By Zev Landau

New York corporations intending to dissolve should keep in mind that it may be possible to pay franchise taxes and file tax returns even after dissolution. An advisory opinion issued on September 13, 2002, by the Commissioner of Taxation and Finance in response to a petition received from Li’l Cricket Enterprises, Inc. [TSB-A-02 (15) C], illustrated the issues involved. The opinion was favorable for the taxpayer and may help corporate taxpayers avoid paying franchise taxes after dissolution.

Li’l Cricket

The facts of the case are as follows: Barbara Amuso was the principal partner of Li’l Cricket Marina (the partnership). She believed that the partnership was the title owner of real property located in Howard Beach, New York, which she intended to use as security for a loan. The partnership was surprised when the results of the title search showed that the legal owner was a related corporate entity—Li’l Cricket Enterprises, Inc. (the corporation)—and that ownership was uninterrupted since November 22, 1974.

On March 27, 1979, the corporation was dissolved by proclamation of the Secretary of State. (Failure to file tax returns and pay franchise taxes can lead to dissolution by proclamation.) The corporation’s representatives submitted the following facts to support their position that the corporation did not have to file tax returns or pay franchise taxes after March 27, 1979:

The Commissioner agreed with the taxpayers, noting the applicable tax laws and earlier advisory opinions. Section 209.1, Article 9-A, of the New York Tax Law imposes a franchise tax on every corporation for the privilege of exercising its franchise. Only the state can terminate that privilege. In the case of Li’l Cricket, the state dissolved the corporation by proclamation. Taking the franchise privilege away implied that the corporation did not have to file the Franchise Tax Return, but more tests are required before the final determination.

Doing business is one factor that subjects corporations to the franchise tax, and the corporation did not do any business after the dissolution. Moreover, the corporation was a nullity and was viewed as a nonexisting entity since it became the title holder of the property.

The corporation presented sufficient evidence to support the contention that it did not employ capital, that it did not own any property, and that it was absolutely inactive. Title holding was not considered to be an employment of capital when the holder is an inactive nominee corporation. By being viewed as a nonexisting corporation and having no elected officers, it apparently did not have an office in New York.

Please note that section 209.3, Article 9-A, of the Tax Law provides that a dissolved corporation that continues to conduct business shall be subject to the franchise tax. But a dissolved, inactive corporation that is merely a record title of real property located in New York, as a nominee for others, is not considered to be doing business. Note, however, that the regulations allow exceptions. For example, when the activities of a dissolved corporation are limited to the liquidation of its business affairs, the disposition of its assets (other than on ordinary sales in the regular course of business), and the distribution of the proceeds, the dissolved corporation is not subject to tax under Article 9-A.

Analysis

The experience of Li’l Cricket Enterprises, Inc., and other advisory opinions provide useful guidance for taxpayers. Should a corporation dissolve or surrender its authority to do business in New York, all regular business activities must stop.

Taxpayers should be advised not to maintain a business checking account, and not to disburse or collect any businesses payments. Dissolved corporations should not execute documents such as lease agreements or other business contracts. Officers or directors should not be appointed; nor should they or the shareholders hold business meetings. Following this advice can help taxpayers avoid surprising demands by New York for franchise taxes, interest, and penalties.

It is important to note that checking the final return box on the front page of the tax form is not enough to justify nonfiling of franchise tax returns in subsequent years. Publication 110, Instructions for Termination of Business Corporation, describes the procedures required by the Commissioner of Taxation and Finance and the Secretary of State to ensure successful dissolution.