Hi,

Here are the facts:

1) An S-corp that did not file Federal or State tax returns since 2004.
2) The S-Corp was dissolved by NYS in 2009.
3) The S-Corp had income and expenses in 2010.
4) NYS agent said that dissolution by administration does not stop taxability as opposed to voluntary dissolution, however there is nothing that can be done by NYS since there are no assets on the Corporate name.
5) My understanding is that dissolution by the state does not dissolve the corporation for federal tax purposes.

What should I advise my client to do?


Thanks in advance,

GF

GF:

In the state of New York, a corporation that is dissolved by administrative action may continue to conduct business for the purpose of winding up its affairs, and as long as the corporation has not requested voluntary dissolution it is still obligated to file its annual return and pay the minimum tax.

If your client has no intention of continuing in business in New York State I would suggest that you advise him to file for voluntary dissolution of the corporation.

If the corporation was in existence during the years 2005-2009 then the corporation should have filed federal and state returns for those years even if the corporation had no income. At a minimum I suggest you advise your client to file federal and state returns for the corporation for 2010. It would probably be useful for your client to consult with a tax attorney (assuming that you are not one) to determine his best course of action for 2005-2009.

Thanks for the quick response, I actually sent him to my tax attorney for advice. The attorney said he can just walk away from the corporation. I disagree as he has been doing business in 2010 & 2011, 2004-2009 had no activity. I think that all years should be filed, as that would be the ethical thing to do.

GF

“1) An S-corp that did not file Federal or State tax returns since 2004.”---> If your client does not file them, he will probably be subject to penalties since 3/15/2005 up to 2009 or 2010, depending on the situation.; even if he does not owe any taxes, the IRS will impose a late fee of $89 per month (or for part of a month) for 2009 if his 1120S form is late, or does not include all the required information. The $89 fee will also be multiplied by the total number of shareholders in the corporation during any part of the corporation's tax year. The late filing penalty for S-Corp returns for taxation year, 2008 was $85/month per shareholder.If I assume that there is only one shareholder, then the penalty for 2008 will be $1,700[$85*20=$1,700 if the return is filed by 10/15/2010 Unless an extension was filed for the TY08 1120-S. The late filing penalty for S-Corp returns for 2009 was $89/month per shareholder. This means the penalty for 2009 will be $801; $89*9=$801 if the return is filed by 11/15/2010 Unless an extension was filed for the 2009 1120-S and assuming one shareholder). Seriously, the penalty for late filing a 2010 1120-S will jump to $195/month per shareholder. However, the IRS also states that No penalty will be imposed if the corporation shows that the late filing was due to reasonable cause. Your client May need to contact the IRS.
“2) The S-Corp was dissolved by NYS in 2009.”---> Your client would be required to file his 2009 Corporate tax return.
“3) The S-Corp had income and expenses in 2010.”---> As long he receives the dissolution, I am NOT sure if this is the case, then he needs to file his tax returns and indicates Final Return on both the Federal and NY State tax returns. In New York State, the corporation will be dissolved and its existence ended on the date the Certificate of Dissolution is filed by the Department of State.
“4) NYS agent said that dissolution by administration does not stop taxability as opposed to voluntary dissolution, however there is nothing that can be done by NYS since there are no assets on the Corporate name.”--->I guess so.
“5) My understanding is that dissolution by the state does not dissolve the corporation for federal tax purposes.”---> I think that for federal tax purposes, the corporation should file a final return and issue final K-1s to the shareholder(s).
“What should I advise my client to do?”--> I guess he needs professional legal help from a tax attorney

Dear Wnhough,

Thank you for that well written reply. I did the penalty calculations, there are also penalties hanging on NYS and NYC. However, I can save my client 250 per year on the NYS side. It turns out that the S-Corp is a C-Corp (no one elected S status for NYS), hence the failure to furnish the shareholder a NYS k1 penalty of 25 per month can be avoided, by filing a CT-3 instead of a CT-3S. The total damage is around 8-10K with penaqlties and interest.

The shareholder was signing sales tax returns each year (as his prior accountant instructed him to do), but I don't think that the reasonable cause will work because the shareholder was still responsible for knowing what forms were being signed.

Before filing a final NYS tax return, he would need to reinstate the corporation and pay the $55 fee (as per NYS agent), maybe we could file a final return for 2010, but what to do with the activity in 2011?

Thanks so much for your time. I am sure people will also benefit from these posts.

“I did the penalty calculations, there are also penalties hanging on NYS and NYC. However, I can save my client 250 per year on the NYS side.”--> Right, agreed.
“ It turns out that the S-Corp is a C-Corp (no one elected S status for NYS), hence the failure to furnish the shareholder a NYS k1 penalty of 25 per month can be avoided, by filing a CT-3 instead of a CT-3S. The total damage is around 8-10K with penaqlties and interest.”-->I guess it depends; New York S corporation treatment is elective, not automatic. In some states, the federal election automatically secures state S corporation treatment. In New York, the shareholders must make a separate New York S election. If the separate New York election is not made, the corporation is treated as a C corporation for New York State tax purposes. Good for him though.
“The shareholder was signing sales tax returns each year (as his prior accountant instructed him to do), but I don't think that the reasonable cause will work because the shareholder was still responsible for knowing what forms were being signed. “--> I see.
“Before filing a final NYS tax return, he would need to reinstate the corporation and pay the $55 fee (as per NYS agent), maybe we could file a final return for 2010,”-->That is what I think.
“ but what to do with the activity in 2011?”--> Returns need to be filed until the corporation’s charter is dissolved, liquidated, or withdrawn through the NYS Secretary of State.

@Wnhough for 2007 I figure the calculation would be the following in total fees due, unless we show reasonable cause:

2007: $85 per month each month up to a max of 12 moths = $1,020
Late file penalty would be = $100
Late pay penalty @1/2 1% = $6
K1 penalty = $50

Total $1,176

source:

http://www.irs.gov/pub/irs-prior/i1120s--2007.pdf

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