Does a foreign corporation that isn't otherwise subject to New York franchise tax become taxable merely because it privately purchased a limited partnership interest in a partnership that does business in New York?

Plain-English summary

Weightwatchers of Chicago, Inc., a foreign corporation not otherwise subject to New York franchise tax, purchased (through a private placement) limited partnership interests in partnerships doing business in New York. It asked whether that limited-partner status alone would drag it into Article 9-A franchise tax, since a Department regulation says that if a partnership is doing business, employing capital, owning/leasing property, or maintaining an office in New York, so are all its "corporate partners."

The Department did a significant course correction. A 1954 New York Attorney General opinion had held that limited partners are automatically doing business wherever their limited partnership is, reasoning that agency law makes general partners the agents of limited partners. The Department rejected that reasoning as outdated, citing three decades of case law (including federal diversity-jurisdiction and long-arm-statute cases) establishing that a limited partner is a passive investor, not a principal with an agent, and that the general partner does not act as the limited partner's agent. Because a limited partner doesn't directly own a share of partnership assets, doesn't maintain an office through the partnership, and (if genuinely passive) isn't employing capital in New York any more than a nonresident shareholder is by virtue of owning stock, the Department concluded a passive foreign corporate limited partner isn't doing business, employing capital, owning/leasing property, or maintaining an office in New York on that basis alone.

What this means for you

Foreign corporations investing passively in New York limited partnerships

Simply holding a limited partnership interest in a New York-doing-business partnership doesn't by itself create New York franchise tax exposure, as long as your role is genuinely passive — no participation in management or control. This significantly narrows the old, broader "corporate partners of a NY partnership are automatically taxable" rule from the 1954 Attorney General opinion.

Accountants and tax professionals

The Department draws explicit limits: this ruling applies only to true limited partners, not general partners, and not to "limited partners in name only" who actually take an active role (they're treated as general partners for tax purposes). It also doesn't extend to situations where the partnership's New York business is integrally related to the corporate limited partner's own regular business, or where the corporate limited partner holds a controlling interest — those situations would still create doing-business and employing-capital nexus. The key is genuinely passive, disinterested investment.

Common questions

Q: Does this exemption apply to general partners too?
A: No. The opinion is explicitly restricted to limited partners; a foreign corporate general partner in the same circumstances would be treated differently.

Q: What if the limited partner actually gets involved in managing the business?
A: Then it's treated as a general partner for franchise tax purposes regardless of its formal "limited partner" label.

Q: Does owning a controlling interest in the limited partnership change the outcome?
A: Yes — the opinion specifically flags that a controlling interest, or a partnership business integrally related to the limited partner's own regular business, would create doing-business and employing-capital nexus.

Q: Can another foreign corporation with a similar LP interest rely on this ruling?
A: No. It binds the Department only for this specific petitioner's facts and cannot be relied upon by anyone else.

Citations and references

Statutes and regulations:

• Tax Law § 209.1 (Article 9-A franchise tax nexus bases)
• Franchise Tax Regulation 20 NYCRR § 1-3.2(a)(5) (partnership doing business rule); § 1-3.2(c) (employing capital)
• 1954 Opinions of the Attorney General 221 (no longer followed)
• Matter of AT&T v. State Tax Commission, 61 N.Y.2d 393 (1984)
• Matter of Ausbrooks v. Chu, 66 N.Y.2d 281 (1985)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a88_11c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (11)C
Corporation Tax
April 19, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C871013B

