There are a couple of ways a Corporation can be suspended in California. Fail to file tax returns, and the FTB will suspend the corporation. Or forget to file your annual/semi-annual Statement of Information, and the Secretary of State will do the same.
Being suspended comes with a number of ills. First – and one of the most significant – is contract voidability. A suspended corporation cannot enter into a valid contract; as a result any contract entered into while the corporation is suspended is voidable at the option of the other party (note: this provision does not apply to contracts entered into before the corporation is suspended). The only option for the corporation is to a) resolve whatever caused the corporation to be suspended (file and pay past due tax returns, or file past due Statements of Information and pay the penalties) and then get something called a certificate of revivor. Unfortunately, though, that’s not all – you also need to get a “certificate of relief from contract voidabiliy.” So it’s a three-step process. And it can take months.
So what does this have to do with taxes? Find out after the jump.
Turns out, if you’re a suspended corporation, contract voidability is only one of your problems. The other? Contesting your tax debt. In a recent case, Medical Weight Control Specialist v. Commissioner (TCM 2015-52), the Tax Court reaffirmed its position (upheld by the Ninth Circuit) in David Dung Lee, M.D. v. Commissioner, 114 T.C. 268 (2000) aff’d 22 Fed. Appx. 837 (9th Cir. 2001) ) that a suspended corporation cannot maintain an action in Tax Court.
In Medical Weight Control, the taxpayer’s corporation had been suspended in 2004 for failure to pay state taxes. Between 2004 and 2013, presumably, the corporation operated as a suspended corporation, never having resolved the suspension and reviving the company (note: paying the taxes would revive the company, but it appears that did not happen). In 2013, the IRS assessed deficiencies for tax years 2009 – 2011 totaling nearly $300,000.
On June,17, 2013, he taxpayer filed a petition in Tax Court to challenge the deficiency assessment, and the IRS responded by filing a motion to dismiss for lack of jurisdiction on April 28, 2014. On May 12, 2014, the FTB issued a certificate of revivor and on May 21, 2014 they issued a certificate of relief from contract voidability..
Unfortunately for the taxpayer, May 12, 2014 was far beyond the 90-day limit proscribed by Section 6213(a). And while the Tax Court went on for 8 pages explaining the background and the law, that simple fact was fatal to the taxpayer’s case.
The lesson? If you are a California Corporation, and you want to contest an IRS assessment, you need to make sure your corporation has not been suspended by the FTB. If so, you need to fix that problem before you file your petition, because fixing it later won’t help – as the court pointed out, you need to be eligible to maintain an action in court at the time you filed the petition. While other (state) courts might allow the corporation to file the action, but not allow actual prosecution until the company is revived, the Tax Court has no such power, and cannot toll the limits of 6213(a).
Fortunately, if time is of the essence, you can get quick revivors – in as little as 1 day, as opposed to 10-14 days (if all paperwork is in order, all returns are filed, and you pay all delinquent amounts due) for an additional fee, of course. But there are strict rules that need to be followed, and you probably shouldn’t try to resolve the issue without at least some competent advice from a tax attorney.
