New York Advisory Opinion TSB-A-89 (6)I: Issue raised is whether, under Article 22 of the Tax Law, a 'small partnership' is subject to the penalty for failure to file or late filing a partnership return imposed under section 685(h)(2) of the Tax Law, where such partnership is not subject to the failure to file penalty pursuant to section 6698 of the Internal Revenue Code.

Plain-English summary

Petitioner was a three-partner New York partnership. Under the partnership agreement, the partners split income, expense, deduction, and credit items 25%, 37.5%, and 37.5%. One partner - who had personally loaned the partnership the funds behind its savings account - was specially allocated the interest income from that account, plus a $25,000 guaranteed payment; the only other special allocation reimbursed two other partners for out-of-pocket expenses. Altogether these special allocations amounted to less than 2% of total partnership profits. Petitioner argued these amounts weren't true "partnership items" under IRC § 702 but were really just guaranteed payments that happened to be reported on Schedule K-1 as a matter of convenience.

The Department had assessed Petitioner a penalty for late filing its 1987 New York partnership return (Form IT-204). Petitioner pushed back, arguing that because it had only three partners, it fell outside the definition of "partnership" used in IRC § 6231(a)(1)(B) - the provision the IRS uses to identify "small partnerships" (10 or fewer natural-person partners with identical item-sharing ratios) for purposes of the federal unified partnership-audit rules. Under Rev. Proc. 84-35, such small partnerships are treated as having automatically satisfied the federal "reasonable cause" test and are excused from the IRC § 6698 federal late-filing penalty, provided every partner timely and fully reported their share of income. Petitioner reasoned that since Tax Law § 607(a) says undefined Article 22 terms carry the same meaning as under federal law unless a different meaning is clearly required, and "partnership" isn't defined in Article 22, the same small-partnership safe harbor should excuse it from New York's analogous penalty under Tax Law § 685(h)(2).

The Department disagreed, and pinpointed exactly where Petitioner's argument went wrong: it conflated two different federal provisions. IRC § 6031(a) requires every partnership - defined broadly under IRC § 761(a) as any unincorporated business venture not taxed as a corporation, trust, or estate - to file a federal return, full stop; there's no small-partnership exception to that filing duty. The narrower "10-or-fewer-partners" definition in IRC § 6231(a)(1)(B) exists only for the unified partnership-audit procedures in a different part of the Code. Rev. Proc. 84-35 borrows that narrower definition purely as an administrative shortcut, to say that qualifying small partnerships are deemed to have met the reasonable-cause test specifically for the IRC § 6698 penalty - it doesn't erase the underlying filing requirement, and a small partnership can still lose that automatic treatment for other reasons under Rev. Proc. 84-35 § 3.03.

Translated to New York: Tax Law § 658(c)(1) independently requires every partnership with a resident partner or New York-source income to file a New York partnership return, regardless of partner count. If that return isn't filed, or is filed late, Tax Law § 685(h)(2)'s penalty applies unless the partnership shows "reasonable cause." But New York's reasonable-cause test is entirely its own creature, governed by Income Tax Regs § 102.7 - not by whatever standard lets a small partnership dodge the federal § 6698 penalty. Meeting the federal small-partnership safe harbor simply has no bearing on the separate New York inquiry. Because whether Petitioner's specific late filing meets New York's reasonable-cause standard is a factual question, the Department couldn't resolve it in an Advisory Opinion (Tax Law § 171(24); 20 NYCRR 901.1(a)) - so the opinion answers only the legal question (no automatic pass-through), leaving the factual reasonable-cause determination for another day.

What this means for you

Small partnerships (3-10 partners) that missed a NY IT-204 filing deadline

Don't assume that qualifying as a federal "small partnership" under IRC § 6231(a)(1)(B) gets you out of a New York late-filing penalty. New York's filing requirement under Tax Law § 658(c) applies no matter how many partners you have, and the § 685(h)(2) penalty kicks in on a late or incomplete return unless you can independently show reasonable cause under New York's own regulation, Income Tax Regs § 102.7 - things like death or serious illness, destruction of records by fire, a pending advisory-opinion or conciliation request that squarely covers the same filing question, or another cause an ordinarily prudent person would see as reasonable (but never "I didn't know I had to file").

Tax preparers who assume federal small-partnership relief automatically covers state penalties

This opinion is a reminder that Tax Law § 607(a)'s federal-conformity rule for undefined terms only carries a definition across state lines - it doesn't import an entire federal administrative safe harbor. Rev. Proc. 84-35's automatic reasonable-cause treatment is narrowly built for the IRC § 6698 penalty; it says nothing about New York's § 685(h)(2) penalty or New York's § 102.7 reasonable-cause standard. When advising a small partnership client that got federal relief, run the New York reasonable-cause analysis as a wholly separate exercise.

