Are FCC-licensed personal communications services a local telephone business under section 184, and does section 184 reach such a business conducted through a partnership with corporate partners?

Plain-English summary

Sprint Spectrum LP asked (1) whether personal communications services (PCS) it provides in New York under FCC licenses are a "local telephone business" within section 184 of Article 9 (the additional franchise tax on transportation and transmission corporations), and (2) if so, whether section 184 applies when that business is conducted through a partnership that has one or more corporate partners.

The Department held:

• Issue 1 -- PCS is a local telephone business: "Telecommunication services" has the same meaning in section 184 as in section 186-e.1(g) (telephony, including equipment and services provided with it). PCS lets customers transmit and receive telecommunications intra-LATA or inter-LATA; conducting that business constitutes a "local telephone business" under section 184.
• Issue 2 -- partnership vs. corporate partners: Sprint Spectrum LP is a partnership and is not subject to Article 9-A or sections 183/184 unless it is treated as a corporation under IRC section 7704 (publicly traded partnerships) -- which it is not. So the partnership itself is not taxed. But where a partnership conducts a telephone business, each corporate partner is also engaged in that business (following Partners of Buffalo Telephone; 20 NYCRR 1-3.2(a)(6)). A corporate partner that participates in management (more than a passive investor, distinguishing GTE Spacenet) is engaged in the partnership's business: if principally engaged in a telephone business it is subject to section 183, and if also principally engaged in a local telephone business it owes the additional section 184 tax. A passive-investor corporate partner is not.

What this means for you

Wireless/PCS counts as a "local telephone business"

FCC-licensed personal communications services are telecommunication services and a local telephone business under section 184 -- the same definition that governs the section 186-e excise tax applies.

The partnership is a conduit; the corporate partners are where the tax lands

A partnership is not itself subject to sections 183/184 (absent IRC 7704 corporate treatment). Instead, corporate partners that actively participate in the partnership's telephone business are taxed -- section 183 if principally engaged in a telephone business, plus section 184 if principally engaged in local telephone business.

Passive corporate investors escape

A corporate partner that is a mere passive investor and does not take part in day-to-day operations is not considered engaged in the partnership's telephone business and is not subject to sections 183/184 on that basis.

Common questions

Q: Are FCC-licensed personal communications services a local telephone business?
A: Yes. PCS are telecommunication services and constitute a local telephone business under section 184.

Q: Is the partnership itself subject to sections 183 and 184?
A: No, unless it is treated as a corporation under IRC section 7704. Sprint Spectrum LP is not, so the partnership is not taxed.

Q: When does a corporate partner owe section 183/184?
A: When it actively participates in the partnership's telephone business and is principally engaged in it -- section 183, plus section 184 if principally engaged in local telephone business. A passive-investor partner does not.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 183 (Article 9 franchise tax on transportation and transmission corporations)
- Tax Law section 184 (additional franchise tax; local telephone business)
- Tax Law section 184.1 (definition of local telephone business)
- Tax Law section 186-e.1(g) (definition of telecommunication services)
- Internal Revenue Code section 7704 (publicly traded partnerships taxed as corporations)
- 20 NYCRR 1-3.2(a)(6) (corporate partner deemed engaged in partnership's business)
- Sprint Spectrum LP, TSB-A-00(18)C (Nov. 20, 2000)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a00_18c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(18)C
Corporation Tax
November 20, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C000706A

