Is a transfer of trucks and equipment to a corporation in exchange for its stock tax-free as an organizational transfer, when it happens long after the corporation was formed?

Plain-English summary

Kleen Brite Laboratories, Inc. transferred trucks, transportation equipment, and DOT and ICC permits to K-B Transport, Inc. on March 8, 1982, receiving K-B's capital stock in return. K-B had filed its certificate of incorporation on July 18, 1980 but then did nothing until January 15, 1982, when it held its first organization meeting (adopted by-laws, opened a bank account, appointed directors) and authorized the stock issued to Kleen Brite. Kleen Brite argued the transfer was tax-free because it happened when the corporation commenced business.

The Department disagreed — the transfer is a taxable retail sale.

• The exclusion is for transfers "upon organization." New York excludes from "retail sale" a transfer of property to a corporation upon its organization in consideration for its stock (Tax Law 1101(b)(4)(iii)(D)).
• Corporate existence begins at filing, not at the first meeting. By regulation, a corporation is deemed to exist when the certificate of incorporation is filed with the Secretary of State. Only transfers made when the corporation commences business, or within a reasonable time after, while still organizing, qualify. Transfers to a dormant corporation that is being activated are not excluded (20 NYCRR 526.6(d)(4)).
• The timing here fails the test. K-B existed from July 18, 1980. The asset transfer occurred 19 months later (March 8, 1982) — not within a reasonable time after the corporation came into existence. Kleen Brite itself said that before the January 15, 1982 organization meeting "neither the incorporators nor the corporation engaged in any activity whatsoever," which shows K-B was dormant before then.
• A cited decision cut the other way for the taxpayer. Kleen Brite pointed to Matter of E.J. Delmonte Corp. (TSB-H-85(34)S) for the idea that organization isn't complete until stock is issued. But in that case the Tax Commission actually held the corporation came into existence on the incorporation date and that a transfer 11 months later was a taxable retail sale — supporting the Department, not Kleen Brite.
• Result. The transfer was made to a dormant corporation being activated, so it is not excluded from "retail sale" and is subject to the applicable state and local sales or use tax.

What this means for you

The property-for-stock exclusion is a narrow, time-sensitive window. It covers assets you put into a corporation at or shortly after it comes into existence, while it is still organizing. It is not an open-ended tax-free way to capitalize a corporation years later.

"Organization" is measured from the incorporation filing, not from when you finally start using the corporation. A shelf or dormant corporation you incorporated and then left idle doesn't reset the clock. Reviving it and moving assets in is treated as a transfer to a dormant corporation — outside the exclusion.

Plan capital contributions of property early. If you intend to contribute vehicles or equipment to a new corporation tax-free in exchange for stock, do it promptly after incorporating while the entity is genuinely organizing — not many months later.

Common questions

Q: I formed a corporation, and later moved equipment into it for stock. Is that tax-free?
A: Only if the transfer happened upon organization — at or within a reasonable time after the certificate of incorporation was filed, while the corporation was still organizing. A transfer long after formation, especially to a corporation that sat dormant, is a taxable retail sale.

Q: When does the corporation legally begin for this rule?
A: When its certificate of incorporation is filed with the Secretary of State, not when it holds its first meeting or issues stock (20 NYCRR 526.6(d)(4)).

Q: My corporation was dormant, and I'm now activating it and putting in assets. Does the exclusion apply?
A: No. Transfers to a dormant corporation being activated are expressly outside the exclusion, so the transfer is subject to sales or use tax.

Citations and references

Tax Law:

• 1101(b)(4)(iii)(D) — excludes from "retail sale" a transfer of property to a corporation upon its organization in consideration for the issuance of its stock

Regulation:

• 20 NYCRR 526.6(d)(4) — corporate existence begins on filing the certificate of incorporation; only transfers made when the corporation commences business, or within a reasonable time after while still organizing, qualify; transfers to a dormant corporation being activated are not excluded (Example 4)

Prior decision cited:

• Matter of E.J. Delmonte Corp., TSB-H-85(34)S — corporation came into existence on its incorporation date; a transfer 11 months later was a taxable retail sale

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a85_50s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(50)S
Sales Tax
November 7, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S850620A

On June 20, 1985 a Petition for Advisory Opinion was received from Kleen Brite
Laboratories, Inc., 600 Oak Street, Rochester, New York 14608.
The issue raised is whether the conveyance of assets to a corporation in exchange for its
capital stock is excluded from the definition of "retail sale", because it was a transfer of property to
a corporation upon its organization.
Petitioner transferred trucks and transportation equipment as well as DOT and ICC permits
to K-B Transport, Inc. (hereinafter K-B) on March 8, 1982. K-B filed a Certificate of Incorporation
with the New York Secretary of State on July 18, 1980, but did not take any further action until
January 15, 1982 when it held its first organization meeting. At that time the corporate officers
adopted by-laws, approved the opening of a bank account, and appointed the Board of Directors.
The Board then authorized the first issue of capital stock to Petitioner as payment for the acquisition
of certain assets.
Petitioner does not dispute that it exchanged property in consideration for the issue of K-B
stock, but contends the transaction is not a retail sale since it was made at the time of the
commencement of the corporate business which, in Petitioner's view, occurred in January 1982.
The Tax Law excludes from the term "retail sale" the transfer of property to a corporation
upon its organization in consideration for the issuance of its stock (Tax Law 1101 [b][4][iii][D]).
Regulations Section 526.6(d)(4) provides that (ii) "Corporate existence is deemed to begin
upon the filing of the certificate of incorporation with the Secretary of State. Only transfers made
at the time of the commencement of the corporate business, or within a reasonable time thereafter,
while the corporation is still in the process of organizing its business, are eligible for the exclusion.
(iii) Transfers made to a dormant corporation, which is being activated, are not eligible for the
exclusion.
Example 4: A corporation filed a certificate of incorporation with the Secretary of State on
February 1, 1974. On March 10, 1976 it is decided that the corporation is to be
activated, and on March 15, 1976 a stockholder transfers tangible personal property ­
a truck - to the corporation, in consideration of the issuance of shares of stock. The
transfer is not excluded from the definition of retail sale, as it was not made upon the
organization of the corporation."

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-85(50)S
Sales Tax
November 7, 1985

The term "commencement of the corporate business," as used in the preceding paragraph,
cannot be taken out of context. The Regulations, by providing a special rule for the transfer of
property to a dormant corporation, evince the intent of the legislature as interpreted by the Tax
Commission to apply the exclusion only to assets transferred to a corporation while it is engaged,
after incorporation, in a continuing process of organizing its structure and operations.
Petitioner cites the Matter of E.J. Delmonte Corp., Decision of the State Tax Commission,
November 9, 1984, TSB-H-85(34)S, in support of its position that corporate organization is not
completed until the authorized capital stock has been issued. However, in that case the tax
commission actually held that the transferee corporation came into existence on the date of
incorporation and that the transfer of property to it eleven months later was a retail sale, because it
was not made upon the organization of the corporation. Consequently, the conveyance of assets by
Petitioner to K-B 19 months after its incorporation was not made within a reasonable time after the
beginning of the corporate existence.
Moreover, as Petitioner states in the Petition that prior to K-B's organization meeting on
January 15, 1982 "neither the incorporators nor the corporation engaged in any activity whatsoever",
K-B's status before that event clearly was that of a dormant corporation.
Thus, Petitioner made a transfer of property to a dormant corporation which was in the
process of being activated. In accordance with the provisions of the Tax Law and Regulations,
quoted above, this transaction is not excluded from the term "retail sale" and is therefore subject to
the applicable state and local sales or use taxes.

DATED: October 15, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.