We have all had corporate clients who have liquidated assets and filed all tax returns due through and including the liquidation on a timely basis. Perhaps, however, one of your clients has chosen to maintain the corporation as a shell, not holding any assets or conducting any business. Should we be concerned with formally dissolving the now empty corporation? If the corporation has no assets and therefore has no assets that are at risk to claims for delinquent taxes (even minimum taxes), will the lack of a formal dissolution present a potential liability to corporate officers or directors who fail to seek formal dissolution?

Under New York Tax Law Sec. 203-a, the New York State Tax Commission may certify and transmit to the Department of State a list of corporations that have not filed reports required under the Tax Law during a period of two consecutive years next preceding the date of such certification, whereupon the Secretary of State shall declare such corporations dissolved by proclamation. In the past, we have all heard the suggestion that a formal dissolution might not be necessary, and a dormant shell corporation might simply ignore the dissolution process and allow itself to be dissolved by proclamation.

However, Tax Law Sec. 1803 provides a Class E felony for any person who, with the intent to evade payment of any corporate income tax, fails to file a return or report for three consecutive taxable years, provided there is an unpaid tax liability in excess of $250 with respect to each of those three consecutive taxable years. The corporate minimum franchise tax was equal to $250 when Tax Law Sec. 1803 was enacted and became effective in 1985. When the corporate minimum tax was $250, allowing a dormant shell corporation to be dissolved by proclamation by the Secretary of State may have appeared to be a reasonable course of action in many instances. Now that the minimum corporate franchise tax exceeds $250, one should rightfully question whether the Class E felony under Tax Law Sec. 1803 might be imposed on corporate officers and directors.

Could the officers and directors resign after the liquidation has been completed, leaving the shell corporation without any responsible person who might be liable under Sec. 1803? New York's Business Corporation Law Secs. 703(b) and 715(d) suggest that a director's or officer's term does not expire "until his successor has been elected or appointed and qualified."

Recent discussions with the New York State Department of Taxation and Finance, Tax Enforcement, Criminal Prosecution Division, revealed that the legislative intent behind the $250 threshold in Sec. 1803 was specifically targeted to avoid minimum tax situations, and therefore, consistent with that intent, minimum tax liability in excess of $250 under current law is being treated as excluded from the consequences of Sec. 1803 by the Criminal Prosecution Division. The Tax Department has even proposed a technical correction that would increase the $250 threshold in Sec. 1803 to the new minimum corporate franchise tax levels, but that proposal has not been enacted.

Exercise Due Care

There is always the possibility that some vestige of activity or some asset may remain in a corporation that is thought to have been stripped clean. Logic would appear to dictate that the most sensible course of action is the safer route of formal dissolution. Even though it appears that Sec. 1803 does not present a danger to shell corporations that will eventually be dissolved by proclamation under Sec. 203-a, formal dissolution can be accomplished merely by filing:

1. A Certificate of Dissolution;

2. An attorney's check or certified funds in the amount of $20 payable to the Secretary of State; and

3. Corporate Franchise Tax Reports for all periods up to and including the date that the papers are delivered in Albany, along with checks for the appropriate corporate franchise taxes.

All of the above should be sent to: New York State Department of Taxation and Finance, Processing and Revenue Management Division, Corporate Dissolution Unit/Building 8, W. Averell Harriman State Office Building Campus, Albany, NY 12227.

It usually takes the Department of Taxation and Finance a few months to review the corporate tax situation and determine that all appropriate corporate taxes have been paid, thereby approving the corporation's dissolution and forwarding its approval, the Certificate of Dissolution and the $20 fee to the Secretary of State for filing, Preparation of the Dissolution Resolution, appropriate stockholders' and directors' minutes and the Certificate of Dissolution may require the drafting services of an attorney.

If you decide to skip the formal dissolution and let the corporation dissolve by proclamation, you are counting on the (sometimes inefficient) massive state bureaucracy to accomplish your dissolution for you. In the meantime, you and your client had better be thick- skinned to the aggressive notices and assessments for delinquent taxes that will be received from the New York State Department of Taxation and Finance, and you are betting that the Criminal Prosecution Division will not change its current posture and start prosecuting minimum tax situations under Tax Law Sec. 1803.