The Tax Court in Brief – January 2nd – January 6th, 2023
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Tax Litigation: The Week of January 2nd, 2022, through January 6th, 2023
- Mining v. Comm’r, T.C. Memo. 2023-1| January 4, 2023 | Marshall, J. | Dkt. No. 4989-20
- Henry v. Comm’r, T.C. Memo. 2023-2| January 5, 2023| Ashford, J. | Dkt. No. 18832-18
XC Foundation v. Comm’r, T.C. Memo. 2023-3| January 5, 2023 | Lauber, J. | Dkt. No. 9189-21X
Summary: XC Foundation (“XC”) was incorporated in California in 2007. In 2008, the IRS issued XC a determination letter recognizing it as exempt from federal income tax under section 501(c)(3) and as a private foundation under section 509(a). On December 1, 2020, the state of California suspended XC’s corporate powers, rights, and privileges pursuant to state law. On March 2, 2021, the IRS issued XC a final adverse determination letter revoking XC’s tax-exempt status retroactively to January 1, 2016. The letter determined that XC, as of that date, no longer qualified for exemption from federal income tax under section 501(a) as an organization described in section 501(c)(3). On May 28, 2021, XC filed a petition seeking a declaratory judgment that the revocation was erroneous, and at that time XC’s corporate powers had not been restored. The IRS filed a Motion to Dismiss for Lack of Jurisdiction, alleging that XC lacked the capacity either to initiate litigation in the Tax Court or to prosecute any part of the case. XC urged that Rule 60(c), which provides that “[t]he capacity of a corporation to engage in [Tax Court] litigation shall be determined by the law under which it was organized,” violates its rights to equal protection, due process, and protection against cruel and unusual punishment.
Key Issues: Whether the Tax Court has jurisdiction to adjudicate XC’s petition that sought a declaratory judgment that the revocation of its tax-exempt status was erroneous.
Primary Holdings: No. Because XC’s corporate powers were suspended and had not been reinstated by the state of California when XC filed its petition or during the 90-day period in which the petition was required to be filed, the Tax Court lacked jurisdiction over the case. Case dismissed for lack of jurisdiction.
Key Points of Law:
Jurisdiction of the Tax Court. The U.S. Tax Court is an Article I court and possesses jurisdiction only to the extent conferred by Congress. See Freytag v. Commissioner, 501 U.S. 868, 870 (1991); see also 26 U.S.C. § 7442. The Tax Court has jurisdiction to review controversies involving an entity’s initial or continuing qualification for tax-exempt status under section 501(c)(3). 26 U.S.C. § 7428(a)(1). To invoke the Court’s jurisdiction under section 7428(a)(1), an organization must file a petition with the Court within 90 days of the mailing of the final notice of adverse determination. Id. at § 7428(b)(3); see Rule 210(c)(3). A petitioning party must have the capacity to commence and maintain litigation in the Court. See Rule 60(c); see also Brannon’s of Shawnee, Inc. v. Commissioner, 71 T.C. 108, 111 (1978). An IRS Form cannot define this Court’s jurisdiction.
Capacity of Corporation Taxpayer. Rule 60(c) provides that “[t]he capacity of a corporation to engage in [Tax Court] litigation shall be determined by the law under which it was organized.” If a petitioner lacks the capacity to commence and maintain litigation in the Tax Court, it must dismiss the case for lack of jurisdiction. See Brannon’s of Shawnee, Inc., 71 T.C. at 111.
California Corporations. A California corporation whose “corporate powers, rights, and privileges” have been suspended by the State of California lacks the capacity to commence or maintain litigation in the Tax Court. See NT, Inc. v. Commissioner, 126 T.C. 191, 192–94 (2006); David Dung Le, M.D., Inc., 114 T.C. at 274. California Revenue and Tax Code §§ 23301 and 23302 are relevant, and they have been construed to mean that a corporation cannot prosecute or defend an action during the period in which its corporate rights and powers have been suspended. See David Dung Le, M.D., Inc., 114 T.C. at 272.
Frivolous Argument. Contending that Rule 60 is unconstitutional and violates its rights to procedural due process, equal protection, and to the protection against cruel and unusual punishment is and are frivolous arguments. See Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984); Wnuck v. Commissioner, 136 T.C. 498 (2011); Aldrich v. Commissioner, T.C. Memo. 2013-201, 106 T.C.M. (CCH) 192, 194.
Insights: The XC Foundation opinion illustrates the importance of maintaining corporate status in taxpayer’s state of organization. Failing to do so could have adverse consequences to the taxpayer, including a lack of capacity to pursue relief or to defend against claims in the U.S. Tax Court.