The Struggling Business
When things start to go badly in a business, its owners may feel compelled to take certain extraordinary, and usually ill-conceived, measures “to keep the doors open and the lights on.”
For instance, when faced with a reduction in positive cashflow,[i] the owner may decide to forgo the remittance of sales taxes or employment taxes properly withheld by the business,[ii] or the payment of other taxes owed by the business, and instead divert such funds toward the payment of business expenses.
It’s an old story. The owner of the business acknowledges their failure to satisfy its tax obligations, and recognizes that serious consequences may result therefrom. Still, the owner will rationalize their decision to forgo payment by convincing themselves that once the business has turned the proverbial corner, it will discharge whatever taxes may be owing at that time (plus interest and any penalties).
Unfortunately for most business owners who finds themselves in this position, the hoped-for turning point never materializes.
And if that isn’t bad enough, when the “deferred” taxes are owed by a corporation to the state under the laws of which the corporation was organized, there may arise at least one unexpected, and unwelcome, Federal income tax consequence.
“Federal income tax consequence for failing to satisfy a state tax obligation?” you may ask.
Involuntary Dissolution or Suspension
Many states that impose a corporate-level tax may suspend or revoke a corporation’s authority to operate if the corporation fails to satisfy either its obligation to file a state tax return, or its obligation to pay state tax, for a specified number of consecutive years.[iii] At that point, generally speaking, the “legal entity” of the corporation ceases to exist, as do any legal rights to which it was entitled as a corporate entity under the applicable state law.[iv]
Some taxpayers believe that such an involuntary dissolution results in the taxable liquidation of the corporation for Federal income tax purposes.[v] Fortunately, that is not the case.
Unfortunately, however, such a corporate taxpayer may encounter other Federal tax issues; for example, its ability to petition the U.S. Tax Court for the purpose of contesting a tax deficiency asserted, or a collection action initiated, by the IRS may be compromised.
Before considering a recent decision[vi] in which the Tax Court confronted this issue, it may be helpful to review the applicable jurisdictional rules.
Collection Process
If a person liable to pay any tax fails to pay the same after demand,[vii] the amount owing (including any interest or penalty) becomes a lien in favor of the IRS upon all property and rights to property belonging to such person.[viii]
The IRS is required to notify the taxpayer in writing of the filing of a notice of lien.[ix] Among other things, the notice must also inform the taxpayer of their right to request a hearing to challenge the collection action,[x] and of the administrative appeals available to the taxpayer with respect to the lien. Assuming the request for a hearing is properly and timely made, the hearing is held by the IRS Independent Office of Appeals (“IRS Appeals”).[xi]
Within 30 days of the issuance of a Notice of Determination by IRS Appeals (the “30-day period”), the taxpayer may petition the Tax Court for review of such determination.[xii]
With the foregoing background, let’s consider the recent case of a corporation that was denied the opportunity to contest a Federal tax lien because the corporation had previously failed to satisfy its state tax obligations.
For Want of a Nail[xiii]
Taxpayer-Corp was organized as a corporation under California[xiv] law. However, Taxpayer-Corp’s powers, rights, and privileges as a California corporation were suspended in July 2024 because of its failure to satisfy certain state tax obligations.
Federal Deficiency
The IRS determined that Taxpayer-Corp failed to pay its Federal unemployment tax liability for 2017 (the “Taxable Year”).The agency assessed the tax owing and then made a demand for payment of such tax. It subsequently informed Taxpayer-Corp that it had filed a Notice of Federal Tax Lien (the “NFTL”) to collect the outstanding tax liability.
In response, Taxpayer-Corp timely requested, and participated in, a collection due process (“CDP”) hearing before IRS Appeals regarding the proposed collection action.
While Taxpayer-Corp’s corporate status was suspended, IRS Appeals issued a Notice of Determination Concerning Collection Actions (the “Notice of Determination”), dated March 2025, in which it sustained the filing of the NFTL to collect Taxpayer-Corp’s unpaid unemployment tax for the Taxable Year.[xv]
Taxpayer-Corp timely petitioned the Tax Court in April 2025 – i.e., within the 30-day period – to review the Notice of Determination.[xvi] At that time, Taxpayer-Corp’s corporate status under California law remained suspended.
