Is a corporation that filed a 'final' return and stopped operating, but was never formally dissolved, still subject to Article 9-A franchise tax for the years it remained incorporated?

Plain-English summary

Vi-Toria Building Corp. asked whether it is subject to Article 9-A franchise tax for taxable years 1981 through 1991.

The facts: Vi-Toria was incorporated in 1964 and its only asset was a parcel of real estate. After the shareholder died in 1980, his widow inherited the property and the stock. On her advisers' advice, she meant to dissolve the corporation and take the property individually. The corporation's accountant prepared the 1980 return marked "final," the ending balance sheet showed no assets or liabilities, the corporation stopped collecting rents, paying bills, and signing leases, and the widow thereafter managed the property and reported its income on her individual returns. But through miscommunication, the dissolution papers were never filed.

The answer: yes, it owes the tax for all those years. Section 209.1 imposes the franchise tax for the privilege of exercising a corporate franchise -- existing in corporate form, owning property in a corporate capacity. Under 20 NYCRR 2-3.1, a domestic corporation pays tax up to the date it ceases to possess a franchise. Because Vi-Toria was never dissolved -- neither voluntarily nor by proclamation -- it kept its corporate existence and is subject to Article 9-A for every taxable year it remained incorporated, including 1981 through 1991, despite being inactive. The Department reached the same result on similar facts in Highmount Medical Building Inc. (TSB-A-91(12)C).

What this means for you

Filing a "final" return does not dissolve a corporation

Marking a return final, zeroing the balance sheet, and ceasing operations do not end the corporation's existence. Only formal dissolution (voluntary or by proclamation) does -- and until then the franchise tax keeps running.

An undissolved corporation owes franchise tax even while idle

The tax is for the privilege of being a corporation, so an inactive but still-existing corporation owes at least the minimum tax each year.

Dissolution is the dividing line

Compare a corporation actually dissolved by proclamation that then merely holds bare title as nominee -- it can escape tax once it stops doing business. Here, no dissolution ever occurred, so no such relief applies.

Common questions

Q: We filed a final return and stopped operating -- are we off the hook? A: No. Without formal dissolution the corporation still exists and owes franchise tax for each year it remains incorporated.

Q: The property's income was reported on an individual return -- does that help the corporation? A: No. The individual reporting does not dissolve the corporation; the corporation remains the taxpayer until its franchise ends.

Q: How could the corporation have avoided the tax?
A: By actually completing dissolution. A dissolved corporation that stops doing business is treated differently from one that merely intended to dissolve.

Citations and references

Statutes, regulations, and authorities:

• Tax Law section 209.1 (franchise tax on corporations)
• 20 NYCRR 2-3.1 (tax measured up to the date the franchise ceases)
• Highmount Medical Building Inc., TSB-A-91(12)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a92_8c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (8) C
Corporation Tax
April 6, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C920127E

On January 27, 1992, a Petition for Advisory Opinion was received from Vi-Toria Building Corp., 26-41 202nd Street, Bayside, New York 11361. The issue raised by Petitioner, Vi-Toria Building Corp., is whether it is subject to tax under Article 9-A of the Tax Law for taxable years 1981 through 1991. Petitioner was incorporated in 1964 with its only asset a parcel of real estate. The owner of the corporate shares was Mr. Ignzaio Testani. The property was operated by Petitioner from 1964 through July 10, 1980. On July 10, 1980 Mr. Testani died. Mrs. Testani inherited all of Mr. Testani's assets which included the property as well as the corporate stock. Her attorney and accountant advised her to dissolve Petitioner and distribute the property to herself as an individual. Mrs. Testani agreed and entrusted her accountant and attorney with filing the appropriate papers. Through miscommunication, filing of the appropriate dissolution papers was apparently overlooked. The corporation income tax return for 1980 was prepared by the accountant indicating a final filing. The ending balance sheet indicated Petitioner had no assets and no liabilities. The property was no longer depreciated by Petitioner. Petitioner stopped collecting rents, paying bills, signing leases with tenants and closed its checking account. As of July 10, 1980, Mrs. Testani managed the property and received the rents as an individual. She reported the activity of the property on her individual income tax returns. She executed leases as an individual owner. Section 209.1 of the Tax Law imposes a franchise tax on every corporation for the privilege of exercising its franchise, or of doing business, or of employing capital, or of owning or leasing property in New York State in a corporate or organized capacity, or of maintaining an office in New York State for all or any part of each of its fiscal or calendar years. Section 2-3.1 of the Business Corporation Franchise Tax Regulations (hereinafter "Regulations") provides that every domestic corporation is required to pay a tax measured by entire net income (or other applicable basis) up to the date on which it ceases to possess a franchise. In Highmount Medical Building Inc., Adv 0p Comm T&F, May 7, 1991, TSB-A-91(12)C, the Commissioner advised under similar circumstances, that the petitioner was subject to tax under Article 9-A of the Tax Law for all taxable years until it was dissolved by proclamation. TP-9(9/88)

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TSB-A-92 (8) C
Corporation Tax
April 6, 1992

Herein, Petitioner has not been dissolved, either by voluntary dissolution or dissolution by proclamation. Therefore, pursuant to section 209.1 of the Tax Law and section 2-3.1 of the Regulations, Petitioner is subject to the franchise tax under Article 9-A of the Tax Law for all taxable years in which it is incorporated, including taxable years 1981 through 1991.

DATED: April 6, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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