As we learned from this scene in The Princess Bride, there’s dead...and then there’s mostly dead.
In Timbron Holdings Corporation v. Commissioner, T.C. Memo. 2019-31 (April 8, 2019) (Judge Vasquez), the Tax Court decided that it could not hear the petition filed by a mostly dead corporation. In reaching this conclusion, Judge Vasquez carefully followed existing Tax Court precedents to hold: (1) a corporation whose charter is suspended under California law (i.e. is mostly dead) has no capacity to file a Tax Court petition; (2) the corporation’s lack of capacity is not a defense that the government must raise but is instead an element of §6213’s jurisdictional requirements; and (3) “reliance on equity and policy considerations [cannot] overcome a jurisdictional defect.”
The idea that §6213 is a jurisdictional statute is an old idea. Really old. Decrepitly old. If the right right case goes up on appeal, I think an appellate court will likely decide that old idea is dead. Deceased. Kaput. Expired. Gone. Done in. All-the-way dead. Parrot dead. To beat the dead horse, an appellate court is likely to find that §6213 is not a jurisdictional restriction on the Tax Court but is instead a “claims processing rule,” a term the Supreme Court uses to describe limitations that are important but not jurisdictional. You can find the deathly dull details in my forthcoming article (Fall 2019 issue of The Tax Lawyer).
Timbron is not the right case to take on appeal. I think the result would be the same even if §6213 were treated as a straight-forward non-jurisdictional limitations period. But, either way, the result creates a curious contradiction in the Tax Court Rules. Details below the fold.
The case involves two corporations, Timbron Holdings Corp. and Timbron Int’l Corp. These two corporate taxpayers were given life by the State of California, Timbron in 1996 and Timbron Int’l in 2005. But then, after both corporations failed to keep up with their California state taxes, the California Franchise Tax Board (FTB) suspended their corporate charters, Timbron Int’l in 2009 and Timbron in 2013.
On July 14, 2016 the IRS sent NODs to both corporations for tax years 2010 and 2011. In October 2016 each filed a timely Tax Court petition. In November 2016 the IRS filed its Answer to each petition.
Several months later the IRS discovered that the corporate charters had been suspended and so moved to dismiss the cases for lack of jurisdiction. In response, the corporations got straight with the FTB, obtained certificates of revivor as of September 27, 2017, and asked the Tax Court to reject the IRS motion to dismiss by deeming their certificate of revivor to extend back to their petition date. Those actions set up the question for decision: what is the effect of a corporate suspension and later revival on the corporation's ability to file a petition? The answer depends on the interplay of Tax Court rules and state corporations law. Let's look at each.
Law: The Tax Court Rules
Section 6213 says that “the taxpayer” has 90 days from the date of an NOD to file a petition in Tax Court. The Tax Court Rules are a bit more squishy on that. Rule 13 says that the Court will not exercise its powers under §6213 unless (1) the IRS issued a valid NOD and (2) someone files a timely petition. Notably Rule 13 does not just parrot the statute and say “the taxpayer” must file the petition. It instead switches to passive voice, saying only that there must be “a timely filed petition” without saying who must file it. I do not think this is just careless drafting because Rule 60(a) explicitly contemplates that the petition may not actually be filed by “the taxpayer” but may have been filed by someone acting on the taxpayer’s behalf, without the taxpayer’s knowledge or permission. Again using passive voice, Rule 60(a) says that “[a] case timely brought shall not be dismissed on the ground that it is not properly brought on behalf of a party until a reasonable time has been allowed after objection for ratification by such party of the bringing of the case; and such ratification shall have the same effect as if the case had been properly brought by such party.” (emphasis supplied)
Tax Court case law supplements the statute and Tax Court Rules with the idea of capacity. Whoever files the petition---whether the taxpayer or someone acting on the taxpayer’s behalf---the Tax Court holds that the taxpayer must have the capacity to engage in litigation. “In regard to a corporate taxpayer...a proper filing requires that the taxpayer tendering (or causing to be tendered through an agent) a petition to the Court for filing must have the capacity to engage in litigation in this Court.” David Dung Le M.D. Inc. v. Commissioner, 114 T.C. 268, 270 (2000).
