Suspended Corporations Cannot Sue the IRS: The Hidden Trap in Arbor Vita

The Tax Court’s recent decision in Arbor Vita Corporation v. Commissioner, 166 T.C. No. 5 (Mar. 16, 2026), is a stark reminder of a problem most clients never think about until it is too late: a corporation that has lost its good standing under state law may have no legal capacity to defend itself against the IRS, even on a perfectly timed filing.

The Facts, Quickly

Arbor Vita is a California biotechnology corporation that ended up with unpaid federal unemployment tax liabilities. The IRS filed a Notice of Federal Tax Lien and issued a Collection Due Process (CDP) notice under section 6320. Arbor Vita did exactly what we tell clients to do: requested a CDP hearing and, after Appeals issued a Notice of Determination on March 6, 2025, filed a Tax Court petition on April 3, 2025, within the 30-day window in section 6330(d)(1).

There was one problem. California had suspended Arbor Vita’s corporate powers on July 1, 2024 for failure to comply with state filing and tax obligations, and that suspension remained in place through the entire CDP filing window. The corporation did not obtain a Certificate of Revivor until September 17, 2025, months after the filing deadline expired. The IRS moved to dismiss for lack of jurisdiction. The Tax Court agreed.

Capacity Is Separate From Timeliness

Tax Court Rule 60(c) provides that a corporation’s capacity to litigate is determined by the law of the state under which it was organized. Under California law, a suspended corporation may not prosecute or defend an action in court until it is revived. That disability is not a procedural foot-fault; it bears on the corporation’s ability to act as a litigant at all.

The court held that Arbor Vita lacked the capacity to file when it filed and when the 30-day deadline expired. Because capacity is a prerequisite, the petition was treated as a nullity from the moment it was lodged.

Why Revivor Did Not Save the Day

Arbor Vita argued that California’s revivor statute generally restores corporate powers as if the suspension had never occurred, and that revivor should “relate back” and validate the previously filed petition. California courts do sometimes treat revivor as curing earlier procedural defects.

The Tax Court was not persuaded. Drawing on California authority and Ninth Circuit precedent, the court emphasized a key limit: revivor cannot be applied to strip an opposing party of an accrued statute of limitations defense. By the time Arbor Vita revived, the 30-day clock had run and the IRS had a fully vested limitations defense. Allowing revival to relate back would have erased that defense, contrary to California’s own case law.

The Boechler / Equitable Tolling Argument Also Failed, And Why

After Boechler, P.C. v. Commissioner, 596 U.S. 199 (2022), the 30-day CDP deadline is non-jurisdictional and subject to equitable tolling. Arbor Vita tried to invoke that doctrine. The court drew the distinction sharply: equitable tolling extends a deadline for a party who, despite diligence, could not file on time. Arbor Vita filed on time. The defect was that the entity doing the filing had no legal capacity at the moment of filing. There was no late filing to excuse, so there was nothing to toll.

That reasoning is significant. It means capacity defects sit outside the Boechler safety net, even after the Tax Court’s expansion of equitable tolling to other deadlines such as the 90-day employment tax period in Belagio Fine Jewelry, Inc. v. Commissioner, 164 T.C. No. 7 (2025).

Practical Takeaways for Texas Business Owners

If you operate a Texas corporation or LLC, the analog risk is forfeiture of corporate privileges by the Texas Comptroller for failure to file a Franchise Tax Report or pay franchise tax. While the Texas mechanism differs from California’s, the underlying lesson is the same: state-level standing problems can defeat a federal tax challenge before the merits are ever heard.

Concrete steps for any business owner facing or anticipating an IRS controversy: Before any Tax Court filing, and ideally as part of routine year-end housekeeping, confirm that the entity is in good standing in both its state of organization and its state of principal operation. For a Texas entity, that means a Franchise Tax Account Status check with the Texas Comptroller and confirming the entity remains in active status with the Texas Secretary of State.

