As citizen advocates and award-winning social issue filmmakers, we are seeking your support to help amend an unfair loophole in a NY tax law. Subdivision 7 of Section 203-a of the Tax Law allows corporations to cheat honest small businesses, and, unsuspecting citizens of critical revenue that would otherwise be used to support education, healthcare, public transportation and other essential services upon which citizens, especially the most needy, rely upon.
We are also seeking stories by small business owners who have been adversely affected by the consequences of corporations that have been dissolved by proclamation by New York State for possible inclusion in a film about the subject. (Please send stories to info@NakedEyeProductions.com)
To be specific, New York’s Secretary of State is authorized to dissolve companies who fail to pay state taxes for two consecutive years. Dissolved companies may no longer use their names, and, the benefits of incorporation are relinquished. The business essentially vanishes unless the company pays its back taxes/interest/fines and is reinstated. The company therefore avoids bankruptcy proceedings and is essentially relieved of its debts. Some business owners string creditors along knowing full well that they have no intention of ever making payment. And although illegal, some owners have the temerity to pull equity out of the company while in decline.
To add insult to injury, some business owners transfer their ‘assets’ and resume their core business under the name of a different or similarly named company, which is considered a fraudulent conveyance. With a little investigative effort, an unmistakable premeditative pattern to swindle the government and creditors begins to emerge for business owners who have had other companies similarly dissolved.
Unfortunately, the state rarely prosecutes such companies. It falls upon creditors to either accept the financial loss or to file suit against a business that essentially does not legally exist—an expensive, time consuming and risky alternative.
The following are excerpts of a judge’s edifying ruling regarding one case that involved this tax law:
In “D & W Central Station Alarm Co. Alarm, Plaintiff v Copymasters, Inc., Defendant" (a similar though not identical case to ours), the Judge William D. Friedman wrote:
"As mentioned, herein, subdivision 7 of section 203-a of the Tax Law provides the only statutory provision concerning the after-effects of a dissolution by proclamation under present law and practice. The Department of State will file a certificate of incorporation by anyone if proper on its face, without delving into the past history of the corporation. In the instant case, the Secretary of State by accepting a new certificate of incorporation without any inquiry as the rights of old creditors including the State itself has caused a potential wrong to plaintiff. This court in good conscience cannot allow this practice to work in favor of Copymasters, Inc. in that the corporation would be permitted to avoid its obligations."
"The task of collecting unpaid franchise taxes is the responsibility of the Department of Taxation and Finance. In New York State some 5,000 corporations are dissolved for nonpayment of taxes each year. (Over 250,000 during the depression years.) (See Henn, Corporations.) The circumstances of the instant case and the need to close tax escape loopholes clearly dictate the need for improved communications, and a better working relationship between the Department of State and the Department of Taxation."
"A court cannot allow a litigant to take advantage of its own wrong -- the nonpayment of it of its own corporate franchise taxes."
In a subsequent ruling to enforce the judgment awarded in the case, Judge Friedman noted:
“What happens following the dissolution by proclamation? Either the corporation elects to take if its continuing in business corrective action or it elects to re-incorporate with little or no difficulty and as is seen by this application enjoys the real possibility of avoiding its obligations to its creditors and the avoidance of the payment of its delinquent franchise taxes which caused its dissolution.”
“Such an abusive result should not be sanctioned by our courts (even though legislative and administrative corrective action is obviously called for).”
Please amend this tax law to enhance state revenues and to be fair to small business owners who should no longer be unfairly affected by Section 201A of the NY State Tax Code.