L v. Castle Investment Group, Inc. v. Commissioner

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FILED

FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS

________________________ ELEVENTH CIRCUIT

SEPT 26, 2006

No. 05-13267 THOMAS K. KAHN

________________________ CLERK

Tax Court No. 17002-04

L. V. CASTLE INVESTMENT GROUP, INC.,

LAKE VIEW NUTRITION CONSULTING SERVICES, INC.,

Petitioners-Appellants,

versus

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee.

________________________

Petition for Review of a Decision of the

United States Tax Court

_________________________

(September 26, 2006)

Before MARCUS, WILSON and COX, Circuit Judges.

WILSON, Circuit Judge:

Appellants L.V. Castle Investment Group, Inc. (“L.V. Castle”) and Lake

View Nutrition Consulting Services, Inc. (“Lake View”) appeal the Tax Court’s

decision stating that it did not have jurisdiction to entertain Appellants’ petition

contesting a deficiency found against L.V. Castle after L.V. Castle’s dissolution.

Because L.V. Castle did not have the legal capacity to file a petition and because

the IRS has not filed a notice of transferee liability against Lake View, we

AFFIRM.

I. Background

L.V. Castle was an Illinois Corporation. On October 1, 1996, the Illinois

Secretary of State dissolved L.V. Castle because it failed to file an annual report

and because it failed to pay the annual franchise tax. At the time of L.V. Castle’s

dissolution, Lake View was its sole shareholder and successor to its assets.

Pursuant to Tax Court Rule 60(c), Illinois state law determines L.V. Castle’s

capacity to litigate. The relevant Illinois statutes provide that the Illinois Secretary

of State may administratively dissolve any corporation if , inter alia, the

corporation “has failed to file its annual report . . . and pay its franchise tax . . . .”

805 Ill. Comp. Stat. 5/12.35(a). A corporation’s dissolution “terminates its

corporate existence and a dissolved corporation shall not thereafter carry on any

business except that necessary to wind-up and liquidate its business and affairs.”

Id. 5/12.30. Furthermore, the Illinois statutes make it plain that any “action or

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other proceeding” to defend the company’s interests must be commenced within

the state’s five year corporate wind-up period. Id. 5/12.80. L.V. Castle’s wind-up

period expired on October 1, 2001.

In July 1997, the IRS sent L.V. Castle a notice indicating that L.V. Castle

had failed to file an income tax return for the period ending June 30, 1996. Nearly

four years later, on June 14, 2001, L.V. Castle belatedly filed the requested tax

return. On June 9, 2004, the IRS sent L.V. Castle a notice of deficiency under 26

U.S.C. § 6212,1 which disallowed certain deductions for its 1996 taxable year. The

notice further explained that L.V. Castle was liable for delinquency and accuracy

related penalties, plus interest. Both the issuance of the notice of deficiency and

the filing of the petition challenging the deficiency occurred in 2004, well beyond

the October 1, 2001 deadline.

On September 13, 2004, a petition in the names of L.V. Castle and Lake

View was filed in the Tax Court under 26 U.S.C. § 6213 2 to redetermine L.V.

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The statute provides in relevant part:

In general. If the Secretary determines that there is a deficiency in respect of any

tax imposed by subtitles A or B of chapter 41, 42, 43 or 44 he is authorized to

send notice of such deficiency to the taxpayer by certified mail or registered mail.

Such notice shall include a notice to the taxpayer of the taxpayer’s right to contact

a local office of the taxpayer advocate and the location and phone number of the

appropriate office.

26 U.S.C. § 6212(a).

2

The statute provides in relevant part:

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Castle’s deficiency. The Commissioner filed a motion to dismiss for lack of

jurisdiction. The Commissioner argued that L.V. Castle lacked the capacity to

petition the Tax Court because, under Illinois law, L.V. Castle was dissolved and

its ability to commence new proceedings had expired in 2001 (after the conclusion

of Illinois’ five year wind-up period). He also argued that Lake View could not

maintain the petition pursuant to I.R.C. § 6213(a) and Tax Court Rule 34(b)

because the Commissioner had not issued it either a notice of deficiency or a notice

of transferee liability.

