the owner’s death under 26 U.S.C. § 401(a)(9)(H), with annual distributions in the interim if the owner had reached required beginning date. If the trust does not qualify, the payout can be compressed to five years. Trusts drafted before 2020 often lack the right language.

How North Star Law Firm Can Help

North Star Law Firm reviews and restates existing California estate plans, prepares revocable living trusts, wills, powers of attorney, and health care directives, files Heggstad petitions and handles trust administration after a death, and prepares the Form 706 and fiduciary income tax returns a plan generates. Phillip Zagotti is a California attorney and a CPA, so one review covers the deeds, the beneficiary forms, and the tax consequences together.

If your trust predates 2021, or any event in the table above has happened since it was signed, schedule a review at calendly.com/pzagotti-ca-legal/30min or through the contact page.

September 15, 2026

Ding v. Structure Therapeutics: The Ninth Circuit Lets a Harassment Claim Found in Arbitration Escape to Court

On August 19, 2026, the Ninth Circuit told California employers that an employee who spent a year arbitrating her discrimination claims, took discovery, and then walked away can file a fresh sexual harassment lawsuit in court and pull the rest of her case out of arbitration with it. The decision is Ding v. Structure Therapeutics, Inc., No. 25-1532 (9th Cir. Aug. 19, 2026), and for a warehouse operator in Fontana or a medical group in Roseville it changes what an arbitration agreement actually buys.

What happened in Ding v. Structure Therapeutics?

Structure Therapeutics hired Dr. Ding Ding as its CFO in December 2021 under an agreement sending all disputes to arbitration. The company terminated her in March 2022, days after she was injured in a domestic violence incident. Her October 2022 arbitration demand alleged national origin discrimination and mistreatment tied to her status as a domestic violence victim, not sex.

Discovery turned up an email from the CEO describing male candidates as the preferred “phenotype” for the job and signs he relied on complaints from male investment bankers when he let her go. In October 2023 she withdrew, citing the company’s late payment of arbitration fees. In March 2024 she sued in California Superior Court for sex discrimination and a sex-based hostile work environment under Cal. Gov. Code § 12940. The company removed the case and moved to compel arbitration; the district court refused and a divided panel affirmed.

Why didn’t filing in arbitration first count as an EFAA election?

The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, 9 U.S.C. § 401 and 9 U.S.C. § 402, says that “at the election of the person alleging conduct constituting a sexual harassment dispute,” no predispute arbitration agreement is enforceable “with respect to a case” relating to that dispute. The employer argued she got one election and used it in 2022.

The majority disagreed. An election is a choice among options, and in October 2022 Dr. Ding had none: she was not yet “alleging conduct constituting a sexual harassment dispute,” so the clause bound her. Her only election came in March 2024. Congress passed the EFAA to give victims “a real choice,” which cannot be forfeited before a plaintiff knows she has a claim.

Ordinary waiver doctrine still applies: a plaintiff who knows the facts supporting a harassment claim and either sits on it or deliberately arbitrates it can lose her EFAA rights. Judge Rawlinson, dissenting, would have treated a year of active arbitration as a knowing choice of forum.

Does one harassment claim pull the whole case out of arbitration in California?

Yes. Because the statute voids the agreement “with respect to a case,” not a claim, Dr. Ding’s domestic violence claims left arbitration with the sex-based claims. The panel relied on Bruce v. Adams & Reese, LLP, 168 F.4th 367 (6th Cir. 2026).

California courts got there first. Doe v. Second Street Corp., 105 Cal.App.5th 552 (2024), held that a FEHA hostile work environment claim is a “sexual harassment dispute” and that the EFAA blocks arbitration of every claim in the case, wage claims included. Liu v. Miniso Depot CA, Inc., 105 Cal.App.5th 791 (2024), agreed where the harassment was comments about the plaintiff’s gender expression and sexual orientation. The United States Supreme Court denied review in Liu on October 6, 2025.

