Is a corporation dissolved by proclamation that held title to New York real estate subject to franchise tax, and for what period?

Plain-English summary

343 East 18th Street Corporation was formed in New York in 1962 solely to hold title to a Manhattan brownstone and settle litigation between its shareholders (the Lowrys and Ms. Speziali). It took title to the building, was added as a mortgagor on the existing mortgage, and kept a bank account into which one shareholder deposited her share of taxes and expenses. It never filed a franchise tax return and was dissolved by proclamation in 1967 for non-payment. The question: is it subject to Article 9-A franchise tax, and for which years?

Yes -- but only for the years it was actually doing business (1962 through 1976). A dissolved corporation is subject to franchise tax only while it continues to conduct business (Tax Law section 209.3). Under 20 NYCRR 1-2.4(c), a dissolved corporation whose activities are limited to liquidating and merely holding record title as a nominee is not taxable. Following Joseph Barsh and Abe Schwartz, the Department found this corporation's post-dissolution activities (the bank account and the mortgage obligation) were the same as before dissolution, so it kept doing business and exceeded merely holding title. It was therefore taxable from incorporation in 1962 until 1976, when the mortgage was satisfied and it ceased business; the minimal bank-account activity afterward, by itself, was not doing business.

What this means for you

Dissolution by proclamation does not end franchise tax if business continues

Cancelling a corporate charter for unpaid franchise taxes does not stop the franchise tax clock. If the corporation keeps operating the way it did before dissolution, it remains subject to Article 9-A for those years.

Merely holding record title as a nominee is not taxable

A dissolved corporation that only holds record title to New York real estate for the benefit of others, and is otherwise inactive, is not "doing business" under section 209.3 and 20 NYCRR 1-2.4(c).

The taxable period runs only until business actually stops

Here the line was 1976 -- when the mortgage in the corporation's name was satisfied and active operations ended. Keeping a near-dormant bank account open after that did not, by itself, extend the taxable period.

Common questions

Q: Does dissolving a corporation by proclamation end its franchise tax liability?
A: No. If the corporation keeps conducting business as before, it stays liable for franchise tax for those years despite the dissolution.

Q: Is a corporation that just holds title to property taxable?
A: Not if it merely holds record title as a nominee and is otherwise inactive; that is treated as liquidation, not doing business.

Q: When did this corporation stop being taxable?
A: In 1976, when the mortgage in its name was satisfied and it ceased its activities; the leftover bank account alone was not enough to keep it doing business.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (Article 9-A franchise tax)
- Tax Law section 209.3 (dissolved corporation that continues to do business)
- 20 NYCRR 1-2.4(c) (dissolved corporation limited to liquidation is not taxable); 20 NYCRR 2-3.1 (tax measured to the date the franchise ceases)
- Joseph Barsh and Abe Schwartz, TSB-A-90(21)C; W.R.H.R.E. Corp., TSB-A-95(4)C; Highmount Medical Building, TSB-A-91(12)C (dissolved nominee title-holder)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a97_2c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(2)C
Corporation Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C961001A

On October 1, 1996, a Petition for Advisory Opinion was received from 343
East 18th Street Corporation, c/o Andrew Lowry, 441 Hawthorne Place, Ridgewood,
New Jersey 07450.
The issue raised by Petitioner, 343 East 18th Street Corporation, is
whether it is subject to franchise tax under Article 9-A of the Tax Law after it
discontinued business operations and after it was dissolved by proclamation.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
The premises located at 343 East 18th Street, New York, New York, Section
3, Block 924 are improved by a four story brownstone dwelling. The ground floor
and first floor were occupied by Alfred Lowry and his wife, Ellen N. Lowry, as
their primary residence from the 1940's until the death of Mr. Lowry on March 9,
1995 and Mrs. Lowry on November 21, 1991. The second floor was and still is
occupied by Edith Speziali as her primary residence since the 1940's.
Ms.
Speziali and the Lowrys were not related. The third floor was rented to various
tenants as a residence.
The owner of the premises died in, approximately, 1956. Mr. and Mrs. Lowry
acquired the premises on August 12, 1958, and a mortgage was issued on that date
naming the Lowrys as the borrowers.
When the premises were acquired by the
Lowrys, the Lowrys and Ms. Speziali had agreed that Ms. Speziali would own her
apartment on the premises although this was not reflected in the deed or any
writing. In 1960, Ms. Speziali brought suit against the Lowrys in Supreme Court,
New York County concerning, among other matters, ownership of the premises. On
June 1, 1962, the Lowrys and Ms. Speziali entered into a settlement agreement
which provided, among other things, that the premises would be conveyed to a
corporation. Ms. Speziali would own 25% of the corporation and have the right
to occupy her apartment; and the Lowrys would own 75% of the corporation and
would occupy their apartment and have the right to rent the additional apartment.
Petitioner was incorporated in New York on June 20, 1962. The shareholders
were Mr. and Mrs. Lowry as joint tenants with right of survivorship for 75 shares
and Ms. Speziali for 25 shares. Petitioner was formed for the sole purpose of
facilitating the settlement of litigation between the shareholders. Under the
settlement agreement, Ms. Speziali would pay 25% of the operating expenses of the
premises and the mortgage and the Lowrys would pay the other 75%.
On June 27, 1962, Petitioner acquired title to the premises located at 343
East 18th Street, New York from the Lowrys. The mortgage obtained by the Lowrys
in 1958 was amended in 1962 to add Petitioner as mortgagor. The Lowrys remained
as mortgagors and co-obligors. The mortgage was satisfied in 1976 and on January
20, 1977 a satisfaction dated September 3, 1976 was recorded.

