No Change In Corporation’s Status For Federal Tax Purposes After Dissolution By State

Corporate-SilhouettesA corporation’s dissolution by state administrative action did not end its corporate status for federal tax purposes, the IRS has determined. The IRS reiterated that the question of whether a business entity is to be taxed as a corporation is determined by federal and not state law. The state’s action had no impact on the continuing treatment of the business entity as a corporation for federal tax purposes.

Background

The taxpayer originally incorporated under the laws of State A. Sometime later, the state administratively dissolved the corporation. The state took action to dissolve the taxpayer’s corporate status because the corporation failed to file an annual report and pay an annual franchise tax. The taxpayer was unaware of the state’s action in dissolving its corporate status.

For federal tax purposes, the taxpayer continued to pay all corporate taxes as they came due. The taxpayer also continued to file Form 1120, U.S. Corporation Income Tax Return. The taxpayer subsequently discovered that the state had dissolved its corporate status. The taxpayer reorganized as a corporation in the same state.

IRS analysis

The question of whether a business entity is to be taxed as a corporation is determined by federal and not state law, the IRS first noted. The core test of corporate existence for purposes of federal income taxation is always a matter of federal law. For as long as an entity continues to do business in a corporate manner, despite the fact that its recognized status under state law is terminated, the entity is subject to federal corporate income tax liability. It is irrelevant if termination of corporate status is voluntary or involuntary, the IRS observed.

The IRS determined that the state’s action to dissolve the corporation had no affect for federal tax purposes. The taxpayer’s status as a corporation for federal tax purposes continued after the dissolution.

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