General partnerships handling special allocations and guaranteed payments

The facts here (a special allocation of loan-funded interest income, a $25,000 guaranteed payment, and reimbursement of two partners' expenses, together under 2% of total profits) didn't change the outcome - the Department didn't need to resolve whether those amounts were "partnership items" or disguised guaranteed payments, because the filing and penalty questions turned entirely on partner count and reasonable cause, not on how income was characterized on the K-1. If you're structuring special allocations, keep in mind that doing so doesn't affect whether the entity must file a partnership return or whether a late-filing penalty applies.

Common questions

Q: If the IRS waives my late-filing penalty because I'm a small partnership, does New York automatically waive its penalty too? A: No. The federal small-partnership safe harbor under Rev. Proc. 84-35 only establishes automatic "reasonable cause" for purposes of the federal IRC § 6698 penalty. New York's reasonable-cause standard under Income Tax Regs § 102.7 is a completely independent inquiry, and meeting the federal test has no bearing on it.

Q: Does having 10 or fewer partners exempt my partnership from having to file a New York partnership return at all? A: No. Tax Law § 658(c)(1) requires every partnership with a New York resident partner or New York-source income to file a return, regardless of how many partners it has. Even federally, IRC § 6031(a) requires every partnership (as broadly defined in IRC § 761(a)) to file a return - the small-partnership definition in IRC § 6231(a)(1)(B) only affects penalty exposure under a different Code section, not the filing duty itself.

Q: What counts as "reasonable cause" for a late New York partnership return? A: Income Tax Regs § 102.7(d) lists specific grounds: death or serious illness of the taxpayer, preparer, or a family member (or unavoidable absence) that precluded timely filing; destruction of business records by fire or casualty; a pending advisory opinion, declaratory ruling, conciliation conference, Division of Tax Appeals petition, or court proceeding that squarely involves the same filing question; or any other cause an ordinarily prudent person would view as reasonable. Ignorance of the law is expressly excluded. Regs § 102.7(e) separately addresses late-arriving information (like late W-2s), which generally isn't reasonable cause unless the taxpayer timely requested an extension and made a good-faith estimated payment.

Q: Did the Department decide whether this particular partnership's late filing was excused? A: No. Whether reasonable cause exists is a factual determination that the Department said it cannot make in an Advisory Opinion, citing Tax Law § 171(24) and 20 NYCRR 901.1(a). The opinion only resolves the legal question - that the federal small-partnership safe harbor doesn't automatically satisfy the New York standard - leaving the factual reasonable-cause dispute over Petitioner's 1987 return unresolved.

Q: Does it matter that some of the partnership's income was specially allocated (a $25,000 guaranteed payment and loan-funded interest) rather than split under the standard 25%/37.5%/37.5% ratio? A: Not for this ruling. Petitioner argued the special allocations were really disguised guaranteed payments rather than true "partnership items," but the Department didn't need to reach that characterization question - the filing requirement and penalty analysis applied regardless of how the partnership's income was allocated among its three partners.

Citations and references

• Tax Law § 658(c)(1) - requires every partnership with a NY resident partner or NY-source income to file a NY partnership return setting out all items of income, gain, loss, and deduction
• Tax Law § 685(h)(2) - imposes a monthly penalty (capped at five months) for failing to timely file, or filing an incomplete, partnership/S-corp return, unless due to reasonable cause and not willful neglect
• Tax Law § 607(a) - undefined Article 22 terms take the same meaning as under federal tax law "unless a different meaning is clearly required"
• IRC § 761(a) - defines "partnership" broadly as any unincorporated business/financial venture not taxed as a corporation, trust, or estate
• IRC § 6031(a) - requires every partnership as so defined to file a federal return
• IRC § 6698(a) - federal penalty for a partnership's failure to timely file a complete return, unless due to reasonable cause
• IRC § 6231(a)(1)(B) - narrower "small partnership" definition (10 or fewer natural-person partners with identical item-sharing ratios), used for the subchapter C unified partnership-audit procedures
• Rev. Proc. 84-35 (1984-1 CB 509) §§ 3.01, 3.03 - deems qualifying small partnerships to have automatically met the reasonable-cause test against the IRC § 6698 penalty (if all partners fully and timely reported their shares), but notes this treatment can still be lost for other reasons and does not remove the underlying filing requirement
• Income Tax Regs § 102.7(d) - New York's own grounds for reasonable cause: death/serious illness/unavoidable absence, destruction of records by casualty, a pending advisory opinion/conciliation/Tax Appeals/judicial proceeding on the same filing question, or any other cause an ordinarily prudent person would view as reasonable (excluding ignorance of the law)
• Income Tax Regs § 102.7(e) - inability to timely obtain necessary information is not reasonable cause unless the taxpayer timely sought an extension and made a good-faith estimated payment
• Tax Law § 171(24); 20 NYCRR 901.1(a) - reasonable cause is a factual question that the Department cannot resolve in an Advisory Opinion

