New York Advisory Opinion TSB-A-86 (15)I: May a railroad-equipment-leasing limited partnership, whose only place of business is in New York, allocate part of its income to sources outside New York based on its lessee's out-of-state activities?

Plain-English summary

Hallin Equipment Company, a New York limited partnership, was organized to acquire and lease railroad cars to a single customer, Penn Central Company (later Conrail), whose headquarters were in Philadelphia. All of the partnership's substantive activities - financing, purchasing, leasing, maintaining the equipment, and holding the core business records - were handled by a general partner and management company both located in New York. Penn Central was appointed the partnership's "attorney and agent-in-fact" for the lease term, performing functions like inspecting and accepting delivery of new railcars (in Pennsylvania or Indiana) and furnishing annual equipment inventories. Because Penn Central's own operations spanned states outside New York, the partnership argued it was "doing business" both within and without New York and should be able to allocate part of its income to non-New York sources for its nonresident partners under Tax Law § 637(a)(1) and § 632.

The Department rejected the argument on two independent grounds. First, under 20 NYCRR 131.4 and 131.14, allocating income out of state requires either a regular place of business outside New York or business activities conducted outside New York with a fair measure of permanency and continuity - and neither the lessee's premises nor the rental agency's office counted, since office space not owned or rented by the taxpayer isn't a "regular place of business maintained by the taxpayer" for allocation purposes (citing Matter of Burgmeiger). Second, and more fundamentally, the Department found that Penn Central - despite being formally labeled Petitioner's "agent" - was not actually conducting Petitioner's business outside New York at all. There was little evidence of a genuine agency relationship (Petitioner exercised no real control over Penn Central's activities), and even assuming an agency existed, Penn Central's activities (accepting delivery, storing/transporting equipment, furnishing inventory reports) were simply the ordinary activities of a lessee and customer - not activities undertaken for the partnership's benefit. Labeling a customer an "agent" doesn't transform the customer's own business into the principal's business. With no genuine out-of-state business activity of its own, the partnership was found to be doing business only in New York and could not allocate any income out of state.

The opinion also declined to resolve a separate request - that no penalties be assessed against the partners for underpayment resulting from this allocation dispute - because whether "reasonable cause" excuses a late-payment penalty under Tax Law § 685(a)(3) is an inherently factual question (per regulation § 102.8(b)) that an advisory opinion cannot resolve; that determination would have to be made in the audit context instead.

What this means for you

Businesses with a single out-of-state customer trying to claim multi-state allocation

Having one customer whose own operations span multiple states does not, by itself, mean your business is "carried on" in those states. To allocate income outside New York, you need your own regular place of business outside the state, or your own business activities conducted outside New York with genuine permanency and continuity - not just a customer's activities.

Businesses that formally designate a customer as their "agent"

Be cautious about assuming that appointing a customer as your "agent-in-fact" transforms that customer's ordinary business activities into your own business activities for allocation purposes. The Department looks past labels to whether a genuine agency relationship exists (including whether you actually control the agent) and whether the supposed agent's activities are truly conducted for your benefit rather than simply being that party's own ordinary business.

Partnerships and their nonresident partners assessing multi-state tax exposure

If your partnership's core operational activities (financing, records, management, decision-making) are all concentrated in New York, expect that all of the partnership's income will be treated as New York-source for allocation purposes, even if the partnership's customers or counterparties operate elsewhere.

Common questions

Q: Can I allocate business income to another state just because my main customer's operations are based there?
A: No. This opinion confirms that a customer's out-of-state activities are not the taxpayer's own business activities, even if the customer is formally appointed as the taxpayer's agent, unless a genuine agency relationship exists and the agent's activities are truly conducted for the taxpayer's benefit rather than being the agent/customer's own ordinary business.

Q: What does it take to establish a "regular place of business" outside New York for allocation purposes?
A: You need to occupy, maintain, or operate space (an office, shop, warehouse, etc.) that you own or rent, where your own affairs are systematically and regularly carried on with a fair measure of permanency and continuity. Office space belonging to someone else (like a lessee or rental agent) doesn't count.