How does the EFAA fit with FEHA and AB 51 after Chamber of Commerce v. Bonta?

AB 51, Cal. Lab. Code § 432.6, tried to bar mandatory arbitration. The Ninth Circuit held in Chamber of Commerce v. Bonta, 62 F.4th 473 (9th Cir. 2023), that the Federal Arbitration Act preempts it, and the statute is now permanently enjoined.

The EFAA is a carve-out from the FAA itself, so preemption is no defense. Section 402(b) adds that a court, not an arbitrator, decides whether the EFAA applies, delegation clause or not. And because FEHA harassment liability reaches employers of any size under § 12940(j), a California plaintiff can trigger the statute with a FEHA claim alone.

What does the arbitration fee deadline in CCP § 1281.98 have to do with this?

Dr. Ding left arbitration over late fee payments. Cal. Civ. Proc. Code § 1281.98 makes an employer’s failure to pay fees within 30 days after the due date a material breach. The employee may then withdraw, sue in court with the limitations period tolled, and recover her arbitration costs, and the court must impose sanctions.

The California Supreme Court softened the rule in Hohenshelt v. Superior Court (Cal. Aug. 11, 2025), holding that § 1281.98 survives FAA preemption but that relief from forfeiture under Civil Code § 3275 and CCP § 473(b) remains available for an inadvertent late payment. A willful or grossly negligent default still forfeits the forum. Put Ding and § 1281.98 together: a slipped invoice hands the employee an exit, and the EFAA lets her rebuild the case in court.

What should a Riverside employer with 40 employees do now?

Take a Riverside HVAC contractor with 40 employees. Under Cal. Gov. Code § 12950.1, supervisors need two hours of harassment prevention training and everyone else one hour, every two years, with new hires trained within six months. The agreement should carve out EFAA-covered claims by name, and its severability clause should say that if federal law excludes any claim or case from arbitration, the parties arbitrate what remains and litigate the rest.

Situation	Can the employer compel arbitration?	Authority	Practical note
Wage claim only, no harassment allegation	Yes, if the agreement is enforceable	Chamber v. Bonta	AB 51 enjoined; FAA governs
FEHA sexual harassment claim in court	No, at the employee’s election	9 U.S.C. § 402(a); Doe	Court, not arbitrator, decides
Harassment plus unrelated wage claims	No, entire case stays in court	Liu; Ding	Cert denied in Liu, Oct. 2025
Employee arbitrated other claims, then found sex-based facts	No, absent knowing waiver	Ding	Document what she knew and when
Fees paid more than 30 days late	Only with relief from forfeiture	CCP § 1281.98; Hohenshelt	Sanctions follow willful default

What does the worked example look like in dollars?

Same contractor. A service coordinator terminated in August 2025 files a JAMS demand in February 2026 for retaliation and unpaid overtime. The employer pays $43,500 in JAMS filing, arbitrator, and case management fees and about $60,000 in defense fees. In September 2026 an email produced in discovery shows the dispatch supervisor rating female coordinators on appearance and calling her “too emotional to keep.” She withdraws in October 2026 and files a FEHA harassment and sex discrimination complaint in Riverside Superior Court, retaliation and overtime claims included.

Under Ding, Doe, and Liu, the employer cannot compel arbitration of any of it unless it proves she knew the sex-based facts in February. The $103,500 spent bought a discovery record the plaintiff will reuse. If the August invoice also went out 35 days late without an excuse that satisfies Hohenshelt, § 1281.98 adds her arbitration costs and a mandatory sanction.

What does an attorney-CPA see that a pure litigator might miss?

First, any settlement subject to a nondisclosure agreement runs into 26 U.S.C. § 162(q), which denies a deduction for a settlement or payment “related to sexual harassment or sexual abuse” that is subject to an NDA, and for the attorney’s fees tied to it. A $150,000 confidential settlement of a mixed case can cost an S corporation owner in the 37 percent federal bracket more than $55,000 in lost deductions unless the agreement allocates, defensibly, what is being paid for what.