Time for filing petition and restriction on assessment. Within 90 days, or 150

days if the notice is addressed to a person outside the United States, after the

notice of deficiency authorized in section 6212 is mailed (not counting Saturday,

Sunday, or a legal holiday in the District of Columbia as the last day), the

taxpayer may file a petition with the Tax Court for a redetermination of the

deficiency. Except as otherwise provided in section 6851, 6852 or 6861, no

assessment of a deficiency in respect of any tax imposed by subtitle A, or B,

chapter 41, 42, 43, or 44 and no levy or proceeding in court for its collection shall

be made, begun, or prosecuted until such notice has been mailed to the taxpayer,

nor until the expiration of such 90-day or 150-day period, as the case may be, nor,

if a petition has been filed with the Tax Court, until the decision of the Tax Court

has become final. Notwithstanding the provisions of section 7421(a), the making

of such assessment or the beginning of such proceeding or levy during the time

such prohibition is in force may be enjoined by a proceeding in the proper court,

including the Tax Court, and a refund may be ordered by such court of any

amount collected within the period during which the Secretary is prohibited from

collecting by levy or through a proceeding in court under the provisions of this

subsection. The Tax Court shall have no jurisdiction to enjoin any action or

proceeding or order any refund under this subsection unless a timely petition for a

redetermination of the deficiency has been filed and then only in respect of the

deficiency that is the subject of such petition. Any petition filed with the Tax

Court on or before the last date specified for filing such petition by the Secretary

in the notice of deficiency shall be treated as timely filed.

26 U.S.C. § 6213(a).

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Appellants opposed the motion, arguing that the filing of L.V. Castle’s tax

return constituted an “action or other proceeding” under Illinois law that would toll

the expiration of the corporate wind-up period. Alternatively, Appellants argued

that Lake View was the real party in interest, and as such, should be allowed to

maintain the petition in the Tax Court. The Tax Court agreed with the government

and granted the Commissioner’s motion in an order of dismissal.

II. Standard of Review

We have jurisdiction over this appeal under 26 U.S.C. § 7482(a), which

specifies that we review Tax Court decisions “in the same manner and to the same

extent as decisions of the district courts in civil actions tried without a jury.” 26

U.S.C. § 7482(a)(1). Accordingly, we review de novo the Tax Court’s

interpretations of the Internal Revenue Code and state law. Shepherd v. Comm’r,

283 F.3d 1258, 1260 n.1 (11th Cir. 2002); Fabry v. Comm’r, 223 F.3d 1261, 1263

(11th Cir. 2000); Cox v. Comm’r, 121 F.3d 390, 391 (8th Cir. 1997).

III. Analysis

A. L.V. Castle did not have the capacity to petition the Tax Court to

redetermine its deficiency.

Appellants argue that the solicitation or the filing of L.V. Castle’s tax return

prior to the expiration of Illinois’ corporate wrap-up period constituted the

proceeding that triggered the Tax Court’s jurisdiction to entertain appellants’

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petition. Appellants rely upon American Police and Fire Foundation, Inc. v.

Commissioner, 43 T.C.M. (CCH) 77 (1981). In that case, the Tax Court held that

receipt within the corporate survival period of a notice of deficiency created

jurisdiction: “[W]e believe that a proceeding had been commenced at least at the

time of issuance of the statutory notice . . . . We need not decide whether a

qualifying proceeding had commenced before that time.” Id. (emphasis added).

Appellants argue that the court’s refusal to decide whether the qualifying

proceeding had commenced prior to the issuance of the notice indirectly

acknowledged that the expiration of a corporate wind-up period should not limit a

corporate taxpayer’s right to defend itself from a potentially erroneous tax

determination. Appellants contend that this is particularly true where the petition

challenging the determination could not be filed until after the survival period

expired.

