Make Sure the Corporation is in Good Standing Before Filing a Tax Court Petition

Many states will involuntarily or administratively dissolve a corporation for not paying or filing annual reports, fees, or tax returns. The ability of a dissolved corporation to engage in activities after dissolution depends on applicable state law, and typically there are procedures for reinstating such a dissolved corporation.

So what happens if such a dissolved corporation receives a notice of deficiency and petitions the Tax Court for review? Under applicable state law, there may be specific guidance on whether a dissolved corporation can prosecute or defend a lawsuit. Also, some states allow for a dissolved corporation to conduct winding up activities after the dissolution. Such state law provisions have at times allowed authority for a dissolved corporation to file a valid Tax Court petition.

A recent case indicates there are limits, however. In the case, a corporation had been dissolved for over 10 years before receiving a notice of deficiency and filing of a Tax Court petition. The government was able to strike the Tax Court petition as unauthorized under law due to the dissolved status, and thus the taxpayer corporation lost its ability to contest the deficiency in Tax Court. While noting that a dissolved corporation could undertake winding up activities under state law, since the deficiency came after the dissolution, and the dissolution had occurred more than 10 years prior, the Tax Court determined there was no state law authority for the dissolved corporation to file its petition.

The simple solution to avoid such a problem is to reinstate a dissolved corporation before filing the Tax Court petition. This may involve state penalties, and additional expenses relating to curing the deficiency that led to the dissolution. As a practical matter, however, the officers of the corporation may be oblivious to the fact that the corporation has been involuntarily dissolved (and I speak from experience on that), so if they don’t know, they are not going to take timely corrective action to reinstate the corporation.

The real lesson here is that the attorney or representative of the taxpayer should always check on the good standing of a corporate taxpayer that is filing a Tax Court petition to avoid these problems.

Allied Transportation, Inc., TC Memo 2016-102