Second, arbitration fees are a cash-flow item most small employers never budget. Under California’s Armendariz rule the employer bears the costs unique to arbitration, and a company that pays provider invoices on a 45-day cycle is one late check away from a § 1281.98 default.

Frequently Asked Questions

Can a California employee sue for sexual harassment after starting arbitration on other claims?

Under Ding v. Structure Therapeutics, No. 25-1532 (9th Cir. Aug. 19, 2026), yes, if she was unaware of the sex-based facts when she filed in arbitration. The EFAA election happens only when the employee first alleges a sexual harassment dispute. If she knew the facts earlier and chose arbitration anyway, a court can find waiver.

Does the EFAA apply to FEHA claims filed in California state court?

Yes. The statute reaches sexual harassment disputes under any federal, tribal, or state law, and California courts applied it to FEHA hostile work environment claims in Doe v. Second Street Corp. and Liu v. Miniso Depot.

If an employee adds a harassment claim, do her wage claims stay in court too?

Yes. The EFAA voids the arbitration agreement as to the whole case, so overtime, retaliation, and other claims filed with the harassment claim remain in court. The Ninth Circuit, the Sixth Circuit, and the California Court of Appeal agree, and the U.S. Supreme Court declined review in October 2025.

Are mandatory arbitration agreements still legal for California employers?

For most private employers, yes. The Ninth Circuit held in Chamber of Commerce v. Bonta that the Federal Arbitration Act preempts AB 51, Labor Code § 432.6, which is now permanently enjoined. The agreement cannot be enforced against a case that includes a sexual harassment dispute if the employee elects to litigate.

What happens if my company pays an arbitration invoice late in California?

Under Code of Civil Procedure § 1281.98, a payment more than 30 days after the due date is a material breach that lets the employee withdraw, sue in court, and recover her arbitration costs, with mandatory sanctions. After Hohenshelt v. Superior Court (Cal. 2025), a court can excuse a good-faith late payment, but willful or grossly negligent nonpayment still forfeits the forum.

Is a sexual harassment settlement tax deductible for the employer?

Not if it is subject to a nondisclosure agreement. Internal Revenue Code § 162(q) denies a deduction for any settlement or payment related to sexual harassment or sexual abuse that is subject to an NDA, and for the related attorney’s fees. Mixed-case settlements should allocate the payment among claims in writing.

How North Star Law Firm Can Help

North Star Law Firm advises Inland Empire and Sacramento-area employers on drafting and reviewing arbitration agreements that account for the EFAA and California’s fee-payment rules, and on structuring settlements so the tax result matches the business deal. Phillip Zagotti is a California attorney and a CPA, so the firm can handle the tax consequences of a harassment settlement and the contract questions in one engagement.

If a former employee has withdrawn from arbitration or a demand letter alleges harassment alongside wage claims, review the agreement and the fee-payment record before the response is due. Schedule a consultation at calendly.com/pzagotti-ca-legal/30min or through the firm’s contact page.

September 14, 2026

Harada v. Kapitus: Ninth Circuit Lets Bankruptcy Courts Keep MCA Usury Fights Out of Arbitration

A dental practice in Havre, Montana, is an unlikely source of a rule that now guides bankruptcy judges in Riverside, Sacramento, and Fresno. On May 21, 2026, the Ninth Circuit issued Harada Family Dental Care, PC v. Kapitus Servicing, Inc., No. 25-6945 (9th Cir. May 21, 2026) (unpublished). A merchant cash advance funder had filed a $110,898.85 claim in the practice’s Subchapter V case, the practice objected on usury grounds, and the funder invoked its arbitration clause. The bankruptcy court kept the dispute, and the Ninth Circuit agreed.

For a California business owner holding one of these agreements, the question is practical: once the company is in bankruptcy court, can the funder pull the fight into arbitration? When the dispute concerns the funder’s own proof of claim, the answer in this circuit is usually no.