Appellants also rely upon Bahen & Wright, Inc. v. Commissioner, 176 F.2d

538, 539 (4th Cir. 1949) (holding that sending a notice of tax deficiency within the

three year state statutory wind-up period commenced a “proceeding” for purposes

of invoking the Tax Court’s jurisdiction); Bared & Cobo Co., Inc. v.

Commissioner, 77 T.C. 1194, 1196 (1981) (holding that issuance of a notice of

deficiency to a corporation three years after its dissolution was an “action or other

proceeding” under Florida’s corporate survival statute); and American Standard

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Watch Co., Inc. v. Commissioner, 229 F.2d 672, 674-75 (2d Cir. 1956) (holding

that filing a claim for a tax refund within the statutory survival period commenced

the proceeding for jurisdictional purposes). Appellants conclude that they must be

permitted to pursue their claim because they filed their tax return before the wind-

up period expired. They argue that the district court has effectively allowed the

IRS to take advantage of them by filing a notice of deficiency after the expiration

of the wind-up period, during which L.V. Castle could have pursued its petition.

Appellants’ argument fails, however, because Congress has expressly

authorized the Commissioner to issue notices to defunct corporate taxpayers that

can no longer legally contest the notice. Specifically, I.R.C. § 6212(b)(1) provides

that “[i]n the absence of notice to the Secretary under section 6903 of the existence

of a fiduciary relationship, notice of a deficiency in respect of [income] tax . . . if

[properly] mailed to the taxpayer . . . shall be sufficient . . . even if such taxpayer . .

. , in the case of a corporation, has terminated its existence.” Additionally, the Tax

Court has confirmed on numerous occasions that Congress has authorized the

Commissioner through I.R.C. § 6212(b) to issue a notice of deficiency to a

dissolved corporation, despite the fact that the corporation does not have the legal

capacity to challenge the notice in the Tax Court. E.g., Bloomington Transmission

Servs., Inc. v. Comm’r, 87 T.C. 586, 591 (1986) (“We recognize that our holding

will leave petitioner in the anomalous position of being unable to defend against

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the determination, assessment, and possibly the collection of Federal tax. It was,

however, petitioner’s shareholder-officer’s failure to file annual reports or pay

franchise tax, or to cure the defects during either the 2 or 5-year ‘winding-up

period.’”); Padre Island Thunderbird, Inc. v. Comm’r, 72 T.C. 391, 394-95 (1974);

Condo v. Comm’r, 69 T.C. 149, 156 (1977); Dillman Bros. Asphalt Co. v. Comm’r,

64 T.C. 793, 796-97 (1975); Great Falls Bonding Agency, Inc. v. Comm’r, 63 T.C.

304, 306 (1974). The Tax Court has never found the filing of a return to

“commence” a proceeding within the meaning of a statutory wind-up period, but it

has dismissed for lack of jurisdiction a petition filed after the wind-up period in

which a return had been filed before the wind-up period ended. Dillman Bros.

Asphalt Co., 64 T.C. at 796; see also Malone & Hyde, Inc. v. Comm’r, 64 T.C.M.

(CCH) 1309 (1992) (holding that audit of a tax return does not constitute an

“action or proceeding” within the meaning of Delaware statute addressing the

survival of any “action or proceeding” in a merger); Badger Materials, Inc. v.

Comm’r, 40 T.C. 1061, 1062 (1963) (“[W]e . . . do not regard the filing of an

application for tentative carryback adjustment or the issuance of an informal

conference letter as a ‘suit or other proceeding’ within the purview of the

Wisconsin statute.”).

