126 T.C. No. 8

UNITED STATES TAX COURT

NT, INC. d.b.a. NATURES TOUCH, Petitioner

v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 2725-05. Filed April 19, 2006.

On Feb. 14, 2005, P, a corporation, petitioned the

Court to redetermine R’s determination of Federal

income tax deficiencies, additions to tax under sec.

6651(a)(1), I.R.C., and accuracy-related penalties

under sec. 6662(a), I.R.C. Shortly thereafter, the

State in which P was organized suspended P’s corporate

powers, rights, and privileges for failing to pay State

income tax. R moves the Court to dismiss this case for

lack of prosecution to the extent that it relates to

deficiencies and to find without trial that P is liable

for the additions to tax and accuracy-related penalties

as determined. R asserts that P’s suspension precludes

it from prosecuting this case as to the deficiencies. 

R asserts that he bears a burden of production under

sec. 7491(c), I.R.C., as to the additions to tax and

accuracy-related penalties, and that he has met this

burden.

Held: Pursuant to Rules 60(c) and 123(b), Tax

Court Rules of Practice and Procedure, the Court will
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1 Unless otherwise indicated, section references are to the

Internal Revenue Code, and Rule references are to the Tax Court

Rules of Practice and Procedure.

dismiss this case in full in that applicable State law

precludes P from prosecuting any part of this case. 

Although sec. 7491(c), I.R.C., generally places the

burden of production on R as to any addition to tax or

penalty at issue in this Court, that section is

inapplicable where, as here, the petitioning taxpayer

is a corporation.

James G. LeBloch, for petitioner.

Michael W. Berwind, for respondent.

OPINION

LARO, Judge: On February 14, 2005, petitioner petitioned

the Court to redetermine respondent’s determination of

deficiencies of $68,990 and $46,465.20 in its Federal income

taxes for its taxable years ended October 31, 1998 and 1999,

respectively, additions to tax under section 6651(a)(1) of

$10,285.55 and $11,548.25, respectively, and accuracy-related

penalties under section 6662(a) of $13,798 and $9,293.04,

respectively.1 Respondent now moves the Court to dismiss this

case to the extent it relates to deficiencies and to find without

trial that petitioner is liable for the additions to tax and

accuracy-related penalties as determined. Respondent asserts

that petitioner cannot prosecute this case as to the deficiencies
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because petitioner’s powers, rights, and privileges are suspended

by the State in which it was organized. Respondent asserts that

he has a burden of production under section 7491(c) as to the

additions to tax and accuracy-related penalties, and that he has

met this burden. For the reasons stated below, we shall dismiss

this case in full and enter a decision for respondent in the

amounts determined by respondent.

Background

On November 24, 1997, petitioner was organized as a

corporation under California law. On August 1, 2005, pursuant to

Cal. Rev. & Tax. Code secs. 23301 and 23302 (West 2004), the

California Franchise Tax Board suspended petitioner’s corporate

powers, rights, and privileges for failing to pay State income

tax. On September 30, 2005, the California secretary of state

certified petitioner’s suspension and further certified that

petitioner remained suspended as of the date of certification. 

On December 2, 2005, in response to the motion at hand, the Court

ordered petitioner to file a statement showing cause why it has

the capacity to prosecute this case. In its statement, filed on

December 12, 2005, the same day that this case was called for

trial, petitioner stated that it was active when it petitioned

the Court and that it had ceased doing business. Petitioner also

stated that it lacked sufficient assets to pay its State tax and

that it had filed for bankruptcy on December 6, 2005.
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On December 13, 2005, before this Court held a trial of this

case, this Court ordered the case stayed on account of the

bankruptcy petition and the automatic stay of 11 U.S.C. sec.

362(a)(8) (2000). On February 15, 2006, the bankruptcy court

dismissed petitioner’s bankruptcy case and vacated the automatic

stay. Petitioner moved the bankruptcy court to vacate its order

of dismissal. On March 8, 2006, the bankruptcy court denied

petitioner’s motion, stating: “The debtor [petitioner] failed to

appear at two scheduled creditors meetings and such failures were

not satisfactorily explained. In addition, the motion was not

served on the trustee or creditors in accordance with Local

Rules.” On March 22, 2006, this Court ordered that the automatic

stay was no longer in effect as to this case.

Discussion

Whether a corporation may engage in litigation in this Court

is determined by applicable State law, which here is the law of

California. See Rule 60(c); see also David Dung Le, M.D., Inc.

v. Commissioner, 114 T.C. 268, 270-271 (2000), affd. 22 Fed.

