Tax Court dismisses corporate petition for failing to maintain status with state

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In a decision underscoring the importance of maintaining corporate status with a state, the Tax Court dismissed the petition of a corporation because it was not timely filed by parties with the legal capacity to engage in litigation before the court.

“When a corporation fails to comply with state requirements for maintaining its status — for example, filing annual tax returns, paying state taxes — it can result in dire consequences,” cautioned Barbara Weltman, author of J.K. Lasser’s Small Business Taxes 2019. “For example, a California corporation that didn’t pay its state taxes had its powers, rights and privileges suspended. This occurred during the 90-day period in which it wanted to file a petition in Tax Court. The court rejected the petition, even though the corporation’s powers, rights and privileges were later reinstated.”

In the case, Timbron International Corp. and Timbron Holdings had their “powers, rights, and privileges” suspended by the California Franchise Tax Board for failure to pay state taxes. In July 2016, the IRS issued notices of deficiency for 2010 and 2011. Timbron filed petitions with the Tax Court in October 2016, and the IRS filed an answer in each case the following month. Several months later the IRS moved to dismiss the cases for lack of jurisdiction.

In its opposition to the IRS motions, Timbron did not dispute the actions of the Franchise Tax Board, but stated that they had obtained "certificates of revivor" and were considered “active” as of Sept. 27, 2017. At the Tax Court hearing, the companies argued that under California law they retained “sufficient vitality” to litigate in Tax Court.

Timbron cited a number of cases to support the contention that California courts have allowed a corporation to maintain litigation or an appeal filed at a time when the corporation was suspended and was not properly challenged. The Tax Court rejected the application of such cases.

“However, cases allowing revived prosecuting lawsuits filed at times when the corporations were suspended involved courts of general jurisdiction and claims that were not barred by statutes of limitations or other statutory restrictions,” said the court. “Moreover, the filing of a petition for redetermination of a federal tax deficiency is not contractual but rather a jurisdictional requirement required to engage in litigation in this Court.”

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Tax-related court cases State taxes Corporate taxes Tax Court