Corporation Suspended By State of California Unable to Challenge IRS Collection Determination in Tax Court

No longer possessing a valid charter can create a situation where the entity is unable to file in Tax Court to dispute an IRS finding.  That was the situation for the corporation in the case of Urgent Care Registries, Inc. v. Commissioner, TC Memo 2016-198.

The corporation in this case had filed some income and employment tax returns for 2009 through 2013 but enclosed no payments.  As well, some returns that it should have filed were never filed and the IRS prepared substitutes for returns (SFR).  The IRS assessed the taxes and penalties, and send the taxpayer a Final Notice of Intent to Levy.

The corporation requested a Collection Due Process (CDP) hearing.  The opinion notes:

In June 2015 the SO informed petitioner's representative: “The revenue officer's case history indicates that Urgent Care Nurses Registry, Inc. may no longer be in business. You/your representative told the revenue officer that the business is now being operated under the EIN of [a] sole proprietorship.” The SO requested copies of documents “confirming the dissolution of the corporate entity.” Petitioner’s representative submitted a copy of Form 966, Corporate Dissolution or Liquidation, and a certificate of dissolution of petitioner.

The settlement officer determined that the IRS’s actions in this matter should be sustained.  The taxpayer filed a petition with the Tax Court to review the decision.

The IRS eventually moved to have the case dismissed, arguing that the petition was filed by a party that lacked the capacity to sue.

Tax Court Rule 60(c) provides that the capacity of a corporate to litigate in the Tax Court is determined by reference to state law, which in this case was the state of California.

The opinion points out that, in general:

In California, the board may suspend the “powers, rights[,] and privileges of a domestic taxpayer” if the corporation fails to pay “any tax, penalty, or interest, or any portion thereof, that is due and payable” at specified times. Cal. Rev. & Tax Code sec. 23301 (West 2015); Grell v. Laci Le Beau Corp., 87 Cal. Rptr. 2d 358, 362 (Ct. App. 1999) (citing Reed v. Norman, 309 P.2d 809, 812 (Cal. 1957)). Once a corporation's powers have been suspended, it “may not prosecute or defend an action.” Reed, 309 P.2d at 812.

In the case of this corporation the Court noted:

Petitioner’s corporate powers were suspended in August 2008, and it has supplied no evidence that it has since received a certificate of revivor or become current on its California tax obligations. The California secretary of state confirmed in July 2016 that petitioner’s corporate powers “remain suspended.” Documentation submitted to the SO by petitioner's representative indicates that petitioner has been formally dissolved and that the business it formerly conducted is now being conducted by a sole proprietorship. For these reasons, we find that petitioner lacked the capacity to litigate at the time it filed its petition in this case. See David Dung Le, M.D., Inc., 114 T.C. at 276 (holding that suspended California corporation lacked capacity to sue).