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a89_6i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (6) I
Income Tax
July 12, 1989

STATE TAX COMMISSION
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I890213A

On February 13, 1989, a Petition for Advisory Opinion was received from Zissu Stein and Mosher, 270 Madison Avenue, New York, New York 10022. The issue raised is whether, under Article 22 of the Tax Law, a "small partnership" is subject to the penalty for failure to file or late filing a partnership return imposed under section 685(h)(2) of the Tax Law, where such partnership is not subject to the failure to file penalty pursuant to section 6698 of the Internal Revenue Code. Facts Petitioner is a partnership consisting of three partners. The partners share all items of income, expense, deduction and credit in accordance with their partnership agreement which calls for a 25%, 37 1/2% and 37 1/2% allocation. Interest income attributable to a savings account is specially allocated to one partner inasmuch as the fund represented by the account was loaned to the partnership by him. In addition, this partner receives a guaranteed payment of $25,000 in accordance with the partnership agreement. The only other "special allocation" is to reimburse two partners for various out of pocket expenses. The "special allocations" account for less than 2% of total partnership profits. Petitioner contends that the "special allocations"are not "partnership items" (See, Internal Revenue Code, section 702), but are properly regarded as guaranteed payments for which Schedule K-1 is merely a convenient reporting vehicle. Petitioner has been assessed a penalty for the late filing of its 1987 New York State Partnership Tax Return (Form IT-204). Because Petitioner consists of only three partners, Petitioner argues that it is not a "partnership" pursuant to section 6231(a)(1)(B) of the Internal Revenue Code (hereinafter "IRC"). In addition, Petitioner contends that it is not subject to the penalty imposed pursuant to section 6698 of the Internal Revenue Code. Petitioner states that the penalty contained in section 685(h)(2) of the Tax Law employs substantially the same language as section 6698 of the IRC. Also, Petitioner provides that it has been held that the state tax law is to be interpreted so as to follow federal judicial and administrative determinations and precedents where section 607of the Tax Law is applicable. Moreover, Petitioner provides that section 607(a)of the Tax Law states that "[a]ny term used in this article [22] shall have the same meaning as when used in a comparable context in the laws of the United States relating to federal income taxes, unless a different meaning is clearly required.... " Therefore, Petitioner asserts that based upon section 607 of the Tax Law, the word "partnership" as used in section 685(h)(2) of the Tax Law has the same meaning as under section 6698 of the IRC. Petitioner further asserts that although neither of such statutes contains a definition of this word, various federal authorities restrict its meaning to exclude the partnership in question.

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For example, Internal Revenue Procedure 84-35 (1984-1 CB 509) incorporates the definition set forth in section 6231(a)(1)(B) of the IRC to exclude from the coverage of section 6698 of the IRC, partnerships consisting of 10 or fewer partners. Discussion Section 658(c)(1) of Article 22 of the Tax Law requires: Every partnership having a resident partner or having any income derived from New York sources, determined in accordance with the applicable rules of section six hundred thirty-two as in the case of a nonresident individual, shall make a return for the taxable year setting forth all items of income, gain, loss and deduction and such other pertinent information as the tax commission may by regulations and instructions prescribe .... Section 685(h)(2) of the Tax Law provides: If any partnership or S corporation required to file a return under subsection (c) of section six hundred fifty-eight for any taxable year fails to file such return at the time prescribed therefor (determined with regard to any extension of time for filing), or files a return which fails to show the information required under subsection (c), unless it is shorn that such failure is due to reasonable cause and not due to willful neglect, there shall, upon notice and demand by the tax commission and in the same manner as tax, be paid by the partnership or S corporation a penalty for each month (or fraction thereof)during which such failure continues (but not to exceed five months) .... The term "partnership" is not defined in Article 22 of the Tax Law. However, pursuant to section 607(a) of the Tax Law, such term will have the same meaning as when used in comparable text in the IRC. Section 761(a) of IRC provides that for federal income tax purposes: the term "partnership" includes a syndicate, group, pool, joint venture or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title [subtitle], a corporation or a trust or estate .... In addition, section 6031(a) of the IRC requires: Every partnership (as defined in section 761 (a)) shall make a return for each taxable year, stating specifically the items of its gross income and the deductions allowable by subtitle A, and such other information for the purpose of carrying out