Tax Court Rule 60(c) says that the capacity of a corporate taxpayer to “to engage in such litigation shall be determined by the law under which it was organized.” Here, that would be California law, so to that we now turn.
Law: The California Rules on Corporate Suspension and Revival
Like most states, California has rules for suspending corporate charters and then reinstating them. You can find them in the California Revenue and Taxation Code (RTC) §23301 - §23311. The basic effect of a suspension is to temporarily remove a corporation’s “powers, rights, and privileges.” One such power is the power to sue and be sued. Timberline v. Jaisinghani, 54 Cal. App. 4th 1361 (1997).
But the statute still leaves the corporation with enough legal life to ask the California Franchise Tax Board (FTB, remember) for a certificate of revivor. Generally, the FTB does so only when the corporation deals with the reasons for the suspension. The usual cause for a FTB suspension is a failure to file returns or pay applicable taxes, and California courts routinely recognize that the purpose of the suspension process is to get corporations to pay their taxes. Timberline, supra.
A certificate of revivor does not cure all past ills, however. It’s not a never-mind document. RTC §23305a provides that “the taxpayer therein named shall become reinstated but the reinstatement shall be without prejudice to any action, defense or right which has accrued by reason of the original suspension or forfeiture...”
Here's how that statute works in litigation. When a suspended corporation files a lawsuit, California courts usually apply the revival retroactively to the date of filing. But they won't if doing so prejudices a substantive defense accrued during the corporation’s suspension. See Benton v. County of Napa, 226 Cal. App. 3d 1485, 1490 (Cal. Ct. App. 1991)(The revival of corporate powers validates any procedural step taken on behalf of the corporation while it was under suspension but does not eliminate any substantive defenses to the lawsuit that accrued after the case was filed). One substantive defense that might accrue is the running of the relevant statute of limitation (SOL) after the filing date but before the revival date. In those situations, California courts refuse to apply the revival retroactively to cure the SOL problem. See discussion in Bourhis v. Lord, 295 P.3d 895 (2013)(revival cannot defeat a properly raised SOL defense).
Notably, California courts do not focus on the jurisdictional nature of the relevant limitation period. They focus only on whether the SOL would have been an available defense. For example, if a suspended corporation timely appeals an adverse judgment but does not obtain the certificate of revivor until after the period for appeals has run, California courts permit the revival to ratify the act of filing the notice of appeal. And yet in California, the period in which to take appeals governs the subject-matter jurisdiction of the courts. Bourhis.
This lack of focus on the jurisdictional nature of the relevant limitation period led one California court to ask the obvious question: “We question why the timely filing of a notice of appeal, which is jurisdictional and cannot be waived, is a procedural act unaffected by a corporation's suspension, while the statute of limitations, which is not jurisdictional and can be waived, is a substantive defense fatal to a suspended corporation's cause of action.” ABA Recovery Systems v. Konold, 198 Cal.App.3d 720, 724-725 (1988). The California Supreme Court’s answer to that question rested on the statutory language in section 23305a. The time in which to appeal was not a substantive defense given to parties opposing appeal and so section 23305a did not bar the retroactive effect of a revival. Bourhis, supra, (reviewing case law to conclude “that the expiration of the time to file a valid notice of appeal does not provide an “action, defense or right” within the meaning of [RTC §23305a].”).
In sum, under California law, whether a certificate of revivor can operate retroactively to cure the defect of corporate suspension depends on whether doing so would prejudice an “action, defense or right” within the meaning of RTC §23305a when that “action, defense or right” accrued during the corporate suspension.
Lesson: Revival of Corporate Charter After §6213 Period Runs Does Not Cure Petition.