If your entity is suspended, forfeited, or otherwise not in good standing, treat that as a stop-everything event. Cure the underlying state problem before filing. Filing a Tax Court petition “to protect the deadline” while the entity has no capacity may leave you with nothing to protect. If you receive a Notice of Determination, a statutory notice of deficiency, or any other short-window IRS document, the standing check belongs at the very top of your engagement checklist, before substantive analysis, before drafting, before anything else.

Why North Star Law Firm Approaches These Cases Differently

I am admitted to both the State Bar of California and to practice before federal courts in California and Texas, including the U.S. Tax Court. That bicoastal admission lets us handle entity standing problems in both states without referring out, which matters because tax controversy clients often have entities organized in one state and operating in another. North Star Law Firm offers entity good-standing reviews as part of any new IRS controversy engagement, because losing on capacity before reaching the merits is the worst possible outcome.

Next Steps

If your business is facing an IRS controversy, the first question is not the substantive one, it is whether the entity has the legal capacity to fight. North Star Law Firm represents Texas and California business owners in IRS controversies, Tax Court litigation, and entity good-standing matters.

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Phillip Zagotti, JD/CPA │ 832-384-4526

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Frequently asked questions

What does it mean for a Texas entity to be in good standing?

A Texas entity is in good standing when it has filed all required Franchise Tax Reports with the Texas Comptroller, paid all franchise tax owed, and remains in active status with the Texas Secretary of State. Failure to file or pay can lead to the Comptroller forfeiting the entity’s right to transact business in Texas, and prolonged failures can lead to administrative termination by the Secretary of State.

Can I file a Tax Court petition while my Texas entity is forfeited?

It is risky. Tax Court Rule 60(c) determines a corporation’s capacity to litigate by the law of the state of organization. If Texas law would deny a forfeited entity the right to bring or defend a lawsuit, the Tax Court is likely to follow the same rule. The safer course is to cure the forfeiture before filing, so that capacity exists at the moment of filing.

How do I check if my Texas entity is in good standing?

Run a Franchise Tax Account Status check on the Texas Comptroller website using the entity’s name or 11-digit taxpayer number, and confirm the entity’s active status on the Texas Secretary of State website using the SOSDirect search. Both checks take a few minutes and should be done as part of any new IRS controversy engagement, regardless of how confident the client is about standing.

What is the Texas equivalent of a California Certificate of Revivor?

Texas does not use the term “revivor.” Instead, a forfeited entity reinstates by filing the missing Franchise Tax Reports, paying all franchise tax owed (with interest and penalties), and obtaining a Tax Clearance Letter from the Comptroller. The entity then files an Application for Reinstatement with the Texas Secretary of State. The mechanics are different from California’s, but the underlying concept, cure the state problem before filing federal litigation, is the same.

Can equitable tolling save a petition filed by a forfeited entity?

Probably not, based on Arbor Vita. The Tax Court held that equitable tolling is about extending a deadline for a party who could not file on time despite diligence. A forfeited entity that filed on time but lacked capacity at the moment of filing has not missed a deadline; it has filed a nullity. Equitable tolling has nothing to extend in that scenario.

What if I miss the 30-day or 90-day Tax Court deadline because of standing problems?

If standing problems caused you to miss the deadline outright (as opposed to filing on time without capacity), Boechler and Belagio leave open the possibility of equitable tolling for the missed deadline. The argument is fact-specific and difficult, and the better answer is always to cure the standing problem before the deadline rather than rely on equitable tolling after.

How do I reinstate a Texas entity that has forfeited its rights?

File all delinquent Franchise Tax Reports with the Texas Comptroller, pay franchise tax owed plus interest and penalties, request a Tax Clearance Letter from the Comptroller, and file an Application for Reinstatement with the Texas Secretary of State along with the Tax Clearance Letter. The full process can take several weeks depending on how delinquent the entity is and how quickly the Comptroller processes the clearance request.