What happened in Harada v. Kapitus?

Harada Family Dental Care filed Subchapter V in the District of Montana in 2024. Kapitus filed a proof of claim for the unpaid balance of its advance. The debtor objected and counterclaimed, contending the “purchase of future receivables” was a disguised loan at a rate that violated Montana’s usury statute, with a penalty the debtor computed at more than double the claim.

Kapitus moved to compel arbitration. On July 1, 2025, the bankruptcy court denied the motion in Harada Family Dental Care, P.C. v. Strategic Funding Source, Inc., Adv. No. 4:25-ap-04001-BPH (Bankr. D. Mont.), reasoning that claim allowance is core and that the usury defense could not be separated from the claim objection.

Why does it matter that a claim objection is a “core” proceeding?

The Ninth Circuit’s framework comes from Continental Insurance Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011 (9th Cir. 2012). In a non-core proceeding, the bankruptcy court generally must enforce an arbitration clause. In a core proceeding, the court has “discretion to deny enforcement of an arbitration agreement” when arbitration “would conflict with the underlying purposes of the Bankruptcy Code.”

28 U.S.C. § 157(b)(2)(B) covers the “allowance or disallowance of claims against the estate,” and § 157(b)(2)(C) covers “counterclaims by the estate against persons filing claims against the estate.” An MCA funder that files a proof of claim has placed its contract inside both categories. Ackerman v. Eber (In re Eber), 687 F.3d 1123 (9th Cir. 2012), applied the same logic to a fraud-based discharge dispute. And as Morgan v. Sundance, Inc., 596 U.S. 411 (2022), put it, arbitration agreements are “as enforceable as other contracts, but not more so.”

On appeal, Kapitus argued the court could not assume delay without evidence of how long arbitration would take. Quoting Thorpe, the panel explained that arbitration of a creditor’s claim, “even if conducted expeditiously, prevents the coordinated resolution of debtor-creditor rights and can delay the confirmation of a plan.” The panel also corrected the district court, which had refused to hear the appeal: under 9 U.S.C. § 16(a)(1)(B), an order refusing arbitration is appealable as of right.

Being Pushed Into Arbitration by a Lender While Your Business Is Failing? The first response usually frames everything that follows. Talk it through with an attorney and CPA before you act.

Schedule a Free Consultation

Which disputes stay in bankruptcy court and which go to arbitration?

The Central District applies Thorpe the same way. In In re Orchid Child Productions, LLC, Adv. No. 2:21-ap-01212-RK (Bankr. C.D. Cal. Apr. 22, 2024), the court refused to arbitrate a trustee’s counterclaims against a claimant because an arbitrator would otherwise be deciding claim allowance. Common MCA disputes tend to land as follows.

Dispute	Core or non-core	Likely forum	Authority
Objection to funder’s proof of claim (usury, recharacterization)	Core, § 157(b)(2)(B)	Bankruptcy court	Harada; Thorpe
Estate counterclaim for statutory penalties	Core, § 157(b)(2)(C)	Bankruptcy court	Harada; Orchid Child
Preference or fraudulent transfer avoidance (daily ACH debits)	Core, § 157(b)(2)(F), (H)	Bankruptcy court	Thorpe framework
Automatic stay or discharge violation by funder	Core	Bankruptcy court	Eber; § 362(k)
Debtor’s prepetition tort claim, funder filed no claim	Often non-core	Arbitration likely	Thorpe
Guarantor’s personal dispute outside the case	Not a bankruptcy matter	Arbitration or state court	FAA; CCP § 1281.2

What California law can a debtor raise against an MCA funder?

