At issue in Timbron Holdings Corporation and Timbron International Corporation v. Commissioner, T.C. Memo 2019-31, is whether a corporation can file a Tax Court petition when its corporate charter has lapsed. The Tax Court holds that it cannot and that reviving the charter after the filing of the petition does not save the Tax Court case. The non-precedential opinion reminds us of the importance of corporate formalities when seeking to litigate regarding corporate tax liabilities.
On March 2, 2009, and August 1, 2013, respectively, the California Franchise Tax Board suspended Timbron International’s and Timbron Holdings’ powers, rights, and privileges for failure to pay State taxes. Petitioners’ powers, rights, and privileges remained suspended as of July 6, 2017. The suspension of corporate powers provides another example of the types of state benefits that taxpayers can lose by not paying state taxes. I had not previously seen this exercise of power by a state but I do not represent corporations. The suspension must happen routinely in California with potentially far sweeping results including those at issue here. This means that corporations that fall behind in paying their state taxes will have difficulty in many contexts. It also could have significant consequences for the responsible persons of the corporations. This post will not discuss the broader issues.
The court notes that as of July 6, 2017, the powers remained suspended. The suspension of the corporate powers, of course, does not stop the IRS from auditing the corporation and from issuing a notice of deficiency. The IRS did issue the notice on July 14, 2016. The corporations responded by filing Tax Court petitions on October 11, 2016 which respondent answered the following month. In the answer the IRS did not raise the jurisdictional issue but such issues can be raised at any time. Several months later the IRS must have noticed the suspended powers and the fact the suspension existed at the time of the filing of the petitions and it filed motions to dismiss for lack of jurisdiction due to the lapse of corporate existence at the time of the filing of the petitions. In response the corporations did not argue with the fact of the suspension but argued that at the time of the filing of the petition “that they had obtained certificates of reviver and were considered ‘active’ as of September 27, 2017 (approximately 11 months after the end of the applicable period).”
The court set up the issue with the following statement:
Whether we have jurisdiction to decide a matter is an issue that a party, or this or an appellate court sua sponte, may raise at any time. David Dung Le, M.D., Inc. v. Commissioner, 114 T.C. 268, 269 (2000), aff’d, 22 F. App’x 837 (9th Cir. 2001). Jurisdiction must be shown affirmatively, and petitioners bear the burden of proving all facts necessary to establish jurisdiction in this Court. Id. at 270. Petitioners must establish that: (1) respondent issued them valid notices of deficiency and (2) they, or someone authorized to act on their behalf, filed timely petitions with the Court. See Rule 13(a), (c); Monge v. Commissioner, 93 T.C. 22, 27 (1989); see also secs. 6212 and 6213.
The court noted that corporate petitioners must have capacity to file a petition in order to for the court to have jurisdiction. (For a good discussion of the Timbron case commenting on Tax Court Rule 60(a), see Bryan Camp’s blog post here.) It then looks to California law to determine what it means to have the corporate powers suspended. The IRS relied on the case of David Dung Le, M.D., Inc. v. Commissioner, 114 T.C. 268, 269 (2000), aff’d, 22 F.App. 837 (9th Cir. 2001). In that case the Tax Court interpreted California law in a very similar situation and determined that “[i]n reaching our holding we cited Cal. Rev. & Tax. Code secs. 23301 and 23302 (West 1992 & Supp. 1999), noting that the Supreme Court of California has construed those sections to mean that a corporation may not prosecute or defend an action during the period in which it is suspended.”
Petitioners argued that even though the state suspended its powers it still retained some rights and that those residual rights gave it capacity to file the Tax Court petition. They pointed to cases in California courts brought by suspended corporations which were allowed to proceed after the lifting of the suspension. The Tax Court rejected this argument pointing to its long history on this issue and discussing the fact that a post-petition restoration of rights did not revive a petition filed at the time corporate powers were suspended, for a court with limited jurisdiction. In this way it differentiated itself from the courts of general jurisdiction in California to which petitioners had cited.
Petitioners also argued that the 90-day period for filing a petition after the issuance of a notice of deficiency was not a jurisdictional time period. Since that period for filing a petition is not jurisdictional, petitions argued that the period could remain open until the restoration of corporate powers. The court dismissed this argument in a footnote citing to the Guralnik case in which the Tax Court, in a 16-0 reviewed opinion, rejected similar arguments concerning its jurisdiction raised by the tax clinic at Harvard. This is an issue we have discussed repeatedly in the blog though not in the context of lapsed corporate powers and not with an 11-month time frame to equitably toll.
The outcome here comes as no surprise. A host of cases have reached similar results including the almost identical case of David Dung Le. States regularly suspend corporations for failure to pay the annual registration fees. As states find more ways to suspend corporate powers, corporations must pay careful attention to their status at the time of filing the Tax Court petition. Chief Counsel, IRS will pay attention to this issue since it presents an easy way to dispose of a case. Then a corporation already in financial trouble will only have the opportunity to contest the IRS determination if it can come up with full payment of the liability in order to meet the Flora rule.