Monday, June 29, 2015

Can a Corporation Stop Filing Tax Returns After Dissolution?

William Delaney, EA
Westwood, MA
The Corporation has been administratively dissolved - it can stop filing tax returns since it isn't a corporation

How often has this happened…  Your corporate client stopped filing annual reports with the secretary of state’s corporate division.  Eventually, the corporation was administratively dissolved for failure to file the required reports and pay the filing fees.  However, it continued doing business as if nothing had changed, yet it was no longer a corporation so something must have changed.

While something did change, for federal filing purposes nothing had changed.  A taxpayer was recently reminded of that in Private Letter Ruling 201522001 (5/29/2015), wherein a corporation which had been administratively dissolved continued to file an 1120 each year.  Upon discovery of the dissolution, the corporation “reincorporated in State A…”  In MA, this would be a corporate reinstatement rather than a reincorporation, but the issue is the same.

Taxpayer, in the PLR, asked if it was appropriate to file an 1120 for the periods covered by the administrative dissolution.  Response:  “A corporation is subject to federal corporate income tax liability as long as it continues to do business in a corporate manner, despite the fact that its recognized legal status under state law is voluntary or involuntarily terminated.”  Cited for this authority is Messer v. Comm., 438 F 2d 774 (3rd Cir. 1971).  Within Messer, a number of other cases are cited to support the same principle.

Now, let’s change the fact pattern a bit.  Instead of an administrative dissolution (involuntary termination of legal status), the corporation filed articles of dissolution and obtained a voluntary and final termination of legal status.  However, the corporation continued doing business as if nothing had changed.  Are 1120s required when the corporation has obtained a voluntary and final termination of legal status?

The answer is still yes---if the corporation continues to look and act like a corporation, and transact business, it remains a corporate filer.  To quote from the PLR---“The core test of corporate existence for purposes of federal income taxation is always a matter of federal law.  Whether an organization is to be taxed as a corporation under the Code is determined by federal, not state law.”

So, it isn’t enough to dissolve, whether it be voluntary or involuntary.  The test is really whether or not you have ceased doing business in corporate form.

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