If a corporation has its corporate status terminated by the state, does that automatically terminate its corporate status for federal tax purposes?
The IRS says the answer is no, though it depends on the facts and circumstances.
In a private letter ruling, the IRS was asked what happens when a corporation loses its corporate status at the state level but continues to file corporate tax returns. Is this correct, or should the entity revert to filing as a sole proprietor or partnership?
Here’s what the IRS says (emphasis added):
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. Ochs v. United States, 158 Ct. Cl. 115, 119, 305 F.2d 844, 847 (1962). 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 voluntarily or involuntarily terminated. Messer v. Commissioner, 438 F.2d 774, 778 (3d Cir. 1971).
So according to the IRS, if a corporation loses its corporate status at the state level but continues to operate as a corporation, it should continue to file corporate tax returns.
The court cases referenced in the letter ruling make for interesting reading. Here are links:
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