The cases Appellants rely upon are readily distinguishable. In Bahen &

Wright, Inc., 176 F.2d at 539; Bared & Cobo Co., 77 T.C. at 1196; and American

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Police & Fire Foundation, Inc., 43 T.C.M. (CCH) 77, the courts held only that the

issuance of a notice of deficiency constituted the commencement of a “proceeding”

within the meaning of the state wind-up statute before it.3 A notice of deficiency

serves a function different from that of a tax return. As the Tax Court stated in

American Police & Fire Foundation, Inc., it “signals the existence of a contest

over tax liability” and is the taxpayer’s “‘ticket to the Tax Court.’” Am. Police &

Fire Found., Inc., 43 T.C.M. (CCH) 77; see also I.R.C. § 6213(a); Laing v. United

States, 423 U.S. 161, 165 n.4, 96 S. Ct. 473, 477 n.4, 46 L. Ed. 2d 416 (1976) (“A

deficiency notice is of import primarily because it is a jurisdictional prerequisite to

a taxpayer’s suit in the Tax Court for redetermination of his tax liability.”). A tax

return, on the other hand, does not signal the existence of a controversy. See

Malone & Hyde, Inc., 64 T.C.M. (CCH) 1309 (finding the cases upon which the

appellants rely to be distinguishable and holding that even the post-return event of

an audit does not commence an action or a proceeding). Indeed, because the return

does not signal a controversy, the Commissioner can immediately assess the tax

liability that a taxpayer reports on a return. I.R.C. § 6201(a)(1).

The Tax Code and the Tax Court clearly establish that Congress has

3

Another of Appellants’ cited cases, American Standard Watch Co., Inc., 229 F.2d 672,

involved a special statutory scheme for the former excess profits tax in which the filing of an

administrative claim for refund served as the functional equivalent of the issuance of a notice of

deficiency for jurisdictional purposes.

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allowed the IRS to file a notice of deficiency against a dissolved corporation that

can no longer legally defend itself in such an action. Furthermore, as we will

discuss in our analysis of Appellants’ second argument, such a result is in fact not

as inequitable 4 as it first appears because the IRS has yet to file a notice of

transferee liability, which it must do before it can move against the corporation’s

assets if they have already been transferred from the dissolved corporation (as they

have been in this case). I.R.C. §§ 6213(a), 6901(a), (g).

B. Lake View cannot file a petition in the Tax Court on behalf of

L.V. Castle.

Appellants argue that, under Illinois law, L. V. Castle’s assets automatically

passed to Lake View upon L.V. Castle ’s dissolution and that Lake View stepped

into the shoes of L.V. Castle with regard to litigating any claims against L.V.

Castle. See Matos v. Richard A. Nellis, Inc., 101 F.3d 1193, 1195 (7th Cir. 1996);

Dubey v. Abam Bldg. Corp., 639 N.E.2d 215, 218 (Ill. App. Ct. 1994); Shute v.

Chambers, 492 N.E.2d 528, 531 (Ill. App. Ct. 1986). Appellants contend therefore

that Lake View can litigate the Commissioner’s claim for deficient taxes—a claim

which could be enforced against those assets.

4

Any potential inequities are irrelevant in any case because “the Tax Court is a court of

strictly limited jurisdiction and cannot assert equitable powers in any way that could be

construed as extending its jurisdiction.” Roberts v. Comm’r, 175 F.3d 889, 896 n.7 (11th Cir.

1999) (internal quotations and citations omitted).

10

Appellants cite to the United States Tax Court and at least one Illinois court

as support for their position. Appellants argue that in Bloomington Transmission

Services, Inc., 87 T.C. at 589, although the court held that the petitioner lacked the

capacity to litigate the question of its tax liability because the Illinois survival

period had expired, the court left the door open for the dissolved corporation’s

successors to litigate issues of determination, assessment, and collection of federal

tax. Appellants also cite to Dubey, 639 N.E.2d at 218-19, which held that the

applicable corporate wind-up statute did not bar an action of a dissolved

corporation’s sole shareholder to recover a security deposit made by the dissolved

corporation because the deposit was a corporate asset to which the former

shareholder succeeded by operation of law following dissolution.

