Does an LLC taxed as a partnership owe New York's annual filing fee for a year in which its only income was bank interest on proceeds from a prior property sale, with no other business activity?

Plain-English summary

Richard Berman, CPA, asked the Department whether a New York LLC treated as a partnership for federal income tax purposes owed the annual LLC filing fee for taxable year 2003. Under Tax Law § 658(c)(3), an LLC taxed as a partnership must pay a filing fee - a flat amount per member, subject to a $500 floor and $25,000 ceiling - for any year in which it has income derived from New York sources.

The facts were narrow: in 2002 the LLC had owned and managed New York real property and sold it at a gain. But in 2003 the members simply held the sale proceeds in a bank account. The LLC did not operate any trade or business that year, did not rent out or manage property, did not own real property, and did not use the funds to buy another parcel. Its only 2003 income was interest earned on that bank account, and the LLC was never dissolved or terminated during the year.

The Department applied Tax Law § 631, which governs how New York source income is determined (the same test § 658(c)(3) borrows to decide whether the filing fee applies). Under § 631(b), income from intangible property - including bank interest - is New York source income only to the extent the property producing it is employed in a business, trade, profession, or occupation carried on in New York. Because the LLC's bank account was not tied to any New York business activity in 2003, the interest it earned did not count as New York source income.

With no New York source income for 2003, the LLC fell outside the reach of § 658(c)(3) entirely, so it owed no annual filing fee for that year - even though it had been an active, income-producing LLC with New York real estate the year before.

What this means for you

LLCs and LLPs winding down New York activity

If your LLC or LLP (taxed as a partnership) sells its New York property or otherwise stops doing business, simply parking the proceeds in a bank account and earning interest does not, by itself, create New York source income. Without New York source income, the entity is not subject to the § 658(c)(3) annual filing fee for that year, even if the entity remains legally in existence and hasn't been dissolved.

Accountants and tax professionals

When determining whether a client LLC owes the filing fee for a given year, look at what the entity actually did with its money during that specific year - not what it did in prior years. Passive interest income is New York source income only if the underlying funds are employed in a New York trade or business; idle cash sitting in a bank account, generating only interest, does not meet that standard under Tax Law § 631(b)(2).

Common questions

Q: Does an LLC have to formally dissolve to avoid the filing fee?
A: No. This LLC remained in existence throughout 2003 and was never terminated or dissolved, yet it still owed no filing fee because it had no New York source income that year.

Q: Why did the LLC's 2002 property sale not matter for the 2003 fee determination?
A: The filing fee under § 658(c)(3) is assessed on a year-by-year basis according to whether the LLC has New York source income for that particular taxable year. The 2002 sale and gain were irrelevant to whether the LLC had New York source income in 2003.

Q: Would the answer change if the LLC had used the bank funds to buy another New York property?
A: The facts here state the LLC did not seek to purchase another parcel with the funds. Had it done so, the funds (and any resulting income) could again be tied to New York real property ownership or a New York business, potentially creating New York source income and triggering the fee.

Q: Is interest income ever New York source income for a nonresident-owned entity?
A: Yes - under Tax Law § 631(b)(2), interest and other income from intangible property is New York source income if the property generating it is employed in a business, trade, profession, or occupation carried on in New York. It is only when the funds are simply held, unconnected to any New York business activity, that the interest escapes New York source income treatment.

Citations and references

• Tax Law § 658(c)(3) - imposes an annual filing fee, based on membership count (minimum $500, maximum $25,000), on subchapter K LLCs and LLPs with New York source income
• Tax Law § 631(a) - defines the New York source income of a nonresident individual
• Tax Law § 631(b)(1) - New York source income includes items attributable to ownership of real or tangible personal property in New York, or a business, trade, profession, or occupation carried on in the state
• Tax Law § 631(b)(2) - income from intangible personal property (including interest) is New York source income only to the extent employed in a New York business, trade, profession, or occupation

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2004.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a04_9i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-04(9)I
Income Tax
December 13, 2004