On October 13, 1987, a Petition for Advisory Opinion was received from Weightwatchers
of Chicago, Inc., 611 Enterprise Drive, Oakbrook, Illinois 60521.
The issue raised is whether a foreign corporation which is not otherwise subject to the
corporate franchise tax imposed under Article 9-A of the Tax Law becomes subject to such tax solely
by virtue of its purchase, through a private placement, of a limited partnership interest in a limited
partnership which is doing business in New York.
FACTS:
Petitioner is a foreign corporation, not otherwise subject to New York franchise tax, which
has purchased, through private placements, interests in limited partnerships doing business in New
York State but which are not subject to the Federal Securities Act of 1933.
APPLICABLE LAW:
Section 209.1 of Article 9-A of the New York 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. In interpreting this section, Franchise Tax Regulation 20 NYCRR §
1-3.2(a)(5) sets forth a genera] rule which holds that if a partnership is exercising any of the
privileges of section 209.1, then all of its corporate partners are subject to the tax imposed by Article
9-A.
ANALYSIS:
The broad issue presented here is whether Petitioner is subject to the Article 9-A franchise
tax. But the pivotal issue is whether, as a matter of law, a limited partner is doing business if the
limited partnership is. Within the context of the Article 9-A franchise tax, the New York Attorney
General, in a December 28, 1954 Opinion, answered both of those questions in the affirmative. See,
1954 Opinions of the Attorney General 221. However, since 1954, limited partnerships have
multiplied, resulting in a much more refined judicial philosophy concerning the status of the limited
partner. In light of these developments, it is now clear that the rationale employed by the Attorney
General has not withstood the test of time and that the 1954 Opinion itself should no longer be
followed insofar as it relates to corporate limited partners.
The heart of the 1954 Opinion is the belief that the common law doctrine of agency is at all
times mutually inherent, as a matter of law, in the relationship between limited partners and general
partners. The soundness of the agency rationale is essential for the validity of the 1954 Opinion.
RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

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As authority for this assertion, the 1954 Opinion relied chiefly on two New York cases: People ex
rel Badische Anilin & Soda Fabrik v. Roberts, 152 NY 59 (1897)(1 dissent); and Matter of Chapman
v. Browne, 268 AD 806 (3d Dept 1944), mot lv app den, 293 NY 933 (1944).
Were it applicable, the agency doctrine would lead to the conclusion that limited partners
inevitably are doing business wherever the general partners are doing business. However, the agency
doctrine simply has no place in analyzing the status of the typical limited partner who remains
passive in the business:
"As the Official Comment to § 1 of the Uniform [Limited
Partnership] Act makes clear, a limited partner, though so called by
custom, is not 'in any sense' either a partner or a principal in the
business or transactions of the partnership .... See 6 Uniform Laws
Annotated, Uniform Limited Partnership Act § 1 .... Succinctly put,
a limited partnership interest in a business is in the nature of an
investment .... He is an investor in the partnership venture, without
authority to participate in the management of the business .... Hence,
the general rule would appear to be that the principal-agent
relationship which exists between the parties of an ordinary
partnership is not per se present between general and limited partners
in a limited partnership."
Klein v. Weiss, 284 Md 36, 395 A. 2d 126, 136 (1978), citing Riviera Congress Assoc. v. Yassky,
25 AD 2d 291 (lst Dept. 1966), aff'd 18 NY 2d 540 (1966); Ruzicka v. Rager, 305 NY 191 (1953);
Lynn v. Cohen, 359 F. Supp. 565 (SDNY 1973); Freedman v. Tax Review Board of Philadelphia,
212 Pa Super 442 (1968) (unanimous 7/0 opinion), aff'd by an equally divided court (3/3)(dissent
not grounded in agency law), 434 Pa 282 (1969); and 60 Am. Jur. 2d Partnership § 379 (1972).
The Lynn case, a diversity action, focused on the territorial power of New York to attain in
personam civil jurisdiction over a nonresident limited partner via the New York long-arm statute as
limited by the Due Process Clause of the Fourteenth Amendment to the Federal Constitution. The
district court held that the limited partner's investment in partnerships producing movies in New
York did not, of itself, constitute the "transacting of any business" in New York, through an agent,
within the meaning of the long-arm statute. On this point, Lynn said:
"Plaintiffs argue that by investing in the partnerships, both of
which were producing movies in New York, the defendant transacted
business in New York. In making this argument, plaintiffs assume
that a general partner engaged in the business of a limited partnership
acts as the 'agent' of the limited partners within the meaning of CPLR
§ 307(a). This assumption is unfounded. Being strictly a creature of
statute, a limited partnership resembles a corporation more closely
than it does an ordinary partnership. Ruzicka v. Rager, 305 NY 191

