If three doctors incorporated only to satisfy a bank's mortgage requirement, believed the corporation was dissolved and the property reconveyed to them personally years earlier, but the corporation was actually dissolved by proclamation years later than believed, for which years does it owe Article 9-A tax?

Plain-English summary

In 1976, three doctors formed an informal partnership to buy land, build a medical office building, and rent suites to physicians (including themselves). When the partners sought a construction loan in 1978, the lending institution insisted the mortgagor be a corporation -- but agreed in advance that once the mortgage was recorded, the corporation could convey the property back to the partners without violating the mortgage. Highmount Medical Building, Inc. was incorporated on May 4, 1978 purely to satisfy this lender requirement; the partners deeded the property to it, and it executed the mortgage the same day. The plan from the start was to operate as a partnership, not a corporation -- so once the building was built and rented, the partners closed the corporate bank account, ran everything as a partnership, and (on their accountant's advice, who certified the corporation "defunct" to the state in 1979) believed Highmount had been dissolved and the property reconveyed to them by the end of 1979.

Neither belief was accurate. Years later, when the partnership itself tried to dissolve, the partners discovered the real property title had never actually been reconveyed, and that Highmount's corporate dissolution didn't happen in 1979 as believed -- it was dissolved by proclamation in September 1982, filed with the County Clerk on November 12, 1982.

The Department's answer splits at the actual (not believed) dissolution date. Tax Law section 209.3 makes a dissolved corporation that continues conducting business still taxable, but Regulations section 1-2.2 exempts one whose activities are limited to holding bare record title as nominee for others while otherwise inactive (following Harold S. Sommers, TSB-A-90(9)C, and Babson Bros., TSB-A-88(19)C). So: for May 4, 1978 through September 1982 -- the entire period Highmount was actually incorporated -- it owes Article 9-A franchise tax, regardless of the partners' good-faith but mistaken belief that dissolution occurred back in 1979. After the actual September 1982 proclamation dissolution, Highmount held the property purely as an inactive nominee and owes no further Article 9-A tax.

What this means for you

Businesses that incorporated solely to satisfy a lender's requirement

If your corporation was formed only because a lender insisted on a corporate mortgagor, and you plan to unwind it afterward, make sure the actual reconveyance and dissolution are legally completed and confirmed -- a mistaken belief that dissolution happened, even one your accountant certified to the state, does not substitute for the corporation's actual legal dissolution date for franchise tax purposes.

Partners operating what they believe is a "defunct" corporation

Verify your corporation's dissolution status directly with the Department/Secretary of State rather than relying on an assumption. Here, the gap between believed dissolution (1979) and actual dissolution (1982) created roughly three extra years of Article 9-A liability.

Accountants and tax professionals

This ruling reinforces that franchise tax liability tracks the corporation's actual legal existence, not the taxpayer's good-faith belief about its status -- an accountant's certification to the state of "defunct" status doesn't itself effect a dissolution.

Common questions

Q: Does a corporation stop owing franchise tax once its owners believe it's dissolved?
A: No -- tax liability runs through the corporation's actual legal dissolution date, regardless of a mistaken earlier belief.

Q: Does holding bare title as nominee after dissolution create ongoing tax liability?
A: No -- once actually dissolved, a corporation that merely holds record title as nominee for others' benefit, with no other activity, isn't "conducting business" and owes no further Article 9-A tax.

Q: Why was the corporation formed here in the first place?
A: Solely because the construction lender required the mortgagor to be a corporation -- the underlying business was always intended to be run as a partnership.

Citations and references

Statutes and regulations:

• Tax Law section 209.1 (Article 9-A franchise tax)
• Tax Law section 209.3 (dissolved corporation continuing business remains taxable)
• Business Corporation Franchise Tax Regulations section 1-2.2 (liquidation-only/nominee exception)
• Business Corporation Franchise Tax Regulations section 2-3.1 (tax through date franchise ceases)

Prior opinions cited in the ruling:

• Harold S. Sommers, TSB-A-90(9)C
• Babson Bros. Co. of New York Inc., TSB-A-88(19)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a91_12c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91(12)C
Corporation Tax
May 7, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C910222A

On February 22, 1991, a Petition for Advisory Opinion was received from Highmount
Medical Building Inc., c/o Michael H. Reeder, 37 Congers Road, P. O. Box 669, New City, New
York 10956.
The issue raised by Petitioner, Highmount Medical Building, Inc., is whether an inactive
corporation that was dissolved by proclamation and that is record title holder of real property in New
York State, is subject to New York State franchise tax under Article 9-A of the Tax Law.
In 1976, three doctors formed an informal partnership for the purpose of acquiring a parcel
of real property, erecting a medical office building thereon, and renting the offices to members of
the medical profession, including themselves and others. In 1976, the three partners individually
acquired the property. In 1978, the three partners obtained a commitment from a bank for a loan for
the construction of the building. The lending institution insisted that the mortgagor be a corporation,
but agreed that after the mortgage was executed and recorded, the corporation had the lender's
permission to convey the title to the real property back to the partners without violating any
provisions of the mortgage.
Petitioner was incorporated on May 4, 1978 to meet the requirement of the lending
institution. On July 6, 1978, the three partners executed a deed for the realty to the corporation and
on the same day, the corporation executed and delivered its mortgage on the realty to the lender.
Using the loan proceeds, the building was constructed and the suites were rented to tenants.
Because it was their plan from inception to own and operate the property as a partnership,
and not as a corporation (the reason they negotiated for and obtained the lender's consent to the
conveyance of the property back to the partners as partners), each and all of the partners believed that
to have, in fact, been done. All leases were executed with the partnership as the landlord. The
corporate bank account was closed. The partners believed Petitioner to have been dissolved. The
partners were advised by the partnership's accountant that Petitioner was dissolved prior to
December 31, 1979. The accountant had, in fact, certified to the State of New York that the
corporation was defunct on November 14, 1979 by returning a Notice of Failure to File Corporation
Tax Form duly noted to that effect.
Ever since 1979, the entire operation of the business of the partners was transacted as a
partnership. Believing Petitioner to have been dissolved, the partners also assumed the realty had
been reconveyed to the partnership. At no time thereafter did Petitioner transact any business
activity whatsoever.
TP-9 (9/88)

-2­
TSB-A-91(12)C
Corporation Tax
May 7, 1991

Upon the attempt to dissolve the partnership it was discovered that the title to the real property had
never been reconveyed, and that the dissolution of Petitioner was not completed in 1979 as believed,
but was dissolved by proclamation in September 1982 with such dissolution filed in the County
Clerk's Office on November 12, 1982.
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.
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. 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.
Accordingly, for the taxable years during which Petitioner was incorporated, May 4, 1978
through September 1982, Petitioner is subject to the franchise tax imposed by Article 9-A of the Tax
Law, pursuant to section 209.1 of the Tax Law. After its dissolution by proclamation in September
1982, Petitioner was merely holding property as nominee for the benefit of others and was not
conducting business in New York State pursuant to section 209.3 of the Tax Law. Therefore,
Petitioner is not subject to tax under Article 9-A after it was dissolved by proclamation.

DATED: May 7, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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