On July 6, 2000, a Petition for Advisory Opinion was received from Sprint Spectrum LP,
6500 Sprint Parkway, MS: KSOPHL0512 - 5ATTX, Overland Park, Kansas 66251.
The issues raised by Petitioner, Sprint Spectrum LP, are:
(1) Whether personal communications services provided in New York under licenses
granted by the Federal Communications Commission (“FCC”) are a “local telephone
business” within the meaning of section 184 of Article 9 of the Tax Law imposing
the additional franchise tax on transportation and transmission corporations and
associations.
(2) Assuming the personal communications services referred to in Issue (1) are a
“local telephone business” for purposes of section 184 of the Tax Law, whether
section 184 applies to such business when conducted through a partnership which has
one or more corporate partners.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner provides broadband personal communications services (“PCS”) under licenses
granted to it by the FCC. These licenses permit Petitioner to provide to its subscribers wireless
communications in New York and other states throughout the nation. Petitioner began providing
its New York subscribers with PCS on or about December 27, 1996. Subscribers to Petitioner’s
wireless service are generally capable of making or receiving telecommunications that either (1)
originate and terminate within the same local access and transport area (“LATA”) or (2) originate
in one LATA and terminate in a different LATA.
Discussion
Issue 1
Section 184.1 of Article 9 of the Tax Law, provides that the term "local telephone business"
means the provision or furnishing of telecommunication services for hire wherein the service
furnished by the provider thereof consists of carrier access service or the service originates and
terminates within the same local access and transport area ("LATA"). It also provides that the term
"telecommunication services" has the same meaning for purposes of section 184 as for section 186-e
of the Tax Law.

-2­
TSB-A-00(18)C
Corporation Tax
November 20, 2000

Section 186-e.1(g) of the Tax Law defines "telecommunication services" as "telephony or
telegraphy, or telephone or telegraph service, including, but not limited to, any transmission of voice,
image, data, information and paging, through the use of wire, cable, fiber-optic, laser, microwave,
radio wave, satellite or similar media or any combination thereof and shall include services that are
ancillary to the provision of telephone service ... and also include any equipment and services
provided therewith. Provided, the definition of telecommunication services shall not apply to
separately stated charges for any service which alters the substantive content of the message received
by the recipient from that sent."
In this case, Petitioner provides PCS under licenses granted by the FCC. Petitioner provides
to its subscribers wireless communications in New York and other states. Subscribers can make or
receive telecommunications that are either intra-LATA or inter-LATA. The conduct of such
business constitutes a “local telephone business” under section 184 of the Tax Law.
Issue 2
Section 209.1 of Article 9-A of the Tax Law imposes an annual franchise tax on domestic
or foreign corporations for the privilege of exercising a corporate franchise, doing business,
employing capital, owning or leasing property in a corporate or organized capacity, or maintaining
an office in New York State. Section 209.4 of the Tax Law provides that a corporation liable for tax
under sections 183 through 185 of Article 9 of the Tax Law is not subject to tax under Article 9-A
of the Tax Law.
Section 183 of Article 9 of the Tax Law imposes a franchise tax on a domestic or foreign
corporation formed for or principally engaged in the conduct of a telephone business, for the
privilege of exercising its corporate franchise, doing business, employing capital, owning or leasing
property in a corporate or organized capacity or maintaining an office, in New York State. The
conduct of a “local telephone business” pursuant to section 184 of the Tax Law, constitutes the
conduct of a “telephone business” under section 183 of the Tax Law.
Section 184.1 of the Tax Law provides that a corporation subject to tax under section 183
of the Tax Law is subject to the additional franchise tax under section 184 for the privilege of
exercising its corporate franchise, doing business, employing capital, owning or leasing property in
a corporate or organized capacity or maintaining an office, in New York State, if it is formed for or
principally engaged in the conduct of local telephone business.
For purposes of Article 9-A and sections 183 and 184 of Article 9 of the Tax Law, the term
“corporation” includes a publicly traded partnership treated as a corporation for purposes of section
7704 of the IRC.