Well after the Petition was filed and the expiration of the 30-day period,[xvii] the California Franchise Tax Board (“FTB”) issued a Certificate of Revivor to Taxpayer-Corp (dated September 2025), which revived, or reinstated, Taxpayer-Corp’s corporate status and returned Taxpayer-Corp to good standing under state law, with all the rights attendant thereto.
Lack of Jurisdiction?
The IRS moved to dismiss Taxpayer-Corp’s Petition for lack of jurisdiction, contending that the Petition was not filed by a party with capacity to maintain an action.[xviii]
Specifically, the IRS maintained that Taxpayer-Corp lacked capacity to file a petition because its corporate status under California law was suspended at the time it filed its Petition and it remained suspended through the expiration of the 30-day period.
Taxpayer-Corp maintained that the Court should deny the IRS’s motion because the Certificate of Revivor issued by the FTB had, as a matter of California law, retroactively validated the otherwise timely Petition filed by the corporation.
The Court’s Response
The Court pointed out that because it had limited jurisdiction, its authority to hear a matter was an issue that any party thereto, as well as the Court itself, could raise at any time.
Jurisdiction and Capacity
According to the Court, Taxpayer-Corp had the burden of proving all facts necessary to establish the Court’s jurisdiction over its Petition. In particular, Taxpayer-Corp had to (i) establish that IRS Appeals issued a valid Notice of Determination, and (ii) demonstrate it had the requisite capacity to initiate and participate in a proceeding before the Court.[xix]
There was no dispute, the Court continued, that IRS Appeals issued a valid Notice of Determination to Taxpayer-Corp. Thus, Taxpayer-Corp had to establish that it met the capacity requirements.
The applicable Tax Court Rule[xx] provides that “[t]he capacity of a corporation to engage in . . . litigation [in this Court] shall be determined by the law under which it was organized.”
The Court observed that, because Taxpayer-Corp was organized under the laws of California, the corporate law of that state controlled the Court’s determination of Taxpayer-Corp’s capacity. The Court then stated that it had to consider whether, under California law, Taxpayer-Corp’s corporate revival related back to when it timely filed its Petition.
Suspension and Revival
In California, the Court explained, the FTB may suspend the “powers, rights, and privileges of a domestic taxpayer” if the corporation failed to pay “any tax, penalty, or interest, or any portion thereof, that [was] due and payable” at specific times.
Once a corporation’s powers were suspended, the Court continued, the corporation “may not prosecute or defend an action.”
That being said, the Court also noted that the suspended corporation may still revive its status under California law upon satisfaction of its tax obligations and a written application to the FTB.
Procedural Act
Specifically, the Court stated that, under California law, “procedural acts in the prosecution or defense of a lawsuit are validated retroactively by corporate revival.”[xxi]
Thus, the Court continued, “on revivor of its corporate powers a corporation may continue an action commenced during the period of suspension and not previously dismissed, even though the opposing party pleaded the suspension prior to the revivor.”
However, the Court explained that, under California law, any revival must “be without prejudice to any action, defense, or right which has accrued by reason of the original suspension or forfeiture.” In other words, if relation back of a corporation’s revival would prejudice or invalidate an opposing party’s defense that accrued because of the suspension of corporate status, regardless of the nature of that defense, then the revivor could not retroactively validate even an otherwise procedural act.[xxii]
Substantive Act
In contrast to procedural acts, the Court continued, substantive acts were not validated retroactively upon revival of the corporation’s status.
The Court then considered whether a statute of limitations – meaning, a statutorily prescribed period of time after a specific event within which some act must be completed – was procedural or substantive under the California revivor statute.
On the one hand, a statute of limitations is generally “procedural,” the Court explained, because it promotes “the orderly progress of litigation but [does] not bear on a court’s power.”
On the other hand, the Court asserted, a statute of limitations that also serves as a jurisdictional grant is substantive, rather than procedural, because it confers rights upon a party and “failure to comply with the [time] bar deprives a court of all authority to hear a case.”