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Corporation Tax

A bank account was established at Citibank in the name of Petitioner.
Periodically, Ms. Speziali would deliver to the Lowrys her check payable to
Petitioner representing 25% of real estate taxes and other expenses of
maintaining the premises. This check would be deposited in Petitioner's bank
account. Mrs. Lowry was the sole signatory on this account. Periodically, Mrs.
Lowry would draw the amount in the account to pay some of the expenses of
operating the premises. The bank account was closed in 1993.
The real estate taxes, homeowners liability insurance policy and most
expenses incurred in connection with the premises were usually paid by the Lowrys
from their personal account and bills for such expenses were in the name of the
Lowrys. Any and all leases signed with tenants showed the Lowrys as landlords.
All rent was paid to the Lowrys and deposited in their personal accounts. All
income and 75% of the expenses related to the premises were reported on the
personal income tax returns of the Lowrys.
Petitioner was dissolved by proclamation in 1967 for failure to pay
corporate franchise taxes. No corporate franchise taxes had ever been paid and
no corporate franchise tax returns were ever filed. Petitioner states that it
has not conducted any business operations whatsoever.
Section 209.1 of the Tax Law imposes, annually, 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
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.
Section 209.3 of the Tax Law provides that a dissolved corporation which
continues to conduct business shall be subject to tax under Article 9-A of the
Tax Law. Section 1-2.4(c) of the Business Corporation Franchise Tax Regulations
provides further that where the activities of a dissolved corporation are limited
to the liquidation of its business and affairs, the disposition of its assets
(other than in the regular course of business), and the distribution of the
proceeds, the dissolved corporation is not subject to tax under Article 9-A.
Therefore, a dissolved corporation that is merely a record title holder of
real property located in New York State as nominee for the benefit of others, and
is otherwise inactive, is not conducting business in New York State as
contemplated by section 209.3 of the Tax Law. W.R.H.R.E Corp., Adv Op Comm T &
F, March 3, 1995, TSB-A-95(4)C; Highmount Medical Building Inc., Adv Op Comm T
& F, May 7, 1991, TSB-A-91(12)C; Harold S. Sommers, Adv Op Comm T & F, March 15,
1990, TSB-A-90(9)C; Babson Bros. Co. of New York Inc., Adv Op Comm T & F,
September 1, 1988, TSB-A-88(19)C.

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Liquidation is the operation of winding up the corporation's affairs by
settling its debts, realizing upon and distributing its assets. (Wilcox, 43 BTA
931, affd 137 F2d 136; Hellman v Helvering, 68 F2d 763.) However, if normal
corporate operations are continued, not even the cancellation of the corporate
charter for failure to pay the annual state franchise tax will be sufficient to
prove liquidation. (Zimmerman, 31 BTA 754)
In Joseph Barsh and Abe Schwartz, Adv Op Comm T & F, October 12, 1990, TSBA-90(21)C, the petitioners were shareholders in a corporation that was formed in
1972 to hold title to real property. The corporation opened a bank account in
1972 and deposited rents therein. The account was maintained and rents continued
to be deposited into it after the corporation was dissolved by proclamation in
1978.
Also, after dissolution, leases continued to be renewed with the
corporation listed on the leases as landlord. The shareholders reported the
rental income and expense generated from the real property on their individual
income tax returns for the years 1972 through 1987. The corporation continued
to hold record title to the real property until 1988 when the property was
conveyed to the shareholders individually.
The opinion held that the
corporation's activities after dissolution were the same as before dissolution
and that the corporation continued to do business after it was dissolved by
proclamation because its activities exceeded the mere holding of record title of
real property and the liquidating of its business and affairs. The corporation
was held subject to the franchise tax imposed under Article 9-A of the Tax Law
for all taxable years from the date of incorporation to the date the corporation
was liquidated and the real property was transferred to the individuals in 1988.
Petitioner was
This case is similar to Barsh and Schwartz, supra.
incorporated and acquired title to the premises in 1962. In 1962, the existing
mortgage was amended to add Petitioner as a borrower. A bank account was opened
at Citibank and Ms. Speziali's checks for her 25% of the real estate taxes and
other expenses of maintaining the premises were deposited in this account.
Periodically, Mrs. Lowry would draw on the account to pay some of the expenses
of operating the premises.
These activities continued after Petitioner was
dissolved by proclamation in 1967. The mortgage was satisfied in 1976 and the
bank account was closed in 1993.
Since the activities of Petitioner after dissolution were the same as
before dissolution, Petitioner continued to do business after it was dissolved.
Therefore, like Barsh and Schwartz, supra, Petitioner's activities exceeded the
mere holding of record title to real property and the liquidating of its business
and affairs. However, the mere maintenance of the bank account with the minimal
activity in this case does not constitute doing business and is not sufficient
activity, by itself, to subject Petitioner to tax under Article 9-A of the Tax
Law. Accordingly, Petitioner is subject to the franchise tax imposed under
Article 9-A of the Tax Law for all taxable years from the date it was

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incorporated in 1962 to taxable year 1976 when Petitioner ceased to conduct
business activities when the mortgage in Petitioner's name was satisfied.

Dated: January 21, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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