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I040203B

On February 3, 2004, a Petition for Advisory Opinion was received from Richard
Berman, CPA, Berman and Berman, LLP, One Penn Plaza, New York, New York 10119.
The issue raised by Petitioner, Richard Berman, CPA, is whether a limited liability
company (LLC), that is treated as a partnership for federal income tax purposes, is subject to a
filing fee pursuant to section 658(c)(3) of the Tax Law for taxable year 2003.
Petitioner submits the following facts as the basis for this Advisory Opinion.
In taxable year 2002, an LLC, that is treated as a partnership for federal income tax
purposes, owned and managed a piece of real property located in New York State. During the
year, the LLC sold the property and realized a gain from the sale.
In taxable year 2003, the members of the LLC maintained the proceeds from the sale of
the property in a bank account. The LLC did not engage in a trade or business during the year.
It did not hold property out for rental, manage property, own real property, or seek to purchase
another parcel of real property with the funds held in the bank account. The only income that the
LLC generated in taxable year 2003 was interest income earned on the bank account. The LLC
was not terminated or dissolved in 2003.
Applicable law and regulations
Section 631 of the Tax Law provides, in part:
(a) General. The New York source income of a nonresident individual shall be
the sum of the following: (1) The net amount of items of income, gain, loss and
deduction entering into his federal adjusted gross income, as defined in the laws of the
United States for the taxable year, derived from or connected with New York sources,…:
*

*

*

(2) The portion of the modifications described in subsections (b) and (c) of
section six hundred twelve which relate to income derived from New York sources
(including any modifications attributable to him as a partner . . . .
(b) Income and deductions from New York sources.

TSB-A-04(9)I
Income Tax
December 13, 2004

2

(1) Items of income, gain, loss and deduction derived from or connected with
New York sources shall be those items attributable to:
(A) the ownership of any interest in real or tangible personal property in this state;
or
(B) a business, trade, profession or occupation carried on in this state; or
*

*

*

(2) Income from intangible personal property, including annuities, dividends,
interest, and gains from the disposition of intangible personal property, shall constitute
income derived from New York sources only to the extent that such income is from
property employed in a business, trade, profession, or occupation carried on in this
state. . . .
Section 658(c)(3) of the Tax Law imposes a filing fee on limited liability companies and
limited liability partnerships that are treated as partnerships for federal income purposes. Such
section 658(c)(3), as amended by Chapter 62 of the Laws of 2003, effective for taxable years
beginning in 2003 and 2004, provides, in part:
(3) Filing fees. Every subchapter K limited liability company . . . and every
limited liability partnership under article eight-B of the partnership law and every foreign
limited liability partnership, which has any income derived from New York sources,
determined in accordance with the applicable rules of section six hundred thirty-one as in
the case of a nonresident individual, shall, within thirty days after the last day of the
taxable year, make a payment of a filing fee. The amount of the filing fee shall be the
product of (a) one hundred dollars and (b) the number of members of such company or
number of partners of such partnership, as the case may be, as of the last day of the
taxable year, but in no event shall such fee be less than five hundred dollars nor more
than twenty-five thousand dollars. . . . Where such fee is not timely paid, it shall be paid
upon notice and demand and shall be assessed, collected and paid in the same manner as
taxes, and for such purposes any reference in this article to tax imposed by this article
shall be deemed also to refer to the fee prescribed herein.
Opinion
Section 658(c)(3) of the Tax Law provides for an annual filing fee to be imposed on an
LLC that is treated as a partnership for federal income tax purposes that had any income derived
from New York sources. Section 631 of the Tax Law provides, in general, that items of income,
gain, loss or deduction from New York sources include those items attributable to the ownership
of any interest in real or tangible personal property located in New York State or a business,
trade, profession or occupation carried on in the State. Income from intangible property,
including interest income from a bank account, shall constitute income derived from New York

TSB-A-04(9)I
Income Tax
December 13, 2004

3

sources only to the extent that such income is from property employed in a business, trade,
profession, or occupation carried on in this State.
In this case, the interest income received by the LLC in taxable year 2003 was
attributable only to money in a bank account and the money was not employed in a business,
trade, profession, or occupation in New York. Under these circumstances, the LLC did not have
any income derived from New York sources in taxable year 2003. Therefore, pursuant to section
658(c)(3) of the Tax Law, the LLC is not subject to an annual filing fee for 2003.

DATED: December 13, 2004

NOTE:

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

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