Is a corporation still liable for New York franchise tax and its shareholders liable as transferees, when the corporation was dissolved by proclamation in 1978 but kept a bank account, collected rents, and stayed listed as landlord on renewed leases for another decade before formally transferring the property?

Plain-English summary

Barshabe Realty Corp., incorporated in New York in 1972, was dissolved by Proclamation of the Department of State on September 26, 1978. At dissolution it held title to a three-lot Brooklyn property, part vacant (used rent-free by the shareholders as a used-car lot) and part improved with commercial buildings leased to unrelated tenants. Here's the key fact: the corporation's landlord activities did not stop at dissolution. Barshabe's bank account, opened in 1972 to deposit rents, stayed open and kept collecting rent after dissolution; existing leases were continued and renewed to the same tenants "thereafter with Barshabe listed on the lease as landlord"; and Barshabe continued to hold record title until July 13, 1988, when it finally conveyed the property to its two former shareholders, who immediately resold it to an unrelated buyer for $265,000 (versus Barshabe's original $47,150 basis plus $8,750 of improvements).

The Department drew a sharp line between passive nominee-holding and continued active landlording. A dissolved corporation that is merely a nominee record-titleholder, otherwise inactive, is not "doing business" under section 209.3 (citing Strasser, TSB-A-88(18)C, and Babson Bros., TSB-A-88(19)C -- both cited elsewhere in the corpus as contrast cases). But Barshabe's post-dissolution conduct -- an active rent-collection bank account, ongoing lease renewals as landlord -- was "the same as before dissolution," exceeding both the passive-nominee safe harbor and the narrower liquidation exception (limited to winding up, disposing of assets, and distributing proceeds). Barshabe therefore owed Article 9-A franchise tax for the entire period from its 1972 incorporation through the July 1988 transfer.

Because they weren't good-faith purchasers, the shareholders can't escape via the lien-expiration rule. Ordinarily a franchise tax lien on real property expires after 10 years (section 219), protecting later good-faith purchasers or mortgagees. But the two former shareholders became statutory "transferees" of Barshabe's property under section 1093(a) when they received it in 1988 -- and transferees, unlike arm's-length good-faith buyers, remain personally liable for the corporation's unpaid taxes regardless of the 10-year lien clock. The 1988 transfer itself may still be tax-free (both to Barshabe and the shareholders) if a valid federal Internal Revenue Code section 333 liquidation election was properly made, since New York's Article 9-A tax base starts from federal taxable income. The Department declined to fix the actual dollar amount of tax, interest, or penalties owed, since that's outside an advisory opinion's scope, and also declined to address the separate New York City General Corporation Tax, which the Commissioner isn't authorized to rule on.

What this means for you

Owners of long-dissolved corporations still holding rental property

Formal corporate dissolution doesn't stop the tax clock if the corporation's day-to-day activities continue unchanged -- collecting rent, renewing leases as landlord, running a bank account for the business. To fall inside the passive nominee-holder safe harbor, a dissolved corporation genuinely has to stop operating, not just lose its charter.

Shareholders who inherit or receive property from a dissolved corporation

If you become a "transferee" of a dissolved corporation's property (rather than an arm's-length good-faith purchaser), the standard 10-year franchise-tax-lien expiration doesn't shield you -- you can remain personally liable for the corporation's accrued taxes going back to whenever it stopped being a passive nominee.

Accountants and tax attorneys handling legacy or "zombie" corporations

This is a useful companion to the passive-nominee cases (Strasser, Babson Bros., and later the Highmount Medical Building line) -- read them together to see exactly where the line falls between a dormant, merely-titleholding shell and a corporation that keeps functioning under a different name. A properly made federal IRC section 333 election can still make the eventual liquidation transfer tax-free even after years of continued post-dissolution activity.

Common questions

Q: Does dissolving a corporation automatically stop its New York franchise tax obligations?
A: No -- only if its post-dissolution activities are limited to passive nominee-holding or genuine winding-up/liquidation. Continuing to actively manage rental property (collecting rent, renewing leases as landlord) keeps the franchise tax running.

Q: Can shareholders avoid liability for a dissolved corporation's back taxes by waiting out the 10-year lien period?
A: Not if they're "transferees" who received the corporation's property (as opposed to good-faith arm's-length purchasers) -- the 10-year lien-expiration protection doesn't apply to transferees.

