If a corporate taxpayer receives a statutory notice of deficiency (i.e. a "90-day letter") from the Internal Revenue Service ("IRS"), one of its options is to petition the United States Tax Court for a redetermination of the proposed deficiency. A statutory notice of deficiency tells a taxpayer the IRS has determined that for one reason or another, the taxpayer owes more tax than what they previously reported. Under the Internal Revenue Code ("IRC"), the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency within 90 days (or 150 days if addressed to a taxpayer outside the United States) after the notice of deficiency is mailed by the IRS. The focus of this post are on "the taxpayer," and its capacity to petition the Tax Court within the 90-day (or 150-day for a person outside the united states) period. In a recent Tax Court case, although the taxpayer received a 90-day letter from the IRS, and timely petitioned the Tax Court - i.e. petitioned for deficiency redetermination within 90 days - the Tax Court held the taxpayer lacked the power to petition the Tax Court because under California law applicable to the case - the taxpayer's state of incorporation - the taxpayer's corporate powers, rights, and privileges were suspended at the time it filed its petition.
The case, Medical Weight Control Specialist v. Commissioner ("MWCS"), involved a corporate taxpayer incorporated under the laws of California, whose corporate privileges were suspended in March of 2004 for failure to pay state taxes. Almost ten years later, the IRS mailed a 90-day letter, to which the taxpayer responded by petitioning the Tax Court within the 90 day period. After the taxpayer filed its petition (and after the 90-day window closed), the California Franchise Tax Board ("CFTB") revived the taxpayer's corporate powers. Nevertheless, the Tax Court found in favor of the IRS' motion to dismiss for lack of jurisdiction, holding that the taxpayer lacked the capacity to petition the Tax Court during the 90-day period, and because the taxpayer did not have the capacity to invoke the Tax Court's jurisdiction, the Tax Court lacked jurisdiction over the case.
Although the matter was ruled on by the Tax Court, whether a corporate taxpayer has capacity to invoke the Tax Court's jurisdiction is largely a matter of state law. In MWCS, the Tax Court held that the 90-day period for filing a petition with the court is not merely procedural in nature, but rather a true statute of limitations, and while California courts have allowed a corporation to maintain an appeal filed at a time when the corporation was suspended if the corporation's powers were later revived, California courts have been equally clear that statutes of limitations create substantive defenses which cannot be prejudiced by corporate revival. Under California law, the taxpayer's corporate suspension deprived it of the capacity to petition the Tax Court under the IRC, and because the taxpayer did not petition the Tax Court within the 90-day statute of limitations when it had capacity to do so, its corporate revival could not prejudice the IRS's defense that the Tax Court lacked jurisdiction.
McNair Tax Insight
Although a corporate taxpayer generally can't invoke the Tax Court's jurisdiction while it's corporate powers (and its capacity to sue) have been suspended, taxpayers in this position still have options - e.g. pay the deficiency and sue for a refund in United States District Court, or the Court of Federal Claims once they regain the capacity to sue (if the statute of limitations has not run by that point). Nevertheless, if the taxpayer wants to resolve the IRS's deficiency determination without having to pay first, they should review the laws and regulations of the state in which they are incorporated, as there are certain exceptions which grant a corporation the capacity to sue after dissolution.
Most state laws provide that, following dissolution, corporations continue in existence for a limited period of time for the purpose of prosecuting and defending claims (the "post-dissolution period"), and the Tax Court follows a general rule that during such period, the qualified representative of a dissolved corporation may petition the Tax Court. However, a suit or proceeding begun after the post-dissolution period will be dismissed for lack of jurisdiction. For the purpose of applying this general rule, the Tax Court deems the mailing of a 90-day letter by the IRS as the beginning of a suit or proceeding. As such, if the applicable state law says a corporation's post-dissolution period may be extended beyond a stated, definite period for the purpose of prosecuting or defending proceedings begun within the period, and the post-dissolution period would otherwise lapse during the 90-day period, the corporate taxpayer would have the capacity to petition the Tax Court during the entire 90-day period because receipt of the 90-day letter began a proceeding (see the general rule above), and extends the post-dissolution period until the proceedings are completed.
Although a determination of whether a corporate taxpayer has the capacity to sue is made by the Tax Court, it is largely based on the laws of the state in which the taxpayer is incorporated. Local counsel can prove to be an invaluable resource when facing the decision of how to respond to a statutory notice of deficiency, and where local corporate legal issues must be considered.