Lincoln in The Bardo isn’t a guide for everybody.  It’s foremost characters (none of whom are Lincoln) are caught within the bardo, an indeterminate house between dying and ultimate after-life, no matter one conceives that to be.  However they’re sluggish to appreciate it, clinging to a perception of their continued existence as they had been.  Full of unreliable narrators and casually vacillating in time and house, the novel isn’t a straightforward learn.  However it’s properly definitely worth the effort, being a beautiful meditation on the that means of life and the that means of dying.

XC Basis v. Commissioner, T.C. Memo. 2023-2 (Jan. 5, 2023) (Decide Lauber), is a straightforward examine a company within the bardo.  It teaches a sensible lesson: at all times make sure that your company shopper is absolutely alive and properly below state regulation earlier than you attempt to file a petition.  There, a company tried to file a petition to contest an IRS choice to revoke its 501(c)(3) standing.  Effectively, really, the company didn’t file the petition.  It couldn’t.  It was caught in a sort of bardo, an indeterminate house between company life and everlasting company dying.  California, the state that had given it life, had suspended its constitution, killing its capability to sue and be sued.  However just like the characters within the novel, it ignored its personal dying and tried to persuade the Tax Court docket to take action as properly.  It seems that taxpayers within the bardo can not file petitions that the Tax Court docket can hear, simply as Lincoln couldn’t hear the pleas of the novel’s characters.  They’re the pleas of ghosts.  Particulars beneath the fold.

Legislation: Of Jurisdiction and Capability
Jurisdiction is a flowery phrase for energy.  Federal courts have solely the facility to listen to these lawsuits Congress lets them hear.  Congress places these permissions in statutes.  So you need to take note of the phrases of the actual statute granting jurisdiction.  The Tax Court docket isn’t any completely different than every other federal court docket in that regard, though for some motive it retains asserting it’s one way or the other extra restricted than different federal courts.  Because the Seventh Circuit Court docket of Appeals as soon as noticed, that assertion is “fatuous.” Flight Attendants v. Commissioner, 165 F.3d 572, 578 (seventh Cir. 1999) (Posner, J.) (“The argument that the Tax Court docket can not apply the doctrines of equitable tolling and equitable estoppel as a result of it’s a court docket of restricted jurisdiction is fatuous. All federal courts are courts of restricted jurisdiction.”).

What’s true, nevertheless, is that Congress offers the Tax Court docket quite a lot of extra restricted and particular grants of energy than it offers federal district courts.  I consider the numerous jurisdictional grants as completely different rooms of energy.  For extra on that see Lesson From The Tax Court docket: The Many Rooms Of Tax Court docket Energy, TaxProf Weblog (Oct. 4, 2021).

Taxpayers—each people and company entities—most frequently invoke the Tax Court docket’s deficiency jurisdiction by submitting a petition to contest an IRS Discover of Deficiency (NOD).  The Tax Court docket says its deficiency jurisdiction is present in §6213.  Hallmark Analysis Collective v. Commissioner, 159 T.C. No. 6 (Nov. 29, 2022) (deficiency jurisdiction is in §6213 whereas jurisdiction to find out overpayments is in §6214).  For a robust pushback on that view, see Carl Smith, What’s Flawed With The Tax Court docket Hallmark Opinion: Half 2, Procedurally Taxing Weblog (Dec. 7, 2022).  Immediately’s case, nevertheless, entails a unique room of energy, present in §7428 (“Declaratory judgments regarding standing and classification of organizations below part 501(c)(3), and so forth.”).

Part 7428 creates a treatment for companies like XC Basis.  When the IRS both makes sure unfavorable selections concerning their tax-exempt standing or fails to make any choice inside a sure period of time after the company asks, the company can go to nearly any federal court docket and file the suitable pleading (referred to as a Grievance in federal district court docket and, of the course, referred to as a Petition in Tax Court docket).  Nonetheless, §7428(b)(1) supplies that “A pleading could also be filed below this part solely by the group the qualification or classification of which is at difficulty.”  Part 7438(b)(3) additionally mirrors the §6213 deficiency process by offering that the pleading should be filed “earlier than the 91st day after the date” the related IRS choice doc is issued.

