Corporation With Rights Suspended Under California Law Unable to File Tax Court Petition Even Though Certain Corporate Rights Later Retroactively Restored

The corporation in the case of Medical Weight Control Specialist v Commissioner, TC Memo 2015-52 found it could not have its day in Court because its corporate privileges had been suspended by the state of California during the 90 day period available for it to file a challenge of an IRS in Tax Court.  This was held to be the case even though the corporation had issued to it by the state a certificate of reviver and certificate of relief from contract voidability later that, in the corporation’s view retroactively reinstated its right to bring the suit initially.

The taxpayer in question had its corporate privileges revoked by the state of California in 2004 for failure to pay state taxes, a provision of California law found at Cal. Rev. & Tax. Code Section 23301.  That condition continued for over a decade with the corporation only restoring itself to the state’s good graces (and thus getting back corporate privileges) in May of 2014.

During the period its privileges were suspended the IRS issued a notice of deficiency to the corporation.  That notice was issued in May of 2013.  The taxpayer filed a petition with the Tax Court in June of 2013.  In April of 2014 the government filed a motion to dismiss the case since the taxpayer lacked the capacity to sue when it filed its petition.  While not stated, it certainly appears the corporation may have been motivated to get its situation with the state resolved when facing the very real possibility that it would denied its day before the Tax Court to challenge the assessment of over $1 million in taxes and penalties for 2009-2011.

The Tax Court noted that this case was virtually identical to the 2000 case of  David Dung Le, M.D., Inc. v. Commissioner, 114 TC 268, aff’d 22 Fed. Appx. 837 (CA9) where the Court had found the corporation lacked the capacity to sue.   In that case the corporation had its privileges suspended when it filed its petition with the Tax Court and obtained a renewal of its privileges after the 90 day deadline had passed.  In that case the Tax Court held (with the approval of the Ninth Circuit on appeal) that it lacked jurisdiction.

However the taxpayer pointed out that in the current case the corporation had obtained a certificate of relief from contract voidability, something that the corporation in David Dung Le, M.D., Inc. had not.

The Court did not find that difference to change the result.  The Court first notes:

However, that relief applies only to “contracts entered into * * * that have not been rescinded” and “[a]ny sale, transfer, or exchange of real property in California” during the period in which the corporation is not qualified to do business. Cal. Rev. & Tax. Code sec. 23305.1(c)(1)(A) and (B) (West 2004). The filing of a petition for redetermination of a Federal tax deficiency neither is contractual nor involves the sale of land in California. This Court’s jurisdiction is statutory, not contractual, and a party may not confer jurisdiction on this Court by agreement or concession. See Camous v. Commissioner, 67 T.C. 721, 729 (1977); see also Am. Airlines, Inc. v. Commissioner, 144 T.C. ___, ___ (slip op. at 12) (Jan. 13, 2015).

The Court continued to explain that it was bound by both its prior decision and that of the Ninth Circuit in the David Dung Le, M.D., Inc. to come to the same result as in that case:

The receipt, therefore, by petitioner of a certificate of relief from contract voidability, by the plain language of California law, does not affect the application of David Dung Le, M.D., Inc. to the present case. Without a difference of material fact, respondent’s motion to dismiss must be granted unless we are to ignore or overturn David Dung Le, M.D., Inc. A departure from that precedent would be especially imprudent given that it was appealed to and affirmed by the Court of Appeals for the Ninth Circuit, and both this Court and the Court of Appeals have recently cited it as controlling precedent in holding that a revived California corporation may not retroactively validate the filing of a petition that occurred during the suspension of its corporate powers and where the revival did not occur until after the period for timely filing the petition. See AMA Enters., Inc. v. Commissioner, 523 Fed. Appx. 455 (9th Cir. 2013); John C. Hom & Assocs., Inc. v. Commissioner, 140 T.C. 210 (2013).

The taxpayer next tries to argue that the Court should consider that California courts make a distinction between procedural and substantive acts.  The Tax Court does agree that California courts have noted such a distinction, generally granting a restored corporation that procedural acts had validity (such as maintaining an appeal).  The taxpayer argues that the provision granting the Tax Court jurisdiction is just such a procedural item.

The Tax Court does not agree.  It notes that California courts have not treated statutes of limitation as such “merely procedural items” and that corporate revival does not eliminate that as a defense by a party that seeks to claim that the adversarial party failed to meet the statute because it lacked a right to file at the time required.  The taxpayer contends that IRC §6213(a) (the 90-day filing window) is not a true statute of limitations, but rather merely a procedural item like the window for filing an appeal in existing litigation.

The Tax Court determines that, in fact, it doesn’t matter if what it has is or is not a statute of limitations.  As the Court holds:

To the contrary, this Court lacks jurisdiction regardless of whether the 90- day limitation of section 6213(a) is to be regarded as a true statute of limitations. Although section 6213(a) provides a taxpayer “may file a petition with the Tax Court” within the 90-day period, this language is to be viewed in the light of the section 7421(a) proscription of any suit in any court by any person “for the purpose of restraining the assessment or collection of any tax”. Cal. Rev. & Tax. Code sec. 23305a (West 2004) provides that corporate revival “shall be without prejudice to any action, defense or right which has accrued by reason of the original suspension or forfeiture”. Thus, even if section 6213(a) is not to be viewed as a statute of limitations, under the above California law limitation on corporate revival section 6213(a) still serves as a limitation on subject-matter jurisdiction, and either party, or the Court sua sponte, may question jurisdiction at any time. See Brown v. Commissioner, 78 T.C. 215, 218 (1982).

Unlike a traditional statute of limitations, the 90-day period of section 6213(a) generally cannot be tolled or extended. See Rich v. Commissioner, 250 F.2d 170 (5th Cir. 1957); Joannou v. Commissioner, 33 T.C. 868 (1960). Jurisdictional statutes such as section 6213(a) are conditions on the waiver of the Federal Government’s sovereign immunity and must be strictly construed. See Bowen v. City of New York, 476 U.S. 467, 479 (1986). Section 6213(a) provides that a petition may be filed by the taxpayer during the 90-day period. Petitioner’s suspension under Cal. Rev. & Tax. Code sec. 23301 deprived it of the capacity to sue under section 6213(a) and prevents its corporate revival from prejudicing respondent’s defense of lack of subject matter jurisdiction.

This case reminds us that “little things” may matter greatly if a client wishes to pursue its rights in Court—and just such a “little thing” is maintaining the good graces of the state which grants the corporation its rights.  Such cases will be decided under the particular state law in question, so the details of this decision will not necessarily apply outside of California.

But that very fact indicates the potential problems that can arise for CPAs who end up either explicitly or implicitly giving a client advice on issues such as the issues that arise if corporate formalities are not respected.  While not an issue that appears to have occurred in this case, things could turn out badly if a CPA representing the client on exam had been aware of this “falling out” with the state and had failed to advise the client to seek legal counsel to deal with this issue—and to document that fact.