The Tax Court has dealt with this problem many times. Judge Vasquez relies heavily on Le v. Commissioner, supra, a fully reviewed opinion. I also like Judge’s Swift’s discussion in Medical Weight Specialists v. Commissioner, T.C. Memo. 2015-52 because I think it gives readers an good understanding of how the California courts use the procedural/substantive distinction to evaluate the effects of certificates of revivor on prior litigation actions. While his opinion treats the §6213 time period as jurisdictional, one can more easily see from his opinion why the jurisdictional nature of §6213 is not important.
As applied to Timbron, even if the 90-day period is not jurisdictional, it is still a substantive defense that was actually raised by the IRS and only afterwards did Timbron cure the suspension. Therefore, under California law, Timbron had no capacity to sue at the time it filed its Tax Court petition and the later certificate of revivor could not operate retroactively to deny the IRS its SOL defense. If §6213 is not jurisdictional, however, the result might be different for non-California corporations because of the Tax Court's reliance on state corporation law to determine capacity.
I confess I am puzzled by Tax Court Rule 60(a). It seems to depart from the Tax Court's otherwise strict insistence on "capacity" because it allows a taxpayer to retroactively ratify a petition that was timely but was "not properly brought on behalf of" the taxpayer. This rule seems to say that so long as the petition was filed timely, the Court won't worry too much about who filed it as long as the right person comes later and touches the petition with a magic wand of approval. Get the timing right and we'll worry about capacity later. If that is indeed how the rule operates in practice, it would seem in tension with the result in Timbron and other cases. But I confess that I don't know much about this Rule.
The taxpayer in Le v. Commissioner, supra, raised a similar point and the Tax Court's response seems say that's not the way Rule 60(a) works. Capacity still matters. The Court said "In contrast to the taxpayers in those cases, petitioner did not have the requisite capacity to bring an action in this Court when the petition was first filed. Petitioner, therefore, neither was authorized, nor could it have authorized another, to file a timely petition in this matter." 114 T.C. at 276.
The Le Court's reasoning seems to glide over the tension between its holding and Rule 60(a). After all, Rule 60(a) says "not properly brought on behalf of..." and that language seems to go to capacity: it refers to a petition filed by someone other than the taxpayer but who was not authorized by the taxpayer at the time of filing. Otherwise you would not need to speak of "ratification" as the Rule does. If the petition had been authorized then it would be properly brought and not improperly brought. You would not need the Rule. Or so it seems to my novice eyes.
I really don't know much about Rule 60(a) and welcome enlightenment from whomever cares to comment on what this rule is supposed to get at. For example, if the rule was supposed to deal with a taxpayer in a coma, whose brother or friend or someone filed a timely petition, to allow the taxpayer to later ratify the filing of the petition, then it seems applicable to a mostly dead corporation being revived and ratifying the filing of the petition by the quasi-zombie entity. The California Supreme Court has used a similar analogy to explain that when the CFTB issues a certificate of revivor, "the legal rights of a suspended corporation are then revived, as an unconscious person is revived by artificial respiration.” Bourhis v. Lord, 56 Cal. 4th 320, 324 (Cal. 2013).
Rule 60(a) is a good rule. I just do not see how it is consistent with the Tax Court's seemingly strict interpretation of §6213 as a jurisdiction statute or its holdings in these mostly-dead corporation cases like Timbron. But then, as I explained in this article, the Tax Court frequently uses its fact-finding powers to circumvent a strict application of §6213 and perhaps Rule 60(a) is just a statement of one set of circumstances when the Tax Court will do that.
Coda: Perhaps in the future, the concept of mostly dead will not be found only in fiction. In case you missed the news, here's an article that explains how scientists have actually reanimated certain parts of dead pigs brains. Apparently the brains were inside heads that had been decapitated in a slaughterhouse. It's probably too early for tax planning based on that, but it brings to mind Ted Williams and others, who are currently not living in Scottsdale, AZ under the supervision of Alcor.
Bryan Camp looks alive as the George H. Mahon Professor of Law at Texas Tech School Thereof.