For an Inland Empire or Sacramento debtor, the California overlay is where the money is. Cal. Const. art. XV, § 1 caps interest on non-consumer loans at 10 percent (or 5 points over the Federal Reserve discount rate) but exempts lenders licensed under the California Financing Law. A funder licensed under Fin. Code § 22100 can charge what a commercial contract says. An unlicensed funder whose “receivables purchase” is recharacterized as a loan has a serious problem. That turns on whether the reconciliation clause is real, whether the funder can accelerate when sales slow, and whether a guaranty makes the purchase risk-free. In a claim objection, the bankruptcy judge decides those questions.

Add Fin. Code § 22800 et seq., enacted as SB 1235 and implemented at 10 CCR § 900 et seq., which requires commercial financing providers, including sales-based financing, to disclose total cost, term, payment schedule, and an annualized rate at the offer stage. A missing disclosure is not a usury defense, but it is evidence of what the deal really was. (A 2024 registration bill for these providers, SB 1482, died on the Assembly inactive file.)

CCP § 1281.2(c), the third-party litigation exception, is usually displaced by the FAA and out-of-state law the contract selects. The fee-default statute, CCP § 1281.98, upheld against preemption in Hohenshelt v. Superior Court, S284498 (Cal. Aug. 11, 2025), covers only employment and consumer arbitration. For a business borrower, the bankruptcy court is often the only forum where the clause does not control.

What does this look like for a Fontana trucking company in Subchapter V?

Consider a Fontana drayage carrier running fourteen tractors between the Port of Long Beach and Inland Empire warehouses. In March 2026 it takes a $150,000 advance against $210,000 of “future receivables,” a 1.40 factor rate, repaid by a $1,000 ACH debit every business day under a contract with New York law, an arbitration clause, and a personal guaranty. By August, freight rates have fallen and the debit eats a third of collections. The company files Subchapter V in the Riverside Division on September 8, 2026, owing $88,000.

The funder files a proof of claim for $88,000 plus default fees. The debtor objects under Fed. R. Bankr. P. 3007 and counterclaims. Over ten months on a declining balance, the $60,000 charge is an annualized rate above 90 percent. If the deal is a loan and the funder holds no California Financing Law license, the objection seeks to disallow the interest, recover interest paid, and obtain treble recovery under Civ. Code § 1916-3. When the funder moves to compel arbitration, Harada lets the judge deny it: the objection and counterclaim are core, and the unsecured class’s recovery turns on the answer.

The calendar is tight. The 11 U.S.C. § 1188 status conference comes within 60 days, and the plan is due within 90 days under § 1189(b), which for a September 8 filing means December 7, 2026. A debtor without a claim objection on file by then negotiates from weakness.

What goes wrong in practice, and what does the CPA side see?

The most common mistake is waiting. A funder that never files a proof of claim has not submitted its contract to the claims process, and a debtor’s affirmative suit against it looks much more like a non-core matter bound for arbitration. A guaranty also lets the funder pursue the owner in New York while the company’s case proceeds.

The accounting side is usually ignored. If the MCA is recharacterized as a loan, the $60,000 charge is interest, and a business that booked the debits as “bank fees” should correct the deduction. A claim disallowed because the debt was never valid produces no cancellation of debt income, but a compromise that writes down a valid claim usually does, subject to the § 108(a)(1)(A) bankruptcy exclusion.

Frequently Asked Questions

Can a merchant cash advance company force my California business into arbitration after it files bankruptcy?

Not always. Under the Ninth Circuit’s Thorpe Insulation rule, applied in Harada v. Kapitus in May 2026, a bankruptcy court may refuse to enforce an arbitration clause when the dispute is core, such as an objection to the funder’s proof of claim, and arbitration would conflict with the Bankruptcy Code’s purposes.

Does an MCA count as a loan under California usury law?

It depends on how the contract actually works. Courts look at whether repayment is truly contingent on receivables, whether the reconciliation clause is real, and whether a guaranty removes the funder’s risk. If the deal is recharacterized as a loan, California’s constitutional interest cap and the California Financing Law licensing requirement come into play.

What is a core proceeding in bankruptcy?