Q: Will an advisory opinion resolve whether I have "reasonable cause" to avoid a late-payment penalty?
A: No. The Department treats the reasonable-cause question under Tax Law § 685(a)(3) as an inherently factual determination that must be resolved in the audit process, not through an advisory opinion.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a86_15i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (15) I
Income Tax
October 24, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I860311C

On March 11, 1986, a Petition for Advisory Opinion was received from Hallin Equipment
Company, 20 Grist Mill Lane, Manhasset, New York 11030.
The issue raised is whether Petitioner carries on business both within and without New York
State so as to permit Petitioner to allocate its net income or loss to New York and non-New York
sources.
Petitioner, Hallin Equipment Company, is a limited partnership with two general partners.
The partnership was organized to acquire and lease railroad equipment to Penn Central Company,
subsequently Conrail.
Penn Central Company, as lessee, is the sole customer of Petitioner. Lessee has its
headquarters in Philadelphia, Pennsylvania.
Ail activities of the Partnership, except for the few the customer has assumed, are overseen
by one of the general partners and a management company, both of whom are located in New York
State. The general partner and management company arrange for the financing, purchasing and
leasing of the railroad cars. They maintain the equipment in good working order and in compliance
with all safety requirements. Also, all books of account, ledgers, files and other records, comprising
the core of the business are also located in New York. Upon termination of the lease the Petitioner
decides whether to re-lease or sell the equipment. Helm Financial Corporation of California arranges
for the re-lease or sale.
Petitioner appointed Penn-Central Company, its attorney and its agent-in-fact for the duration
of the lease. Penn Central performs the following functions: assert and enforce, in the name of the
Petitioner, claims against the seller of the railroad cars; inspect and either accept or reject delivery
of the railroad cars ordered by Petitioner. Delivery takes place in Erie, Pennsylvania or Indian Point,
Indiana. Also, once a year Penn Central furnishes the Petitioner with an inventory of the equipment
and a report on its condition. It is the responsibility of both Petitioner and lessee to maintain the
equipment in good working order and in compliance with all rules and regulations. Upon termination
of the lease, lessee stores and/or transports the equipment, depending upon the Petitioner's wishes.
Section 637 (subd [a], par [1]) of the Tax Law provides: "In determining New York adjusted
gross income of a nonresident partner of any partnership, there shall be included only the portion
derived from or connected with New York sources of such partner's distributive share of items of
partnership income, gain, loss and deduction entering into his federal adjusted gross income, as such
portion shall be determined under regulations of the tax commission consistent with the applicable
rules of section six hundred thirty-two."
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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Section 632 provides in pertinent part:
"(a) General. The New York adjusted gross 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, including:
"(A) his distributive share of partnership income, gain, loss and deduction, determined under
section six hundred thirty-seven,

"(b) Income and deductions from New York sources.
"(1) Items of income, gain, loss and deduction derived from or connected with New York
sources shall be those items attributable to:

"(B) a business, trade, profession or occupation carried on in this state."
These statutory provisions are supplemented by the provisions of regulation sections 131.4[a] and
131.14 which provide:
131.4 Business, trade, profession or occupation carried on in this State (Tax Law,
§632[b][1][B]). The New York adjusted gross income of a nonresident individual
includes items of income, gain, loss and deduction entering into his Federal adjusted
gross income which are attributable to a business, trade, profession or occupation
carried on in this State.
"(a) A business, trade, profession or occupation (as distinguished from personal
services as an employee) is carried on within the State by a nonresident when he
occupies, has, maintains or operates desk room, an office, a shop, a store, a
warehouse, a factory, an agency or other place where his affairs are systematically
and regularly carried on, notwithstanding the occasional consummation of isolated
transactions without the State. This definition is not exclusive. Business is carried on
within the State if activities within the State in connection with the business are
conducted in this State with a fair measure of permanency and continuity. A taxpayer
may enter into transactions for profit within the State and yet not be engaged in a
trade or business within the State. If a taxpayer pursues an undertaking continuously
as one relying on the profit therefrom for his income or part thereof, he is carrying
on a business or occupation. 20 NYCRR 131.4.
131.14 Business carried on partly within and partly without New York State. A
business, trade, profession or occupation (as distinguished from personal services an