Q: Is the eventual transfer of property from a dissolved corporation to its shareholders automatically taxable?
A: Not necessarily -- if a valid federal IRC section 333 liquidation election was made, the transfer can be tax-free for both the corporation and the shareholders, since New York's Article 9-A base starts from federal taxable income.

Citations and references

Statutes and regulations:

• Tax Law section 209.1, 209.3 (Article 9-A tax; dissolved corporation continuing business)
• Business Corporation Franchise Tax Regulations section 1-2.2 (liquidation-only activity exception); section 2-3.1 (tax through date franchise ceases); section 7-4.2, 7-4.3 (lien attachment and release)
• Tax Law section 1092(j) (franchise tax lien); section 219 (10-year lien expiration, good-faith purchaser/mortgagee exception)
• Tax Law section 1093(a) (transferee liability)
• Internal Revenue Code section 333 (protective liquidation election)

Prior opinions and cases cited:

• Eugene Strasser, Adv Op St Comm T&F, September 1, 1988, TSB-A-88(18)C
• Babson Bros. Co. of New York Inc., Adv Op St Comm T&F, September 1, 1988, TSB-A-88(19)C
• Costello v New York State Department of Taxation and Finance, 129 Misc 2d 285, affd 125 AD2d 775
• Wilcox, 43 BTA 931, affd 137 F2d 136; Hellman v Helvering, 68 F2d 763; Zimmerman, 31 BTA 754

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a90_21c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(21)C
Corporation Tax
October 12, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C900608C

On June 8, 1990, a Petition for Advisory Opinion was received from Joseph Barsh and Abe
Schwartz, sole shareholders of Barshabe Realty Corp. now dissolved, c/o Patrick W. Hennessey,
Esq., 233 Seventh Street, P.O. Box 177, Garden City, New York 11530.
The issues raised by the Petitioners, Joseph Barsh and Abe Schwartz are:

1. Whether Barshabe Realty Corp. (hereinafter "Barshabe"), which was dissolved by
   proclamation on September 26, 1978, had an obligation to file New York State corporate franchise
   tax returns or New York City general corporation tax returns or to pay any New York State c6rporate
   franchise tax or New York City general corporation tax for any year after calendar year 1978.
2. Whether the lien on real property owned by Barshabe on the date of its dissolution has
   expired for all years through 1979 pursuant to section 219 of the Tax Law.
3. Whether Petitioners, the former shareholders and officers of Barshabe are now or have
   ever been personally liable for any New York State corporate franchise taxes.
4. Whether the formal record transfer of real property from Barshabe to Petitioners on July
   13, 1988 is tax free to Barshabe and to Petitioners on grounds that the transfer was a formality only
   with no substantive effect because equitable title to the real property passed to Petitioners on
   September 26, 1978, the date the corporation was dissolved. In the alternative, was the transfer tax
   free to all parties because of the existence of a valid election pursuant to section 333 of the Internal
   Revenue Code.
5. Whether the transfer of equitable title to Petitioners on September 26, 1978 produced
   taxable income to either Barshabe or the Petitioners since the property's adjusted basis exceeded its
   fair market value on that date.
6. If there are corporate taxes due, whether the tax plus interest and penalties, if any, can be
   fixed in amount.
   Barshabe was incorporated in New York on February 15, 1972. It was dissolved by
   Proclamation of the Department of State of the State of New York on September 26, 1978.
   On the date of its dissolution, Barshabe held record title to real property known as 5901-5911
   Church Avenue, Brooklyn, New York (County of Kings, Section 15, Vol. 2, Block 4685, Lots 39,
   37 and 36).
   TP-9 (9/88)

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Corporation Tax
October 12, 1990
The entire plot was 100 feet by 100 feet. Lot 39. 60 feet by 100 feet, is vacant land and was used by
Petitioners as a used car lot. Barshabe did not own or operate the used car business and the
stockholders paid no rent to Barshabe. Lots 36 and 37 were each improved by commercial structures
which were rented from time to time to unrelated third parties. Barshabe opened a bank account in
1972 and deposited rents therein. This account stayed open for this purpose after dissolution. It had
leases in its name on the date of dissolution. The leases were continued and renewed to the same
tenants thereafter with Barshabe listed on the lease as landlord. Barshabe continued to hold record
title to the real property until July 13, 1988 when the property was conveyed to Petitioners. On that
same day Petitioners sold the parcel to an unrelated third party for $265,000. The initial cost basis
of the property to Barshabe was $47,150. Improvements to the buildings costing $8,750 were made
between 1972 and 1988. Eighty percent of the original basis and all of the cost of the improvements
were allocated to the structures.
The following was the annual rental income for these properties:
YEAR
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988