Discover that for each §6213 and §7428, the statutes are written in lively voice: they inform us who should file a petition to ensure that the Tax Court docket to train its energy: both the affected taxpayer or the affected group.  Thus, I can not file a petition asking the Tax Court docket to assessment an NOD issued to you, as a result of I’m not the taxpayer.  Nor can I file a petition asking for a declaratory judgment concerning your company’s tax exempt standing, as a result of I’m not the company.

However the Tax Court docket implements these statutory phrases generously, utilizing a doctrine of capability.  That’s, whereas the Tax Court docket doesn’t have the facility to listen to a petition filed by me about your taxes as a result of I don’t have the capability to behave in that regard, Rule 60(a) creates a ratification rule to cope with these conditions: “[a] case well timed introduced shall not be dismissed on the bottom that it isn’t correctly introduced on behalf of a celebration till an affordable time has been allowed after objection for ratification by such get together of the bringing of the case; and such ratification shall have the identical impact as if the case had been correctly introduced by such get together.” (emphasis provided).

In terms of companies, the Tax Court docket thus permits a company whose petition was not correctly filed to later ratify the submitting,  However with a purpose to do this the company will need to have had the capability to interact in litigation on the time the petition was filed.  It can’t be within the bardo. Timbron Holdings Company v. Commissioner, T.C. Memo. 2019-31 (company not allowed to ratify petition when it didn’t have capability at time of submitting even when it later regained capability below state regulation).

Tax Court docket Rule 60(c) says that the capability of a company taxpayer to “to interact in such litigation shall be decided by the regulation below which it was organized.” Immediately’s case entails a California company, so let’s take a fast take a look at California regulation.

Like most states, California has guidelines for suspending company charters after which reinstating them.  You’ll find them within the California Income and Taxation Code (RTC) §23301 – §23311.  The essential impact of a suspension is to quickly take away a company’s “powers, rights, and privileges.”  One such energy is the facility to sue and be sued.  Timberline v. Jaisinghani, 54 Cal. App. 4th 1361 (1997).  A suspension below California regulation doesn’t fully kill a company, nevertheless.  It sends it to the bardo the place it may well probably be reborn by a certificates of revivor.  Id.  As soon as revived, a company regains its capability to sue and be sued and that may generally be utilized retroactively.  See Benton v. County of Napa, 226 Cal. App. 3d 1485, 1490 (Cal. Ct. App. 1991) (The revival of company powers validates any procedural step taken on behalf of the company whereas it was below suspension however doesn’t eradicate any substantive defenses to the lawsuit that accrued after the case was filed). 

Sufficient with the regulation.  Let’s take a look at the info.

Details
In 2007, XC Basis was included below California regulation.

In 2008 the IRS formally gave it §501(c)(3) standing.

In December 2020, the California Franchise Tax Board (FTB) suspended XC Basis’s company rights and powers.  We do not know why, though such suspensions are sometimes the results of a company failing to make the correct reviews or pay their correct taxes.

In March 2021 the IRS revoked XC’s §501(c)(3) standing on the premise of alleged self-dealing by two of its officers between 2016 and 2020.  The IRS additionally issued NODs to the 2 officers, hitting them with excise taxes below §4941 for the alleged self-dealing.  The 2 officers filed well timed Tax Court docket petitions.  In Might 2021 a petition was filed (observe the passive voice!) in search of a declaratory judgment that the IRS’s revocation was fallacious and in addition in search of to consolidate the XC Basis case with the 2 officers’ circumstances.

In July 2022 the IRS moved to dismiss the XC Basis case for lack of jurisdiction as a result of XC’s suspension by the FTB meant it didn’t have the capability to file a Tax Court docket petition.  It  was in authorized bardo.

Decide Lauber agreed, giving us our lesson.

Lesson: Suspended Company Lacks Capability To File Tax Court docket Petition
Decide Lauber offers the easy and simple evaluation.  “Petitioner’s company powers and privileges had been…suspended when it filed the petition and through the whole 90-day interval by which its petition was required to be filed. Petitioner was thus incapable of initiating or prosecuting a case on this Court docket.”  Id. at 4.