Core proceedings are matters listed in 28 U.S.C. § 157(b)(2), including claim allowance, estate counterclaims against claimants, avoidance actions, and stay and discharge matters. The bankruptcy court enters final judgments in them and may keep them out of arbitration.

Does the funder filing a proof of claim change anything?

Yes. Filing a proof of claim submits the funder’s contract to the claims process, which is core under § 157(b)(2)(B), and any estate counterclaim against that funder is core under § 157(b)(2)(C). A funder that never files a claim keeps a stronger argument that a debtor’s affirmative suit belongs in arbitration.

Can the funder appeal an order denying arbitration right away?

Yes. Section 16(a)(1)(B) of the Federal Arbitration Act allows an immediate appeal from an order refusing to compel arbitration, and the Ninth Circuit in Harada held that a district court cannot refuse to hear it. The bankruptcy case does not automatically stop during the appeal.

How fast does a Subchapter V debtor have to act on an MCA claim?

The plan is due 90 days after the petition under 11 U.S.C. § 1189(b), and the status conference comes within 60 days. A claim objection under Bankruptcy Rule 3007 should be filed early enough that the court can rule, or at least estimate the claim, before confirmation.

How North Star Law Firm Can Help

North Star Law Firm represents Inland Empire and Sacramento-area businesses in Subchapter V reorganizations, in SBA loan and business debt restructurings, and in claim objections and adversary proceedings against merchant cash advance funders. Phillip Zagotti is a California attorney and a CPA, admitted to the United States Bankruptcy Court for the Central District of California, so the firm handles both the litigation and the tax side of a disputed MCA. The firm also reviews financing agreements before signing through its contract review practice. See also the firm’s post on what happens when a defendant files Subchapter V.

If a funder is debiting your account daily and threatening arbitration while your company struggles, contact North Star Law Firm or schedule a consultation.

September 13, 2026

Background Checks in California After San Francisco’s 2026 Fair Chance Amendments: The Statewide Rules, LA County’s Ordinance, and a Compliant Hiring Workflow

San Francisco tightened its Fair Chance Ordinance on August 10, 2026, adding new protected categories and firm response deadlines, and doubling its administrative penalties. Most Inland Empire employers will never hire someone to work in San Francisco, so it’s tempting to skip the news. That would be a mistake, because the San Francisco changes are a good prompt to check compliance with the rules that do apply in Riverside and San Bernardino counties: the statewide Fair Chance Act, California’s background check reporting statutes, and, for companies whose drivers or technicians spend time in unincorporated Los Angeles County, one of the strictest local ordinances in the state. State enforcement is active. In July 2026, the Civil Rights Department announced a $200,000 settlement with Ralphs resolving its first Fair Chance Act lawsuit.

What does California’s Fair Chance Act require of every employer with five or more employees?

Government Code § 12952 bars employers with five or more employees from asking about conviction history, or considering it, until after a conditional offer. Even then, some records are off limits entirely: arrests that didn’t lead to a conviction, participation in diversion programs, and convictions that have been sealed, dismissed, or expunged. Labor Code § 432.7 separately prohibits using those records and allows the greater of actual damages or $200 per violation, or the greater of treble damages or $500 for intentional violations, plus attorney’s fees. Under Labor Code § 432.8, misdemeanor marijuana possession convictions more than two years old are also out.

If an employer wants to rescind an offer because of a conviction, it must first make an individualized assessment of whether the conviction has a direct and adverse relationship with the specific duties of the job, considering the nature and gravity of the offense, the time that has passed since the offense and the completion of the sentence, and the nature of the job. It then sends a preliminary notice identifying the conviction and including a copy of any report, and it gives the applicant at least five business days to respond, with five more if the applicant disputes the record and is gathering evidence. The final decision must be in writing and must explain any internal appeal process and the right to file a complaint with the Civil Rights Department. The department’s sample Fair Chance Act forms are a practical starting point.

What did the 2023 regulations add?