LOT 39
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

LOT 37
$ 0
0
0
0
0
3,000.00
3,000.00
3,000.00
3,000.00
3,600.00
3,600.00
3,600.00
3,600.00
3,600.00
4,800.00
3,600.00
0

LOT 36
$2,000.00
2,000.00
2,000.00
2,000.00
2,000.00
2,000.00
2,000.00
2,000.00
2,000.00
2,340.00
2,340.00
2,340.00
2,340.00
2,340.00
2,340.00
0
0

TOTAL
$2,000.00
2,000.00
2,000.00
2,000.00
2,000.00
5,000.00
5,000.00
5,000.00
5,000.00
5,940.00
5,940.00
5,940.00
5,940.00
5,940.00
7,140.00
3,600.00
0

In each year, depreciation, real estate taxes and other expenses exceeded gross rental income,
therefore, there was no taxable income in any year.
Barshabe never filed a corporate tax return of any type. Petitioners reported the rental income
and expense generated from the real property on their individual income tax returns for the years
1972 through 1987. There was no rental income in 1988.
On September 26, 1978, the date of Barshabe's dissolution, the fair market value of the real
property owned by Barshabe was less than its adjusted basis because the property was encumbered
by long-term leases which generated no net income and little or no cash flow. In 1988, because of

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Corporation Tax
October 12, 1990
the explosion in real estate values from 1980 through 1988, the fair market value of the real property
($265,000) far exceeded its value as rental property even though Lots 37 and 36 were still
encumbered by unfavorable leases.
In 1988, Barshabe made a protective election under section 333 Internal Revenue Code
which, if Barshabe is deemed still in existence, would make the transfer of the real property from
Barshabe to Petitioners completely tax free. The sale of the real property by Petitioners to the third
party was reported by Petitioners on their individual tax returns.
Section 209.1 of the Tax Law imposes a franchise tax on domestic and foreign corporations
for the privilege of exercising its corporate 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.
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.
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. Section 1-2.2 of the 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. Eugene Strasser, Adv
0p St Comm T & F, September 1, 1988. TSB-A-88(18)C and Babson Bros. Co. of New York Inc.,
Adv Op St Comm T & F, September 1, 1988, TSB-A-88(19)C.
Federal courts have defined a complete liquidation as 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)
Herein, Barshabe opened a bank account in 1972 and deposited rents therein. This account
was maintained and rents continued to be deposited into it after dissolution on September 26, 1978.
In addition, after dissolution, leases continued to be renewed with Barshabe listed on such leases as
the landlord. Barshabe continued to hold record title to the real property until July 13, 1988 when
the property was conveyed to Petitioners. Consequently, Barshabe's activities after dissolution were
the same as before dissolution.

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Corporation Tax
October 12, 1990
Accordingly, Barshabe continued to do business after it was dissolved by proclamation on
September 26, 1978 because its activities exceeded the mere holding of record title of real property
and the liquidating of its business and affairs.
Therefore, Barshabe is subject to the franchise tax imposed under Article 9-A of the Tax Law
for all taxable years from February 15, 1972, the date of-incorporation, to July 13, 1988 when
Barshabe was liquidated and the real property was transferred to Petitioners.
Pursuant to section 1092(j) of the Tax Law, the tax imposed under Article 9-A of the Tax
Law becomes a lien on the date the report is required to be filed. Section 219 of the Tax Law
provides that, in certain cases, the lien of such tax expires after 10 years.
Section 7-4.2 of the Regulations which relates to section 1092(j) and section 219 of the Tax
Law provides that:
(a) The tax (including additions to tax, penalties and interest) imposed by article g-A
becomes a lien from the date on which the report is required to be filed (without
regard to any extension of time for filing such report), except that the tax becomes
a lien no later than the date the taxpayer ceases to be subject to the tax imposed by
article 9-A or the date the taxpayer ceases to 'exercise its franchise, or do business or
employ capital, or own or lease property in this State in a corporate or organized
capacity or maintain an office.
(b) Each such tax is a lien and binding on the real and personal property of the
taxpayer, or of a transferee liable to pay the tax, until the tax is paid in full, subject
to the following exceptions:
(1) The lien of such taxes after the expiration of 10 years from the date they became
due and payable is no longer a lien as to the following:
(i) owners of real estate who would be purchasers in good faith but for such taxes,
additions to tax, penalties or interest; and
(ii) mortgagees of real estate who would be holders in good faith but for such taxes,
additions to tax, penalties or interest.
These limitations do not apply to any transfer from a corporation subject to tax to a
person or corporation subject to tax with intent to avoid payment of any taxes, or
where with like intent the transfer is made to a grantee corporation subject to tax, or
any subsequent grantee corporation subject to tax, controlled by such grantor or
which has any community of interest with it, either through stock ownership or
otherwise ....
Section 1093(a) of the Tax Law provides that:

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Corporation Tax
October 12, 1990
The liability, at law or in equity, of a transferee of property of a taxpayer for any tax,
additions to tax, penalty or interest due the [tax commissioner]'under this article or
under article ... nine-a ... shall be assessed, paid, and collected in the Same manner
and subject to the same provisions and limitations as in the case of the tax to which
the liability relates, except that the period of limitations for assessment against the
transferee shall be extended by one year for each successive transfer, in order, from
the original taxpayer to the transferee involved, but not by more than three years in
the aggregate. The term transferee includes, in case of successive transfers, donee,
heir, legatee, devisee, distributee, and successor by merger, consolidation or other
reorganization.
The definition of transferee includes the shareholder distributee of property from a dissolved
corporation. Costello v New York State Department of Taxation and Finance 129 Misc 2d 285,
affmd 125 AD2d 775. Herein, Petitioners became transferees on July 13, 1988, pursuant to section
1093 of the Tax Law, and as transferees, Petitioners are therefore liable for the taxes imposed on
Barshabe.
Accordingly, the 10 year expiration of a tax lien does not apply to Barshabe and Petitioners.
The 10 year statute of limitations contained in section 219, would only apply to-a purchaser in good
faith of the real estate that is subject to the lien. While Petitioners are transferees, they are not
purchasers in good faith.
The formal record transfer of real property from Barshabe to Petitioners on July 13, 1988 was
more than a formality with no substantive effect. The transfer constituted the liquidation of
Barshabe. If a valid federal election was made pursuant to section 333 of the Internal Revenue Code,
the transfer of the real property would be a tax free transfer for New York purposes. The starting
point for computing entire net income under Article 9-A of the Tax Law is federal taxable income
and the starting point for computing New York taxable income for an individual under Article 22
of the Tax Law is federal adjusted gross income. Therefore, whatever treatment was accorded the
liquidation of Barshabe for federal income tax purposes would apply for New York purposes. If, for
any taxable year, a federal income tax return is not filed for Barshabe, the starting point for purposes
of Article 9-A, is federal taxable income computed as if Barshabe had properly filed a federal income
tax return.
Section 7-4.3 of the Regulations, which relates to section 1092(j)(2) of the Tax Law, provides
that:
The [Tax Commissioner] may, upon application made to it on form TC-13 and the
payment of a fee of $50 by certified check, release any real property from the lien of
any tax due or to become due under article 9-A, provided that payment is made to the
[Tax Commissioner] of such sum as it deems adequate consideration for such release,
or deposit be made of such security or such bond to be filed as the [Tax
Commissioner] deems proper to secure payment of such tax. The application for
such release must be accompanied by two copies of an accurate description

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Corporation Tax
October 12, 1990
of the property to be released, together with such other information as the [Tax
Commissioner] may require. The release of lien may be recorded in the office in
which conveyances of real estate are entitled to be recorded.
It is not within the scope of an advisory opinion to fix in amount the tax, interest and­
penalties that is owed by Barshabe and or Petitioners.
Finally, section 171, paragraph twenty-fourth of the Tax Law provides that the Commissioner
of Taxation and Finance shall "render advisory opinions with respect to taxes administered by such
commissioner "The New York City General Corporation Tax is not among the taxes administered
by the Commissioner of Taxation and Finance. Accordingly, the Commissioner is not authorized to
issue an advisory opinion with respect to such tax and no opinion is rendered herein with respect to
such tax.

DATED: October 12, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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