When a partnership (not a corporation) operates a cellular telephone utility business in New York, are its corporate partners individually subject to New York's Article 9 telephone-business franchise tax, and can the partnership's own section 186-a utility gross-receipts tax be passed through to be paid by the partners instead?

Subject

Whether (1) the corporate partners of a partnership providing telephone utility services in New York State are subject to franchise tax under sections 183/184 of Article 9, and (2) whether the partnership's section 186-a utility gross-receipts tax can instead be reported and paid pro-rata by the partners.

Plain-English summary

When the FCC opened up cellular telephone service in the early 1980s, it split each market's spectrum between an automatic "wireline" carrier and a competitively-awarded "non-wireline" license. To avoid competing hearings, the FCC encouraged rival applicants for the non-wireline license to team up — so in most markets, several corporations (each formed as a wholly-owned subsidiary of an original applicant) ended up jointly holding the non-wireline license through a partnership rather than a single corporation. Buffalo Telephone Company was one such partnership, regulated as a telephone utility by the New York Public Service Commission. Its corporate partners argued they should be treated, individually, as telephone utilities subject to Article 9's sections 183/184 tax — flowing the partnership's tax character up to each partner under general partnership-conduit principles — rather than under the general Article 9-A business tax. They also asked whether the partnership's own section 186-a utility gross-receipts tax could instead be reported and paid by each partner on its pro-rata share, for administrative and financial-reporting convenience, since several of the operating partnerships were themselves cash-strapped.

The Department's answer split the two questions. On the classification question, it agreed with the conduit theory: since every partner acts as an agent of the partnership under Partnership Law § 20.1, and Buffalo Telephone Company itself is engaged in a telephone business in New York, each corporate partner is likewise treated as engaged in that telephone business — so any corporate partner that is itself principally engaged (more than 50% of its own receipts) in the telephone business is subject to Article 9 tax under sections 183/184, and correspondingly excluded from Article 9-A. But because "principally engaged" is a factual determination, the Department couldn't make the final call for each partner in an advisory opinion. On the pass-through question, the answer was a flat no: section 186-a contains no mechanism to pass the tax through to the partners — the Department has no authority to recognize such a pass-through, however administratively convenient it might be. The partnership itself, Buffalo Telephone Company, must file Form CT-186-P and remit the section 186-a tax directly.

What this means for you

Corporate joint-venture partners in a regulated utility partnership

If your corporation holds its utility business through a partnership rather than directly, the partnership's Article 9 telephone/telegraph tax character can flow up to you as an individual corporate partner (via the partnership-conduit/agency theory) — but only for the specific partner(s) that are themselves principally engaged in the telephone business through that partnership, a fact-specific determination.

Multi-partner cellular, telecom, or other regulated-utility partnerships

Don't expect to shift a partnership-level gross-receipts tax (like section 186-a) onto individual partners for reporting or cash-flow convenience — the statute has no pass-through mechanism, and the Department has no discretion to create one administratively. The partnership entity remains the filer and the payer.

Accountants and tax professionals structuring joint-venture utility entities

This ruling illustrates an important asymmetry: Article 9's corporate-only sections 183/184 can flow through a partnership to its corporate partners (agency/conduit theory, tracking Subchapter K's federal treatment), while section 186-a — which taxes "persons" including partnerships directly and by its own terms reaches "every utility doing business," incorporated or not — stays at the partnership level with no comparable pass-through.

Common questions

Q: If a partnership operates a telephone utility, are its corporate partners automatically subject to Article 9 tax?
A: Only the partner(s) that are themselves principally engaged (more than 50% of their own receipts) in the telephone business through the partnership — a factual question the Department can't resolve in an advisory opinion.

Q: Can a utility partnership's section 186-a tax be paid by the partners instead of the partnership?
A: No. There is no statutory pass-through mechanism, and the Department lacks authority to create one — the partnership must file and pay the tax itself.

Q: Can another cellular or utility partnership rely on this ruling?
A: No. This advisory opinion binds the Department only for the taxpayer and facts presented, and cannot be relied on by anyone else.