The Civil Rights Council’s amended regulation, Cal. Code Regs., tit. 2, § 11017.1, took effect October 1, 2023, and it’s where many employers get caught. Job postings can’t say “no felons” or “must have a clean record.” Employers can’t use a background check or an internet search to learn about conviction history before making an offer. Evidence of rehabilitation is something the applicant may offer, not something the employer may require. Policies that automatically disqualify people for convictions seven or more years old are subject to a rebuttable presumption that they aren’t tailored enough. And the definition of “employer” reaches staffing agencies and the businesses that take workers from them, while “applicant” includes someone who’s already started work under a conditional offer. For a Moreno Valley fulfillment center that brings in seasonal workers through an agency, both companies can be responsible for getting the process right.

Do local ordinances add stricter rules near the Inland Empire?

Yes, and the one that matters most isn’t San Francisco. The Los Angeles County Fair Chance Ordinance for Employers, effective September 3, 2024, covers employers with five or more employees that do business in unincorporated Los Angeles County, for workers who average at least two hours of work a week there, including remote work. It bars considering most convictions more than seven years old, with exceptions for jobs involving minors, dependent adults, people 65 or older, and public funds. It requires written assessments before and after the applicant’s response, and it authorizes penalties of up to $5,000, $10,000, and $20,000 per affected person for successive violations. An Ontario distributor whose merchandisers regularly service stores in unincorporated areas like East Los Angeles or Hacienda Heights should assume it’s covered. The City of Los Angeles has its own ordinance for employers with ten or more employees.

San Francisco’s ordinance applies to employers with five or more employees for jobs involving at least eight hours of work a week in the city. According to published summaries of the August 2026 amendments, they bar reliance on out-of-state arrests or convictions for conduct that’s lawful in California involving abortion care, miscarriage, gender-affirming care, and drag performance. They also require the employer to confirm an applicant’s response in writing within 14 days and to send the final notice within 30 days, and they raise administrative penalties to $1,000 for a first violation, $2,000 for a second, and $4,000 for each one after that. The city’s Fair Chance Ordinance page covers the basics, and its August 2026 poster reflects the update.

Rule	California (statewide)	Unincorporated LA County	San Francisco
Employers covered	5 or more employees	5 or more employees; workers averaging 2+ hours a week in the area	5 or more employees; jobs with 8+ hours a week in the city
Conviction inquiry timing	After conditional offer	After conditional offer	After conditional offer
Older convictions	Blanket 7-year-plus exclusions presumed overbroad	Convictions over 7 years generally can’t be considered	Convictions over 7 years generally can’t be considered
Applicant response time	At least 5 business days, plus 5 if disputing	5 business days, plus 10 in some cases	7 days; employer confirms receipt within 14 days
Final notice	Written, with appeal and CRD complaint rights	Written second assessment and final notice	Within 30 days of response, or of preliminary notice if no response
Penalties	FEHA remedies; CRD enforcement	Up to $5,000 / $10,000 / $20,000 per person	$1,000 / $2,000 / $4,000 administrative penalties

What can a background check company legally report in California?

Less than federal law allows. The Fair Credit Reporting Act lets consumer reporting agencies report convictions indefinitely, but California’s Investigative Consumer Reporting Agencies Act, Civil Code § 1786.18(a)(7), bars reporting convictions whose date of disposition, release, or parole is more than seven years before the report. Before ordering a report, the employer must give a stand-alone disclosure identifying the screening company and the scope of the investigation, with a box the applicant can check to receive a copy, which is due within three business days under § 1786.16. The federal requirements in 15 U.S.C. § 1681b(b) run alongside: a separate disclosure and written authorization before the check, and a copy of the report plus the federal summary of rights before any adverse action.

Two more statutes trip up hiring managers. Labor Code § 1024.5 limits credit reports to specific positions, such as managers and jobs with access to large amounts of cash or confidential financial data, so a warehouse picker isn’t a lawful credit check position. And Government Code § 12954, effective since January 1, 2024, generally bars decisions based on off-duty cannabis use or on drug tests that detect only nonpsychoactive cannabis metabolites, and bars asking applicants about past cannabis use, with exceptions for construction trades and jobs requiring federal background checks.