The lawyer for XC Basis made the sort of argument you’d count on from somebody within the bardo, unwilling to just accept the state of affairs.  It appears XC Basis had, whereas absolutely alive and earlier than the California FTB had suspended its powers, signed a Kind 872 consent to increase the evaluation interval.  In a flurry of magical pondering worthy of the novel’s foremost characters, the taxpayer’s lawyer argued that signing the consent one way or the other prolonged the company’s skill to contest the ensuing choice letter even after company dying, due to this language in Kind 872: “signing this consent is not going to deprive the taxpayer(s) any an attraction rights to which they might in any other case be entitled.” 

Decide Lauber patiently explains that even when that language had been learn broadly to incorporate Tax Court docket petitions, “a company whose powers have been suspended below State regulation isn’t “entitled” to start litigation on this Court docket.” Op. at 5.  They’re within the bardo.  Moreover, events to Tax Court docket litigation can not magically create capability when none exists.  Id. That’s the position of state regulation.

Backside line: earlier than you try and petition Tax Court docket on behalf of your company shopper, ensure they’re nonetheless alive!  If they aren’t, get them revived below state regulation both earlier than you file the petition or inside the related petition interval (e.g. 90 days of the NOL date if it is a deficiency continuing).  Do not depend on the “affordable time…after objection” language in Rule 60.  When you do, your case may develop into one other Lesson From the Tax Court docket!

Remark 1: Certificates of Revivor?  A suspension below California regulation doesn’t fully kill a company.  It retains sufficient authorized life to ask the California Franchise Tax Board (FTB) for a certificates of revivor.  Typically, the FTB does so solely when the company offers with the explanations for the suspension.  The standard trigger for a FTB suspension is a failure to file returns or pay relevant taxes, and California courts routinely acknowledge that the aim of the suspension course of is to get companies to pay their taxes.  Timberline, supra.

A certificates of revivor wouldn’t assist right here, nevertheless.  Such a certificates is not going to apply retroactively if doing so prejudices a substantive protection accrued through the company’s suspension.  One substantive protection is the working of the related statute of limitation (SOL) after the submitting date however earlier than the revival date.  In these conditions, California courts refuse to use the revival retroactively to treatment the SOL downside.  See dialogue in Bourhis v. Lord, 295 P.3d 895 (2013) (revival can not defeat a correctly raised SOL protection).

The Tax Court docket has persistently adopted the identical rule: if a suspended company information a Tax Court docket petition, a revival of its company constitution after the relevant petition interval (usually 90 days) has run can not treatment the unique jurisdictional defect of capability.  For The Princess Bride analogy on this subject, see Lesson From The Tax Court docket: Largely Useless Company Can’t File Petition, TaxProf Weblog (Might 20, 2019) (certificates of revival obtained later than 90 days after the NOD date was ineffective to create retroactive deficiency jurisdiction).

Remark 2: Consolidate in Federal District Court docket?  The taxpayers right here (the 2 officers and the company) wished to consolidate all three circumstances into one continuing.  You’ll be able to see why.  The idea for the evaluation of excise taxes towards the officers concerned the identical points as the choice to revoke the company 501(c)(3) standing, so it could be best to litigate all three circumstances collectively.  One may surprise, due to this fact, why the taxpayers selected the Tax Court docket route and didn’t try and go the refund route in district court docket (for the 2 officers) and have the company file a Grievance in federal district court docket.  Recall §7428  permits a company to acquire judicial assessment in nearly any federal court docket.  The excise taxes below §4941 seem to suit the definition of divisible taxes so the people wouldn’t have to pay the whole quantity asserted towards them however might as a substitute pay only a portion.  However that path could not have been any higher.  Part 7428 imposes a 90-day window to file the suitable pleading within the chosen court docket.  The essential downside right here would stay: XC Company was nonetheless within the bardo for that whole time. 

Bryan Camp is the George H. Mahon Professor of Legislation at Texas Tech College College of Legislation.  He invitations readers to return every Monday (or Tuesday if Monday is a federal vacation) to TaxProf Weblog for one more Lesson From The Tax Court docket.

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