Citations and references

Statutes and regulations:

• Tax Law § 209.1 (Article 9-A franchise tax)
• Tax Law § 209.4 (Article 9 taxpayers excluded from Article 9-A)
• Tax Law § 183, § 184 (Article 9 franchise tax on telephone businesses)
• Tax Law § 186-a (tax on furnishing of utility services; applies to partnerships as "persons")
• 20 NYCRR § 1-3.2(a)(5) (corporate partners taxed under Article 9-A if the partnership exercises Article 9-A privileges)
• Partnership Law § 20.1 (each partner is an agent of the partnership for its business)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a89_3c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (3)C
Corporation Tax
February 22, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C881014A

On October 14, 1988, a Petition for Advisory Opinion was received from The Partners of
Buffalo Telephone Company, 1600 Rand Building, Buffalo, New York 14203.
The issues raised are whether (1) the corporate partners of a partnership providing telephone
utility services in New York State would be considered utilities subject to franchise tax under section
183 and section 184 of Article 9; and (2) for purposes of section 186-a of Article 9 would New York
State allow the partners of the partnership providing the telephone utility service resulting in gross
receipts to report and pay the tax based on each partner's pro-rata share of the applicable partnership
receipts, rather than the partnership.
Facts
The Federal Communications Commission (hereinafter "FCC") has the authority to license
the use of the radio frequency spectrum including band widths used in the provision of cellular
telephone service. The FCC found a need for public cellular radio-telecommunication services
throughout the nation (Report and Order, CC Docket No. 79-318, 8g FCC 2nd 469 (1981),
Memorandum Opinion and Order on Reconsideration, 89 FCC 2nd 58 (1982)). To encourage the
development of this new service, the FCC decided to split the band width available for cellular
telephone service into two equal portions, one portion to be licensed to the land-line carrier or
carriers serving the specific area (often referred to as the "wireline carrier" or "wireline licensee")
and the license for the other portion to be awarded to an applicant based upon legal, technical,
financial and other qualifications (often referred to as the "non-wireline carrier" or "non-wireline
licensee").
In order to expedite the availability of cellular services to the public and to avoid comparative
hearings, the FCC encouraged competing applicants, for the non-wireline license, to settle their
differences in a manner in which each could participate in providing cellular services in each
proposed cellular service area (often referred to as a "CGSA"). As a result, in every CGSA,
applicants for the non-wireline license formed partnerships so that while there would be essentially
one remaining applicant, each of the original applicants would be able to participate. The applicants
selected partnerships as the vehicle for ownership instead of corporations for a number of reasons:
liability and cost sharing, financial reporting and federal tax reporting. Notwithstanding the form
in which the partners have elected to do business, the operating partnerships providing service are
"utilities" subject to the jurisdiction of the New York State Public Service Commission and the
Public Service Law.
TP-9 (9/88)