What does a compliant hiring decision look like in practice?

Suppose a Moreno Valley fulfillment center, working through a staffing agency, extends conditional offers to 60 seasonal pickers and packers. The job postings say nothing about criminal records, and the offers go out before any screening begins. Each candidate then signs the federal disclosure and authorization and the separate California disclosure. One candidate’s report shows a 2019 Nevada misdemeanor petty theft conviction; the case was resolved in March 2019 and probation ended in March 2020.

The first question is whether the screening company should have reported it at all. Counted from the March 2019 disposition, the conviction falls outside California’s seven-year window in 2026. Counted from the end of probation, it doesn’t until March 2027. The statute doesn’t clearly say which date controls when a sentence includes probation, so the employer should ask how its vendor applies the rule. If the conviction is properly on the report, the assessment comes next. Theft has some relationship to a job handling merchandise, but the offense was a misdemeanor, it’s more than seven years old, and the candidate has worked steadily since. A blanket rule screening out this candidate would run into the regulation’s presumption against policies built on older convictions, and an individualized assessment on these facts points away from rescinding the offer. If the employer still has concerns, it sends a combined state and federal preliminary notice with the report and summary of rights, waits at least five business days for a response, considers anything the candidate submits, and documents its final reasoning. Everything goes in a file kept for four years.

Enforcement makes the paperwork worth doing. In June 2026, the Civil Rights Department announced a $93,000 resolution with the City of Signal Hill over a withdrawn offer based on older, unrelated convictions without an individualized assessment. The Ralphs settlement in July added years of reporting obligations on top of the payment. A bill to expand the state law, AB 2095, was reportedly moved to the Assembly’s inactive file in May 2026, but the current rules already give the department plenty to enforce.

Hiring updates rarely happen one at a time. Employers revising offer letters this year should also check their sign-on bonus terms under the new stay-or-pay law and budget for the 2027 minimum wage and exempt salary increase.

Frequently Asked Questions

Can a California employer ask about criminal history on a job application?

No. Employers with five or more employees can’t ask about or consider conviction history until after making a conditional job offer, and some records, like arrests without conviction, can never be considered.

How long does an applicant have to respond to a preliminary notice?

At least five business days under state law, plus five more if the applicant disputes the record and is obtaining evidence. Local ordinances in Los Angeles County and San Francisco set their own timelines.

Can a background check in California include convictions older than seven years?

Generally no. California law bars screening companies from reporting convictions dated more than seven years from disposition, release, or parole, which is stricter than federal law.

Does the Los Angeles County Fair Chance Ordinance apply to Inland Empire companies?

It can. It covers employers with five or more employees for workers averaging at least two hours a week in unincorporated Los Angeles County, even if the company is based elsewhere.

Is a staffing agency or its client responsible for Fair Chance compliance?

Potentially both. California’s regulation includes staffing agencies and the businesses that obtain workers from them within the definition of employer, so contracts should assign who does the assessment and sends notices.

What changed in San Francisco’s Fair Chance Ordinance in August 2026?

It added protection for out-of-state records involving conduct lawful in California, such as abortion and gender-affirming care, set 14-day and 30-day employer deadlines, and doubled administrative penalties.

How North Star Law Firm Can Help

North Star Law Firm helps California employers update hiring forms, staffing agency agreements, and background check workflows so they match state and local Fair Chance rules. The firm’s business and contract law practice covers the vendor and staffing contracts that decide who’s responsible when a notice is missed, and its contract drafting and review service handles offer letters and screening authorizations. Phillip Zagotti is a California attorney and a CPA who works with Inland Empire and Sacramento businesses on the legal and financial sides of growth. Employers preparing for seasonal hiring can schedule a consultation.

September 9, 2026