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(1953); NY Partnership Law, Art 8 (McKinney's Consol. Laws, c. 39,
1948). The principal-agent relationship which exists between the
partners of an ordinary partnership is not present between the limited
and general partners of a limited partnership. Moreover, the actual
relationship between plaintiffs and defendant created by the
partnership agreement does not meet the standards of agency
established by the courts of New York in construing the long-arm
statute. Under the standards, the defendant principal must exercise
'domination and control' over the activities of the plaintiff agent in
order to come within the statute.
Hodom v. Stearns, 32 AD 2d
234, appeal dismissed, 25 NY 2d 722 (1969). The cases make clear
that the amount of 'domination and control' required is considerably
more than defendant Cohen exercised over the plaintiffs under the
partnership agreements."
359 F. Supp. at 567.
Lynn has been cited with approval by several courts, including those in New York. See, e.g.,
Oncology Associates v. McGraw-Hill Corp., 109 AD 2d 616 (lst Dept 1985).
Moreover, the "passive investor/no agency" rationale of Lynn has been subscribed to by other
courts nationwide when faced with the identical civil jurisdiction issue. See, Oriental Imports &
Exports v. Maduro & Curiel's, 701F. 2d 889 (llth Cir 1982) (applying Florida ]aw); Klein v. Mega
Trading Ltd., 416 So. 2d 866 (Fla 3d DCA 1983); Ga-Pak Lumber Co., Inc. v. Nalley, 337 So. 2d
1270 (Mississippi 1976); and Norman v. Kal, 88 Ill App 3d 81 (lst District 1980).
In addition, the instant agency issue appears in contexts besides civil jurisdiction, with the
same result.
For example, the analogous issue has arisen several times in the area of Federal diversity
jurisdiction. Will a limited partner's state of citizenship impede diversity? The Federal circuits are
sharply split on this question, with some courts holding that diversity is destroyed solely because
such a bright-line rule of jurisdiction regarding unincorporated associations is perceived to be the
intent of Congress. See, 13B C. Wright, A. Miller and E. Cooper, Federal Practice and Procedure:
Jurisdiction 2d, § 3630 (collecting cases). However, the cases which disagree with the bright-line
approach are usually then forced to confront an additional argument: it is asserted that a limited
partner's citizenship in the same state as an adverse party will destroy diversity whenever the
partnership is suing or is being sued, for it is claimed that general partners are inherently general
agents for the limited partners and vice versa. Ail of the courts which have faced this anti-diversity
argument have rejected it. See, e.g., Colonial Realty Corp. v. Bache & Co., 358 F. 2d 178 (2d Cir
1966), cert den, 385 US 817 (1966). As one Federal court said in this regard, at times quoting the
Official Comments to the ULPA:

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"Though a general partner has general agency authority to
bind partnership assets and other general partners he cannot bind
limited partners .... [A general partner] is not in any sense a general
agent for the limited partners. [The Official Comments say, in part:]
'First, in the draft the person who contributes the capital, though in
accordance with custom called a limited partner, is not in any sense
a partner. [However, he] may become a partner.' Thus, a limited
partnership such as the one involved herein, which has only one
general partner, is not a true partnership under California law, and the
label 'partnership' is less descriptive of its legal relations than 'sole
proprietorship' would be."
Wroblewski v. Brucher, 550 F. Supp. 742, 747 (WD Okla 1982). Compare the observation of the
First Department in Skolny v. Richter (139 AD 534, 537 /1910)), wherein the court, in ruling that
a limited partner, unlike a general partner, owes no fiduciary duty to fellow partners, permitted
limited partners to invest in a competing partnership. The court stated: "Similarity of terminology
does not always establish identity in meaning or in the rules of law affecting the subjects similarly
named".
In fact, in the face of the modern trend summarized above, only one case could be found
which, like the Third Department's 1944 Chapman case (supra), held general partners to be inherent
general agents of the limited partners: Donroy, Ltd. v. United States, 301F. 2d 200 (9th Cir 1962).
And that case has been sharply criticized by other courts, including the court in Wroblewski v.
Brucher, supra, 550 F. Supp. at 746 n. 6, as well as the California Supreme Court which, in declining
to follow Donroy, held that the Ninth Circuit had badly misconstrued California law on the subject
of limited partners. See, Evans v. Galardi, 16 Cal 3d 300 (1976)(citing Skolny v. Richter, supra).
Even the Ninth Circuit itself has, apparently, abandoned the partnership/agency rationale of Donroy.
See, Estate of Meyer v. Commissioner, 58 TC 311 (1972), nonacq., 1975-1C. B. 3, aff'd per curiam,
503 F. 2d 556 (9th Cir 1974).
It is obvious that the overwhelming weight of the modern authorities in a variety of areas of
law has crippled the foundation on which the 1954 Opinion of the Attorney General rests. The 1944
Chapman case, which explicitly held that agency principles apply so as to taint limited partners as
being engaged in business wherever the partnership is so engaged, was an extremely succinct
opinion, completely devoid of cited authority. Its agency-based rationale stands virtually alone and
quite weak viewed against the more recent decisions discussed above.
Therefore, in the instant case, it cannot be said that Petitioner is doing business in New York
for purposes of section 209.1 of the franchise tax. The 1954 Opinion should no longer be followed.
In this regard, note that "an opinion of the Attorney General is an element to be considered but is not
binding on the courts". Matter of AT&T v. State Tax Commission, 61 NY 2d 393, 404 (1984).