-3­
TSB-A-00(18)C
Corporation Tax
November 20, 2000

In this case, Petitioner is a partnership and is not subject to tax under Article 9-A or section
183 or 184 of Article 9 of the Tax Law unless it is considered to be a corporation for purposes of
section 7704 of the IRC. For purposes of this Advisory Opinion, it is assumed that Petitioner is not
treated as a corporation for purposes of such section 7704. Therefore, Petitioner is not subject to tax
under Article 9-A or sections 183 and 184 of the Tax Law.
However, a corporate partner of a partnership conducting a local telephone business in New
York would be subject to tax under Article 9-A or sections 183 and 184 of the Tax Law.
To determine the classification and proper taxability of a corporate partner of a partnership
under either Article 9 or Article 9-A, an examination of the nature of the corporation’s activities is
necessary, regardless of the purpose for which the corporation was organized. See Matter of
McAllister Bros., Inc. v Bates, 272 App Div 511, 517 (3rd Dept. 1947). Ordinarily, a corporation
is deemed to be principally engaged in the activity from which more than 50 percent of its receipts
are derived. See, e.g., Joseph Bucciero Contracting Inc., Adv Op St Tax Commn, July 23, 1981,
TSB-A-81(5)C.
For purposes of sections 183 and 184 of the Tax Law, where a partnership is engaged in the
conduct of a telephone business, a corporate general partner is, generally, also engaged in the
conduct of a telephone business. In interpreting section 209.1 of the Tax Law, section 1-3.2(a)(5)
of the Article 9-A Regulations sets forth a general rule which holds that if a partnership is exercising
any of the privileges of section 209.1, then all of its corporate general partners are subject to the tax
imposed by Article 9-A. The same interpretation was made for purposes of Article 9 of the Tax
Law in The Partners of Buffalo Telephone Company, Adv Op Comm T & F, February 22, 1989,
TSB-A-89(3)C. The Advisory Opinion held that where a partnership is engaged in a telephone
business in New York State, each corporate partner is also engaged in a telephone business in New
York State, and each corporate general partner of the partnership that was principally engaged in
such telephone business was subject to tax under sections 183 and 184 of Article 9 of the Tax Law.
Section 1-3.2(a)(6)(i) of the of the Business Corporation Franchise Tax Regulations (the
"Article 9-A Regulations") provides, in part:
[a] foreign corporation is doing business, employing capital, owning or
leasing property or maintaining an office in New York State if it is a limited partner
of a partnership, other than a portfolio investment partnership, which is doing
business, employing capital, owning or leasing property or maintaining an office in
New York State and if it is engaged, directly or indirectly, in the participation in or
the domination or control of all or any portion of the business activities or affairs of
the partnership. A foreign corporation is engaged in such manner in the business
activities or affairs of the partnership if one or more of certain factual situations ...
exist during the taxable year ....

-4­
TSB-A-00(18)C
Corporation Tax
November 20, 2000

In GTE Spacenet Corp. v NYS Dept of Taxation and Finance, 224 AD2d 283, the Court held
that while the partnership was arguably engaged in activities enumerated in sections 183, 183-a, 184
and 184-a of the Tax Law, the evidence demonstrated that the partners were engaged in the
investment business and were not engaged in the conduct of any of the businesses enumerated in
sections 183, 183-a, 184 and 184-a of the Tax Law because the partners were mere passive investors
and did not participate in the day-to-day management or operations of the partnership. Therefore,
the partners were subject to tax under Article 9-A and were not subject to the franchise taxes
imposed pursuant to sections 183, 183-a, 184 and 184-a of the Tax Law.
Pursuant to section 1-3.2(a)(6) of the Article 9-A Regulations, a corporate partner would be
engaged, directly or indirectly, in the participation in or the domination or control of all or any
portion of the business activities or affairs of the partnership if it meets the conditions of such section
1-3.2(a)(6). If the corporation does meet the conditions of section 1-3.2(a)(6), it would be doing
business, employing capital, owning or leasing property or maintaining an office in New York State
and would be subject to tax under Article 9-A unless it is subject to tax under section 183 of Article
9 of the Tax Law.
In this case, if the corporate partner is a mere passive investor and does not participate in the
day-to-day management or operations of partnership, then, pursuant to GTE Spacenet, supra, the
corporate partner would not be considered to be engaged in the business of the partnership and would
not be subject to tax under section 183 of Article 9 of the Tax Law. However, if the corporate
partner is not a mere passive investor or if it participates in the day-to-day management or operations
of the partnership, the corporate partner would not come within the scope of GTE Spacenet, supra.
Following Partners of Buffalo Telephone, supra, the corporate partner would be considered to be
engaged in the business of the partnership and if the corporate partner is principally engaged in such
business, it would be subject to tax under section 183 of the Tax Law.
If the corporate partner is principally engaged in a telephone business taxable under section
183 of the Tax Law, and it is also principally engaged in local telephone business, the corporate
partner would also be subject to the additional franchise tax imposed under section 184 of the Tax
Law.

DATED: November 20, 2000

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist III
Technical Services Division

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