Relying on the U.S. Supreme Court,[xxiii] the Tax Court explained that the 30-day period provides “an ordinary, non-jurisdictional deadline subject to equitable tolling.” Therefore, for purposes of CDP cases arising out of California, the lack of corporate status at the time of filing a petition did not inherently bar relation back upon revival.
Application to Taxpayer-Corp
Taxpayer-Corp did not have the requisite corporate status when it received the Notice of Determination because the FTB had earlier suspended its status. Taxpayer-Corp remained without corporate status when it filed its Petition within the 30-day period, and until the FTB deemed it to be in good standing. Taxpayer-Corp’s lack of good standing at the time it filed its Petition did not itself bar the Court’s jurisdiction over its case because the 30-day period provided a non-jurisdictional, procedural deadline.
Notwithstanding the foregoing, after expiration of the 30-day period that began with the Notice of Determination, the IRS accrued a statute of limitations defense against the petition filed by Taxpayer-Corp. To retroactively validate Taxpayer-Corp’s Petition at that juncture would have prejudiced the IRS’s defense by effectively nullifying it because Taxpayer-Corp’s Petition would be considered valid and timely filed.
The Court stated that it was obligated to follow California law, under which a retroactive revival could not prejudice or invalidate an opposing party’s defense that accrued because of the suspension of corporate status.
Thus, the Court declined to retroactively validate Taxpayer-Corp’s Petition, and concluded that Taxpayer-Corp’s corporate revival could not relate back to the time it filed its Petition.
Ninth Circuit
The Court found additional support for its conclusion in the Ninth Circuit’s jurisprudence,[xxiv] under which a statute of limitations defense barred relation back because relation back would prejudice that defense.
For the reasons discussed, the Court determined that Taxpayer-Corp did not have the requisite corporate capacity when it filed its Petition.[xxv]
Consequently, the Court granted the IRS’s Motion.
Takeaway
A troubled business is faced with many choices. Which obligations does it pay, which does it defer, which does it just ignore? There may be trade creditors, there may be institutional lenders, and there are certainly Federal, and perhaps state and local, taxing authorities. Each decision will have consequences.[xxvi]
Almost invariably, the owners of a troubled business believe that, if they can just sustain the business a bit longer, it will become profitable again, at which point the business will either satisfy its creditors, including the taxing authorities, or work out a settlement (perhaps through a reduction of the amount owing and/or the implementation of a payment plan).
Most taxing authorities, however, will suggest that such a business should cease operations altogether, rather than continue to neglect its tax obligations and allow them to grow exponentially (consider the power of daily compounded interest, plus penalties).
The ostrich is among my least favorite creatures. So is the unrealistic or intentionally ignorant taxpayer. Early recognition[xxvii] of the tax issue is the key, followed by immediate planning and implementation of such plan. The preservation of options has to be one element of that plan, and should include the preservation of a corporation’s legal status. Without that, a corporate taxpayer cannot contest a liability in Tax Court, as we saw above. Nor can it pursue its own trade debtors – for example, customers who owe it money for services rendered or products delivered. This, in turn, will make it more difficult for the corporation to pay its own debts and turn the elusive corner that its owners keep looking for.
The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the firm.
Sign up to receive my blog at www.TaxSlaw.com.
[i] Liquid inflow (for example, revenues) vs. outflow (for example, expenses).
[ii] These are almost always the first tax obligations that the struggling business will choose to disregard, and they often go hand-in-hand.
[iii] A corporation formed in New York which has failed to file required franchise tax reports or pay franchise taxes due for two consecutive years may be dissolved by the Secretary of State – a dissolution by proclamation – upon recommendation by the State Tax Commission.
[iv] Note, however, that a New York corporation dissolved by proclamation must continue to file returns and pay taxes until it is reinstated or completes the voluntary dissolution process.
[v] A deemed sale of stock by the shareholder(s) under IRC Sec. 331, and a deemed sale of assets by the corporation under IRC Sec. 336.
[vi] Arbor Vita Corp. v. Commissioner, T.C., No. 4172-25L3/16/26.
