Law Firm's Loss of Corporate Status Precludes Tax Court Challenge

Vanessa M. Hoppe and Katherine Holmes Ankeny, for respondent.

On June 30, 2014, respondent mailed to petitioner a notice of deficiency determining a $1,914,668 Federal income tax deficiency for tax year ended December 31, 2011, and a section 6662(d)¹ penalty of $382,934. On October 1, 2014, petitioner filed a petition in this Court challenging respondent's determination.

On December 1, 2014, respondent filed a motion to dismiss for lack of jurisdiction, alleging that petitioner lacked the capacity to sue at the time its Tax Court petition was filed. On December 24, 2014, petitioner filed a response, objecting to the motion on the ground that the reinstatement of the corporation on [*3] November 26, 2014, retroactively restored its capacity to the time it filed its petition in this case and therefore conferred jurisdiction on this Court.

Petitioner's corporate capacity was suspended at the time the petition was filed on October 1, 2014, and was not reinstated until November 26, 2014, which was after it filed the petition herein. Legal capacity is crucial to bringing an action in the Tax Court. See Rule 60(c). Whether a corporation has the capacity to engage in litigation in this Court is determined by applicable State law, which, in this case, is California law. See id.²; Brannon's of Shawnee, Inc. v. Commissioner, 71 T.C. 108, 111 (1978).

Respondent relies on our opinion in David Dung Le, M.D., Inc. v. Commissioner, 114 T.C. at 268, arguing that petitioner did not have the legal capacity to prosecute this case when the petition was filed. We agree. In David Dung Le, M.D., Inc., a case involving analogous facts, we held that a California corporation lacked the power to file a lawsuit in this Court while its corporate powers were suspended by the State of California for failure to pay income tax. In reaching our holding, we cited Cal. Rev. & Tax. Code secs. 23301 and 23302 [*5] (West 2004), noting that the Supreme Court of California has construed those sections to mean that a corporation may not prosecute or defend an action during the period in which it is suspended. David Dung Le, M.D., Inc., 114 T.C. at 272. Because the taxpayer's corporate status was not reinstated at the time the petition was filed or during the 90-day period, we held that it "[was] fatal to petitioner in that California law does not operate to toll a filing period from running during a period of suspension." Id. at 275. We therefore dismissed the petition in that case for lack of jurisdiction. The U.S. Court of Appeals for the Ninth Circuit, where an appeal in this case would lie, affirmed this Court in David Dung Le, M.D. Inc. v. Commissioner, 22 Fed. App. 837. We will follow our precedent as affirmed by the Court of Appeals for the Ninth Circuit.

As we clearly stated in a recent case, Med. Weight Control Specialist v. Commissioner, T.C. Memo. 2015-52, at *7:

Nonetheless, petitioner relies on Bourhis v. Lord, 153 Cal. Rptr. 3d 510 (2013), to argue that it had the capacity to commence an action in this Court by virtue of a "retroactive revival" and that David Dung Le, M.D., Inc. is no longer good law. We disagree. The Bourhis decision does not contradict David Dung Le, M.D., Inc. The ultimate question in this case is whether the corporation's revival retroactively validated the actions taken during the suspension (i.e., the filing of the petition in this case). The answer depends upon whether the initial filing is treated as a "procedural" or "substantitive" act. See Bourhis, 153 Cal. Rptr. 3d 510. "Procedural acts in the prosecution or defense of a lawsuit are validated retroactively by corporate revival. Most litigation activity has been characterized as procedural for purposes of corporate revival." Benton v. Cnty. of Napa, 277 Cal. Rptr. 541, 545 (Ct. App. 1991). In contrast, where the statute of limitations for pursuing an action expires while the corporation is suspended, subsequent revival of the corporation does not retroactively validate the filing of the lawsuit because statutes of limitations are "substantive". See, e.g., Med. [*8] Weight Control Specialist v. Commissioner, at *5-*8; Sade Shoe Co. v. Oschin & Snyder, 266 Cal. Rptr. 619, 622 n.2 (Ct. App. 1990). Although our Court in David Dung Le, M.D., Inc. did not specifically use the terms "procedural" or "substantive", we effectively treated section 6213 as a substantive requirement, and therefore the petition cannot be retroactively ratified upon corporate revival. See, e.g., AMA Enters., Inc. v. Commissioner, 523 Fed. Appx. 455.

Petitioner's revival did not retroactively restore its capacity to file the petition in this case and confer jurisdiction on this Court. See David Dung Le, M.D., Inc., 114 T.C. at 274, 276. Petitioner's corporate status was not reinstated until after the petition was filed and after the expiration of the 90-day period in which the petition was required to be filed. See sec. 6213(a).

In sum, petitioner lacked the capacity to petition this Court during the 90-day period provided in section 6213(a), and therefore this Court lacks jurisdiction in this case. Accordingly, respondent's motion to dismiss for lack of jurisdiction will be granted.

To reflect the foregoing,

An appropriate order of dismissal for lack of jurisdiction will be entered.

² Rule 60(c) states in relevant part: "The capacity of a corporation to engage in such litigation [in this court] shall be determined by the law under which it was organized."