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The remaining bases for potential jurisdiction under section 209.1 are easily disposed of.
Even if the limited partnership owns property in New York, it cannot be said, for purposes
of jurisdiction, that Petitioner thereby owns property in New York. General partners do not own
direct pro rata shares of each partnership asset. Matter of Havemeyer, 17 NY 7d 216 (1966). The
same is true for limited partners. Matter of Ausbrooks v. Chu, 66 NY 2d 281, 288 (1985)(partnership
A which is a limited partner in partnership B has no direct ownership interest in partnership B's
assets). (That is not to say, though, that computational matters, such as the factors used in computing
the business allocation percentage, may not employ a pass-through approach -- assuming jurisdiction
is otherwise established. See, Tax Law section 210.3(a); 20 NYCRR 4-6.5.)
For like reasons, Petitioner is not "maintaining an office" in New York even though the
limited partnership is.
Nor is Petitioner "employing capital" in New York. In general, employing capital refers to
the use of assets in maintaining or aiding the corporate enterprise or activity in New York (20
NYCRR 1-3.2(c)). There are circumstances where the investment of corporate monies in a New
York State enterprise will constitute "employing capital" in the state (see, Matter of AT&T v. State
Tax Commission, supra, 61 NY2d at 402). However, an investment which is strictly passive is not
sufficient (see , People ex rel Union Ferry Co. v. Roberts, 66 AD 157, 160 (3d Dept. 1901)). As has
been clearly demonstrated, Petitioner is merely a passive investor. As such, it is not employing
capital in New York State.
Petitioner's status is akin to that of a preferred shareholder. If Petitioner were employing
capital for purposes of the jurisdictional bases of section 209.1, then the same would have to be said
for a nonresident shareholder of a corporation which resembles the limited partnership in its New
York operations. Yet the Court of Appeals has held that to subject a nonresident shareholder to the
franchise tax upon the basis of the corporation's activities within New York "would be an
unreasonable exercise of the power of taxation". People v. American Bell Telephone Co., 117 NY
241, 255 (1889). There is no indication that the 1969 legislation which expanded the nexus standards
of Article 9-A of the Tax Law to include "employing capital" was intended to cover purely passive
investments such as in the present case.
It should be emphasized that this opinion is restricted to a partnership interest, in the
circumstances described above, which is owned by a foreign corporation in the capacity of a limited
partner. That is to say, this opinion does not extend to a foreign corporate general partner in the
above circumstances. Moreover, limited partners in name only, i.e., limited partners who shed their
passive role and who in fact take an active part in the partnership should be treated as the general
partners they really are, for purposes of the franchise tax. Cf., New York Partnership Law section
96; Micheli Contracting Corp. v. Fairwood Associates, 68 AD 2d 460 (3d Dept 1979); Estate of
Meyer, supra, 58 TC at 314. Similarly, if a foreign corporation acquires a limited partnership interest

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under circumstances whereby the business carried on by the partnership in New York is integrally
related to the regular business of the foreign corporation or whereby the foreign corporate limited
partner obtains a controlling interest in the limited partnership, such foreign corporate limited partner
should be considered to be both doing business and employing capital in New York. See, People ex
rel Badische Anilin & Soda Fabrik v. Roberts, supra, 152 NY 59. See also, People ex rel Union Ferry
Co. v. Roberts, supra, 66 AD at 160; Matter of AT&T v. State Tax Commission, supra, 61 NY2d
at 402. The key to nontaxability is that the limited partnership holding be a passive, disinterested
investment.
CONCLUSION:
Petitioner's ownership of a limited partnership interest in a limited partnership which is doing
business in New York, when Petitioner is not otherwise subject to the New York Article 9-A
corporate franchise tax, will not in itself cause Petitioner, as a foreign corporate limited partner, to
be doing business, employing capital, owning or leasing property or maintaining an office in New
York and, thus, Petitioner, as a foreign corporate limited partner, is not subject to the Article 9-A
franchise tax.

DATED: April 19, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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