Appx. 837 (9th Cir. 2001); Condo v. Commissioner, 69 T.C. 149,

151 (1977). On the basis of our review of that law, in

particular Cal. Rev. & Tax. Code secs. 23301 and 23302, we

conclude that petitioner, although it had the capacity to

commence this case upon the filing of its petition with this

Court, now lacks the requisite capacity to continue prosecuting
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2 In David Dung Le, M.D., Inc. v. Commissioner, 114 T.C. 268

(2000), affd. 22 Fed. Appx. 837 (9th Cir. 2001), the Court held

that a California corporation lacked the power to file a lawsuit

in this Court while its corporate powers were suspended by the

State of California. In reaching that holding, the Court quoted

Cal. Rev. & Tax. Code secs. 23301 and 23302 (West 2004) and noted

that the Supreme Court of California has construed those sections

to mean that a corporation may not prosecute or defend an action

during the period in which it is suspended. See David Dung Le,

M.D., Inc. v. Commissioner, supra at 272. While this Court

dismissed the petition in David Dung Le, M.D., Inc. for lack of

jurisdiction, we do not do similarly here, where petitioner had

the requisite capacity to file the petition that commenced this

lawsuit. Where a taxpayer such as petitioner files a timely

petition with this Court, our jurisdiction is invoked and remains

unimpaired until the controversy is decided notwithstanding

events which may occur after the filing of the petition. See

Main-Hammond Land Trust v. Commissioner, 17 T.C. 942, 956 (1951),

affd. 200 F.2d 308 (6th Cir. 1952); cf. Coninck v. Commissioner,

100 T.C. 495, 498 (1993); Dorl v. Commissioner, 57 T.C. 720, 722

(1972).

or defending any part of the case. See United States v. 2.61

Acres of Land, 791 F.2d 666 (9th Cir. 1985); Reed v. Norman, 309

P.2d 809 (Cal. 1957) (and the cases cited therein); see also

Grell v. Laci Le Beau Corp., 73 Cal. App. 4th 1300, 1306 (1999). 

Thus, given petitioner’s inability to prosecute or defend any

part of this case, including its lack of capacity to defend

itself against the motion at hand, we shall dismiss this case and

enter a decision against petitioner as to all matters in dispute. 

See Rules 60(c), 123(b); see also sec. 7459(d); cf. David Dung

Le, M.D., Inc. v. Commissioner, supra.

2

Petitioner in its petition alleges that respondent bears the

burden of proof under section 7491 as to all matters inclusive of

the deficiencies, additions to tax, and accuracy-related
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penalties. Respondent in his answer denies this allegation but

in his motion asserts that he has a burden of production under

section 7491(c) as to the additions to tax and accuracy-related

penalties. For the reasons stated below, we conclude that

petitioner has the burden of proof as to issues in this case.

Before section 7491 was added to the Code by the Internal

Revenue Service Restructuring and Reform Act of 1998, Pub. L.

105-206, sec. 3001(c), 112 Stat. 727, a taxpayer who petitioned

this Court generally had the burden of proving that the

Commissioner had erred as to any determination in issue. See

Rule 142(a)(1); see also Welch v. Helvering, 290 U.S. 111, 115

(1933). In certain cases, section 7491 changed this general rule

effective for court proceedings arising from examinations

commencing after July 22, 1998. In relevant part, section 7491

provides:

SEC. 7491. BURDEN OF PROOF.

(a) Burden Shifts Where Taxpayer Produces Credible

Evidence.--

(1) General rule.--If, in any court

proceeding, a taxpayer introduces credible

evidence with respect to any factual issue

relevant to ascertaining the liability of the

taxpayer for any tax imposed by subtitle A or

B, the Secretary shall have the burden of

proof with respect to such issue.

(2) Limitations.--Paragraph (1) shall

apply with respect to an issue only if--
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(A) the taxpayer has complied

with the requirements under this

title to substantiate any item;

(B) the taxpayer has

maintained all records required

under this title and has cooperated

with reasonable requests by the

Secretary for witnesses,

information, documents, meetings,

and interviews; and

(C) in the case of a

partnership, corporation, or trust,

the taxpayer is described in

section 7430(c)(4)(A)(ii).

* * * * * * *

(c) Penalties.--Notwithstanding any other

provision of this title, the Secretary shall have the

burden of production in any court proceeding with

respect to the liability of any individual for any

penalty, addition to tax, or additional amount imposed

by this title.

By their terms, neither section 7491(a) nor section 7491(c)

is applicable here. As to the former, under which the burden of

proof may be placed upon the Commissioner as to factual issues

relevant to a taxpayer’s liability for income, estate, or gift

tax, petitioner has not introduced any “credible evidence with

respect to any factual issue” concerning the deficiencies

determined by respondent. Nor may petitioner do so for purposes

of this motion given that it lacks the power to prosecute or

defend this case. As to the latter, that section also is

inapplicable. Section 7491(c) applies specifically only to the

liability of an “individual for any penalty, addition to tax, or
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additional amount imposed by this title.” See Beiner, Inc. v.

Commissioner, T.C. Memo. 2004-219. Petitioner is not an

individual; it is a corporation.

Accordingly, to reflect the foregoing, 

An appropriate order of

dismissal and decision will be

entered.