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Herein, the corporate partners are corporations formed solely for the purposes of participating
in the cellular telephone business, either as the sole licensee or to hold the partnership interest in the
partnership licensee in each CGSA. As originally established, these corporations were wholly owned
subsidiaries of the original applicants in the CGSA. No applicant corporation applied for a license
in more than one market because a separate corporation was formed for each.
The corporate partners of Petitioner feel that they are subject to franchise taxes under section
183 and section 184 of Article 9 of the Tax Law on the basis of the general theory of partnership
taxation, the statutes themselves and regulations promulgated thereunder. The operating partnership
would serve as a conduit for incidents of taxation. The tax attributes and characteristics of the
partnership would flow to the corporate partners, treating them as utilities providing telephone
services.
Petitioner contends that passing partnership attributes to the partners of a partnership is
consistent with Federal and New York State Law. Subchapter K of the Internal Revenue Code
(hereinafter "IRC") relating to the taxation of partnerships, is a combination of the conduit and entity
concept of partnerships. Although it is clear that a partnership is neither exclusively a conduit nor
exclusively an entity, the conduit theory governs in many of the aspects of partnership taxation.
Section 701 of the IRC provides that partnerships are not liable for income tax. Rather, persons
carrying on partnership activities are liable for tax in their separate capacities. The partnership
merely acts as an income reporting unit, not a tax paying unit. Section 601(b) of the Tax Law
provides the same concept. Further, section 702 of the IRC generally provides that the character of
income and deductions passed to a partner by a partnership be retained.
Petitioner further contends that taxing the corporate partners in the manner proposed will
result in the equitable taxation of the competitors in the given market. The land line competitors,
which were awarded the necessary FCC license automatically, operate the new service in the
corporate form. Thus they are subject to the section 183 and section 184 taxes. Were it not for the
FCC requiring joint application for the second license in the market, a similar type of corporate
structure most likely would have been formed for the non-land line provider, which also would be
subject to the section 183 and section 184 taxes.
Taxing the corporate partners of the second provider, which had its structure effectively
thrust upon it by a governmental agency, in any manner other than that proposed would result in a
lack of uniformity, and perhaps equity, in the taxation of competing businesses.
In addition, section 186-a of Article 9 of the Tax Law, and section 500.1 and 500.2 of the Tax
on the Furnishing of Utility Services regulations, promulgated thereunder, broadly imposes the gross
receipts tax on all entities, including co-partnerships, providing utility services, whether or not the
rendering of such service is the primary business of the entity. Through strict application of this law,
the operating partnerships providing the telephone utility service would be required to report and pay
the section 186-a tax on their applicable receipts.
Petitioner freely acknowledges that a tax on the applicable gross receipts would be incurred
under section 186-a and would be properly submitted to New York State.

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Corporation Tax
February 22, 1989

Petitioner seeks, however, authority to allow the partners, at the partnership's option, to report and
pay this tax on the partners pro-rata share of taxable receipts.
There are several reasons for this request. These include:
(1)

Consistency of tax treatment - allowing the partners to report and pay the section
186-a tax would be consistent with the conduit theory of partnership taxation. The
general thrust of Subchapter K of the IRC and section 601(b) of the Tax Law is to
hold partnerships as tax-reporting entities, rather than tax paying entities.

(2)

Clear performance measurement - by allowing the partners to report and pay this tax,
they would be recording, for financial statement purposes, the full tax effect on the
results of operations inclusive of all federal and state taxes that are income based.

(3)

Administrative ease - the partners in most instances, rather than the partnership, have
the necessary staffing to prepare and submit tax reports. Allowing the partners to
report the section 186-a tax would provide them the opportunity to take advantage
of their staffing. Petitioner states that if question 1 is decided in favor of Petitioner,
this point is particularly significant in light of the similarities between the tax basis
of section 184 and section 186-a. Further, as several of the operating partnerships are
in cash deficit situations, having the partners pay the section 186-a tax would
eliminate the need for them to contribute cash for the partnership to pay the tax
liability.

Petitioner contends the ability of the partners to report and remit the section 186-a tax would
extend only to those partners that hold a direct interest in the utility partnership. In essence, this
would halt the attribution of the conduit theory for purposes of section 186-a at the ownership level
immediately above the operating utility partnership. New York State would continue to have full
recourse for collection of the section 186-a tax through the utility partnership. The statute of
limitations would commence with the filing of the necessary section 186-a tax report by the partners.
Issue 1
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. In interpreting this section, the Business Corporation Franchise Tax
Regulations section 1-3.2(a)(5) 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 partners are subject to the tax imposed
by Article 9-A. Section 209.4 of the Tax Law, provides that corporations liable to tax under sections
183 and 184 of Article 9 of the Tax Law are not subject to tax under Article 9-A.
Sections 183 and 184 of Article 9 of the Tax Law impose franchise taxes, 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