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employee) is carried on partly within and partly without New York State when one
or more of the activities described in subdivision (a) of section 131.4 of this Part is
systematically and regularly carried on within New York State and one or more of
such activities is systematically and regularly carried on outside New York State, or
when one or more of such activities is systematically and regularly carried on both
within and without New York State. 20 NYCRR 131.14.
Petitioner maintains that it is engaged in business both within and without the State of New
York, citing the activities of its lessee/agent as its business activities outside of New York State.
Petitioner concedes that it maintains a regular place of business in New York State, thereby
making its income taxable by New York State. However, Petitioner wishes to allocate a portion of
its income to sources outside New York. In order to do this Petitioner must either maintain a regular
place of business outside of New York or carry on business activities outside of New York with a
fair measure of permanency and continuity.
Neither the lessee nor the rental agency would qualify as a regular place of business
maintained by the Petitioner. Office space not owned or rented by the taxpayer is not recognized as
a regular place of business maintained by the taxpayer outside New York State for allocation
purposes. See Frank H. Burgmeiger, Jr. State Tax Commission Decision, September 19, 1980,
TSB-H-80-(421)-I.
Petitioner proposes that Penn Central, Petitioner's appointed agent, carried on business
activities outside of New York State with a fair measure of permanency and continuity, and that
those activities were carried on behalf of the Petitioner, by virtue of Penn Central being its agent,
thereby allowing Petitioner to allocate its income to both New York and non-New York sources.
However, based upon the facts described herein, it must be concluded that Penn Central is
not conducting Petitioner's business as Petitioner's agent but is, instead, only conducting its own
business.
An agent is not only employed by the principal, but represents him as well. He is the
business representative of the principal and acts not only for the principal but in the place and instead
of the principal. 2 NY Jur 2d, Agency §3. However, the facts in each case must be considered in
determining whether or not it is understood that the primary obligation of one party is to act for the
benefit of the other. The names which the parties give to the relationship are not determinative.
Restatement, Agency, §13, Comment C.
While Petitioner has appointed Penn Central its agent, there is little evidence of the existence
of a true agency relationship. Petitioner does not exercise control over Penn Central's activities
relating to Petitioner as it would if Penn Central were truly its agent.

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However, even if Penn Central is Petitioner's agent, the activities conducted by Penn Central
cannot be said to be the conduct of the business of Petitioner. Rather, Penn Central's activities are
nothing more than the activities of a lessee and customer of Petitioner. The mere naming of a
customer as an agent does not transform the activities of the customer such that the customer's
activities become the business activities of the Petitioner.
Accordingly, since Petitioner is not carrying on its business outside of New York State and
since Penn Central is not carrying on Petitioner's business outside of New York State, Petitioner is
doing business only in New York State and may not allocate its income, gain, loss or deductions out
of the state.
Petitioner also requests that no penalties be assessed against Petitioner's partners relating to
income of the Partnership determined to be attributable to New York due to the resolution of the
above issue.
Section 685(a)(3) of the Tax Law provides for the assessment of penalties for failure to pay
any tax required to be shown on a return "unless it is shown that such failure is due to reasonable
cause and not due to willful neglect . . ."
Personal income tax regulation section 102.8(b) sets forth the grounds for establishing
reasonable cause. The finding of reasonable cause is always a factual question based upon the
particular circumstances of each taxpayer. As such, this question is not susceptible to resolution
within the context of an advisory opinion.

DATED: October 24, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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