[vii] Issued within 60 days after the making of an assessment of a tax, notice must be given to each person liable for the unpaid tax, stating the amount and demanding payment thereof. IRC 6303.
[viii] IRC Sec. 6321.
[ix] IRC Sec. 6320.
[x] A Collection Due Process, or CDP, hearing,
[xi] IRC 6320(b).
[xii] IRC Sec. 6320(c), IRC Sec. 6330(d).
[xiii] For those unfamiliar with the proverb:
“For want of a nail the shoe was lost; For want of a shoe the horse was lost; For want of a horse the rider was lost; For want of a rider the message was lost; For want of a message the battle was lost; For want of a battle the kingdom was lost; And all for the want of a horseshoe nail.”
[xiv] Upper (Alta) California until 1846, then briefly the California Republic before being admitted as a State.
[xv] Under IRC Sec. 6320 or Sec. 6330.
[xvi] Pursuant to IRC Sec. 6320(c) and Sec. 6330(d)(1)
[xvii] IRC Sec. 6330(d)(1)
[xviii] Under Tax Ct. R. Prac. & P. 60(c).
[xix] Rule 60(a), (c).
[xx] Rule 60(c).
[xxi] The Court observed that “most litigation activity is characterized as procedural for purposes of corporate revival.”
[xxii] Thus, a revivor does not relate back to validate the otherwise timely commencement of an action when the revivor occurs after the expiration of the period of limitations because relation back would prejudice the opposing party’s statute of limitations defense.
[xxiii] Boechler, P.C. v. Commissioner, 142 S. Ct. 1493 (2022). The Supreme Court ruled that the 30-day deadline
for taxpayers to file a Tax Court petition to contest an IRS notice of determination to proceed with a lien or levy
action was not a jurisdictional deadline and was subject to equitable tolling. The Supreme Court stated that a filing
deadline was jurisdictional (and so could be equitable tolled) only if Congress “clearly states”’ that it is.
The holding in Boechler distinguished the Tax Court’s precedent regarding corporate revival of California corporations. Past jurisprudence primarily addressed petitions filed pursuant to IRC Sec. 6213(a) – petitioning the Tax Court in response to a notice of deficiency – and held that revival of corporate status did not relate back because the Tax Court, as well as the 9th Circuit, treat the 90-day deadline as a jurisdictional, and therefore substantive, rule. The Court noted that Boechler created some flexibility for corporate taxpayers that file a petition while their corporate status is suspended but is revived before the expiration of the 30-day period.
As an aside, earlier this week, the Federal government argued before the 4th Circuit that the 90-day rule was jurisdictional. The 7th, 9th, and 11th Circuits abide by that position, whereas the 2nd, 3rd, and 6th Circuits (citing Boechler) have held that the deadline is not jurisdictional and, thus, may be extended in the appropriate circumstance.
The “Tax Court Improvement Act” (H.R. 5349) has passed the House and is pending before the Senate Finance Committee. Among other things, the bill grants the Tax Court jurisdiction to toll the 90-day period for filing a petition contesting a notice of deficiency in cases where the Court determines that equitable tolling is warranted. Accordingly, when a deficiency petition is filed beyond the 90-day deadline and none of the other statutory exceptions apply, the Tax Court would consider a motion for equitable tolling, regardless of the Circuit to which its decision would be appealable.
[xxiv] The Circuit in which Taxpayer-Corp resides and to which Taxpayer-Corp’s case is appealable.
[xxv] The Court also determined that the doctrine of equitable tolling was inapplicable in this case. Taxpayer-Corp urged the Court to apply the doctrine if revival did not relate back to the date the Petition was filed. “To be entitled to equitable tolling,” the Court explained, “a taxpayer must establish (1) that it pursued its rights diligently and (2) that extraordinary circumstances outside of its control prevented it from filing on time.” While the Court conceded that equitably tolling may extend the IRC Sec. 6330(d)(1) deadline, Taxpayer-Corp filed its Petition timely. Consequently, there was no extension the Court could grant Taxpayer-Corp.
[xxvi] Rules and consequences, as we hear throughout the John Wick saga.
[xxvii] Pun intended.