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Corporation Tax
February 22, 1989
property in a corporate or organized capacity or maintaining an office, in New York State.
To determine the classification and proper taxability of a corporation under either Article 9
or Article 9-A, an examination of the nature of the corporation's activities is necessary, regardless
of the purposes for which the corporation was organized. See Matter of McAllister Bros., Inc. v.
Bates, 272 A.D. 511, 517 (3d Dept. 1947). Ordinarily, a corporation is deemed to be principally
engaged in the activity from which more than 50% of its receipts are derived. See, e.g. Joseph
Bucciero Contracting Inc., TSB-A-81(24)S August 27, 1981.
Herein, Buffalo Telephone Company is a general partnership that operates as a telephone
utility subject to the jurisdiction of the State Public Service Commission and the Public Service Law.
As such, Buffalo Telephone Company is doing business in New York State. Accordingly, the
corporate partners of Buffalo Telephone Company are subject to tax under Article 9-A of the Tax
Law, unless such corporate partners are subject to tax under sections 183 and 184 of Article 9 of the
Tax Law.
Every partner in a partnership is an agent of the partnership for the purpose of its business,
and the act of every partner, including the execution in the partnership name of any instrument, for
apparently carrying on in the usual way the business of the partnership of which he is a member
binds the partnership. Partnership Law, § 20.1. Since Buffalo Telephone Company is engaged in
a telephone business in New York State, each corporate partner, as agent of the partnership, is also
engaged in a telephone business in New York State. Therefore, each corporate partner of Buffalo
Telephone Company that is principally engaged in such telephone business is subject to tax under
sections 183 and 184 of Article 9.
The determination of whether a corporate partner of Buffalo Telephone Company is
principally engaged in a telephone business is a question of fact not susceptible of determination in
an Advisory Opinion. An Advisory Opinion merely sets forth the applicability of pertinent statutory
and regulatory provisions to "a specified set of facts" Tax Law, § 171, subd. twenty-fourth; 20
NYCRR 901.1(a).
Accordingly, each corporate partner of Buffalo Telephone Company that is principally
engaged in a telephone business is subject to tax under sections 183 and 184 of Article 9 of the Tax
Law. Moreover each corporate partner of Buffalo Telephone Company that is subject to franchise
tax under sections 183 and 184 of Article 9 of the Tax Law is not subject to tax under Article 9-A
of the Tax Law.
Issue 2
Section 186-a of the Tax Law provides:

1. Notwithstanding any other provision of this chapter, or of any other law, a tax
   equal to three per centum of its gross income is hereby imposed upon every utility doing
   business in this state which is subject to the supervision of the state department of public
   service which has a gross income for the year ending December thirty-first in excess of five
   hundred dollars, except motor carriers or brokers subject to such supervision under article
   three-b of the public service law...which taxes shall be in addition to any and all other taxes

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and fees imposed by any other provision of law for the same period.

2. As used in section, (a) the word "utility" includes every person subject to the
   supervision of the state department of public service...
   (b) the word "person" means ... co-partnerships ....
   Section 186-a of the Tax Law imposes a tax on every utility doing business in New York
   State that is subject to the supervision of the New York State Department of Public Service. For
   purposes of section 186-a, a utility includes a person and the definition of a person includes a co­
   partnership. It is noted that unlike sections 183 and 184, which impose tax only upon corporations,
   section 186-a imposes tax upon incorporated and unincorporated entities alike.
   Since Buffalo Telephone Company, a partnership, is a utility subject to the supervision of
   the Department of Public Service, Buffalo Telephone Company is subject to tax under section 186-a
   if its gross income, for the taxable year, is greater than $500.
   There is no provision in section 186-a to "pass through" to the partners, the tax imposed on
   the partnership whereby the partners would individually report and remit their distributive share of
   the tax. The Department of Taxation and Finance is completely without authority to recognize such
   a "pass-through" of tax liability. Accordingly, Buffalo Telephone Company, not the partners, must
   file the section 186-a tax return, form CT-186-P, and must remit any tax due on or before March 15
   of each year, for the year ended the previous December 31.

DATED: February 22, 1989

s/FRANK J. PUCCIA
Director
Technical Services

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