Appellants are correct that shareholders of a dissolved corporation can

litigate the Commissioner’s claims against the dissolved corporation’s assets.

Appellants are attempting to do so prematurely in this case, however. In

deficiency cases, the Tax Court’s jurisdiction is limited to petitions filed by the

party named in the notice of deficiency. I.R.C. § 6213(a); Tax Ct. R. 13(a);

Hempel v. United States, 14 F.3d 572, 573 n.3 (11th Cir. 1994). Congress has

provided a transferee of a defunct corporation with the ability to petition the Tax

Court to challenge the Commissioner’s determination that it is liable as a transferee

for an income tax deficiency of the defunct corporation. I.R.C. § 6901(a). The

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transferee, however, must wait until the Commissioner has made a determination

of transferee liability and issued a notice to it. I.R.C. §§ 6213(a), 6901(a), (g).

Although the Tax Court cannot entertain a transferee’s petition on the basis of a

notice of deficiency sent to the transferor, the transferee is “free to litigate the[ ]

transferor’s liability” after it receives a notice of transferee liability. Great Falls

Bonding Agency, 63 T.C. at 307; accord Dillman Bros. Asphalt Co., 64 T.C. at

796-97; Padre Island Thunderbird, Inc., 72 T.C. at 399; Bloomington

Transmission Servs., Inc., 87 T.C. at 589.5

The IRS has not issued to Lake View a notice of transferee liability. Lake

View cannot yet petition the Tax Court regarding a notice of deficiency issued

against L.V. Castle. The Tax Code provides a procedure in which Lake View

could file a petition after the IRS issues it a notice of transferee liability.6 Until this

5

Dubey, 639 N.E.2d 215 does not conflict with this established IRS procedure. In that

case, the sole shareholder of a dissolved corporation that succeeded to the corporation’s assets

brought an action “in his individual capacity” to recover a security deposit under a lease

executed by the dissolved corporation. Id. at 218. Because the shareholder succeeded to

ownership of the assets by operation of law, he was able to bring an action as an individual that

was not subject to the wind-up statute. Id. at 219. Here, Lake View does not contend that it is

bringing an action in its own capacity. Indeed, as discussed above, such an action is barred in

the Tax Court because Lake View was not issued the requisite notice. Rather, Lake View brings

the action as a substitute for L.V. Castle. That type of action is plainly subject to the Illinois

wind-up statute and Dubey does not support a contrary conclusion.

6

We have no occasion to address today whether Lake View, in its capacity as transferee,

could litigate the issue of L.V. Castle’s tax liability if the IRS issues a notice of transferee

liability against Lake View in the future. The Commissioner made it clear, however, at oral

argument and in his appellate brief, that “the transferee is ‘free to litigate the[] transferor’s

liability’ after it receives a notice of transferee liability, so there is no inequity.” Appellee’s Br.

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happens, however, Lake View is in no danger of losing its assets to the IRS.

Thus, Lake View could not petition for redetermination of L.V. Castle’s

liability, and the Tax Court properly dismissed the petition with respect to both

L.V. Castle and Lake View.7 Therefore, we AFFIRM the Tax Court.

AFFIRMED.

20 (alteration in original) (quoting Great Falls Bonding Agency, Inc. V. Comm’r, 63 T.C. 304,

307 (1974)).

7

The Tax Court characterized its dismissal of the petition as a dismissal for lack of

jurisdiction. Stated more precisely, the ground for dismissal of L.V. Castle’s petition was for

L.V. Castle’s lack of capacity, and the ground for dismissal with respect to Lake View was a

combination of two grounds: lack of real-party-in-interest status with respect to Lake View’s

attempt to litigate as a stand-in for L.V. Castle, and lack of jurisdiction with respect to Lake

View’s attempt to litigate its own transferee liability before it had been issued a notice of

liability. Cf. Liberty Nat’l Ins. Holding Co. v. Charter Co., 734 F.2d 545, 553 n.19 (11th Cir.

1984) .

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