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the provisions of subtitle A as the Secretary may by forms and regulations prescribe, and shall include in the return the names and addresses of the individuals who would be entitled to share in the taxable income if distributed and the amount of the distributive share of each individual. For federal income tax purposes, the penalty for failure to file a partnership return is contained in section 6698(a) of the IRC which provides that, if any partnership required to file a return under section 6031 for any taxable year ­ (1) fails to file such return at the time prescribed therefor (determined with regard to any extension of time for filing), or (2) files a return which fails to show the information required under section 6031, such partnership shall be liable for a penalty determined under subsection (b) for each month (or fraction thereof) during which such failure continues (but not to exceed 5 months), unless it is shown that such failure is due to reasonable cause. Section 6231(a)(1)(B) of the IRC provides that for purposes of subchapter C [Tax treatment of partnership items] of Chapter 63 [assessment] of the IRC the term "partnership" shall not include any partnership if ­ (I) such partnership has 10 or fewer partners each of whom is a natural person (other than a nonresident alien) or an estate, and (II) each partner's share of each partnership item is the same as his share of every other item. Pursuant to Internal Revenue Service Rev. Proc. 84-36, section 3:
.01 [a] domestic partnership composed of 10 or fewer partners and coming within the exceptions outlined in section 6231(a)(1)(B) of the Code will be considered to have met the reasonable cause test and will not be subject to the penalty imposed by section 6698 for the failure to file a complete or timely partnership return, provided that the partnership, or any of the partners, establishes, if so requested by the Internal Revenue Service, that all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely filed income tax returns.

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. . .
.03 Although a partnership of 10 or fewer partners may not be automatically excepted from the penalty imposed by section 6698 of the Code under section 3.01, the partnership may show other reasonable cause for failure to file a complete or timely partnership return.
. . . .
Accordingly, for federal income tax purposes, pursuant to section 6031(a) of the IRC, Petitioner would be required to file a partnership return. However, Petitioner may qualify as a "small partnership" for purposes of meeting the reasonable cause test, and thereby not be subject to the penalty imposed by section 6698 of the IRC. For New York State personal income tax purposes, Petitioner is required to file a partnership return pursuant to section 658(c) of the Tax Law. However, if Petitioner can show reasonable cause for failing to file or late filing such partnership return, the penalty for failure to file a partnership return under section 685(h)(2) of the Tax Law will not be applied. But, it should be noted that meeting the requirements of "reasonable cause" for federal income tax purposes, under section 6698 of the IRC does not necessarily mean that the test for reasonable cause for New York State personal income tax purposes has been met. Reasonable cause must be determined pursuant to the rules set forth in the New York State Personal Income Tax Regulations. Section 102.7 of the Personal Income Tax Regulations provides that, for New York State personal income tax purposes, the grounds for reasonable cause must be clearly established as stated in subdivision (d) and may include the following: (1) The death or serious illness of the taxpayer, employer or other person against whom the additions to tax or penalties have been assessed or are assessable, a member of such party's family, such party's personal representative or employer, or the unavoidable absence of the taxpayer, employer, or other person or personal representative from the usual place of business, which precluded timely compliance, may constitute reasonable cause provided that: (i) in the case of the failure to file any New York State income tax return, the applicable New York State income tax return is filed; or (ii) in the case of the failure to pay or deposit any tax, such amount is paid or deposited; within a justifiable period of time after the death, illness or absence... (2) The destruction of the place of business or business records of the taxpayer, employer or other person against whom the additions to tax or

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penalties have been assessed or are assessable, the place of business or business records of such party's personal representative or employer, or the taxpayer's residence or income records, including wage and tax statements and returns of information, by a fire or other documented casualty, which precluded timely compliance, may constitute reasonable cause provided that: (i) in the case of the failure to file any New York State income tax return, the applicable New York State income tax return is filed; or (ii) in the case of the failure to pay or deposit any tax, such amount is paid or deposited; within a justifiable period of time after the casualty takes place... (3) A pending petition to the Commissioner of Taxation and Finance for an advisory opinion or a declaratory ruling, a pending conciliation conference proceeding in the Bureau of Conciliation and Mediation Services of the Division of Taxation, a pending petition to the Division of Tax Appeals or a pending action or proceeding for judicial determination may constitute reasonable cause, until the time in which the taxpayer has exhausted its administrative or judicial remedies, as applicable, for a taxable period or periods the return or returns for which are due subsequent to the filing of the petition with the Commissioner of Taxation and Finance, the commencement of the conciliation conference proceeding, the filing of the petition with the Division of Tax Appeals or the commencement of the judicial action or proceeding provided that: (i) the petition, action or proceeding involves a question or issue affecting whether or not the individual or entity is subject to tax and/or required to file a New York State income tax return; (ii) the petition, action or proceeding is not based on a position which is frivolous nor is it intended to delay or impede the administration of article 22 of the Tax Law; and (iii) the facts and circumstances for such taxable period or periods are identical or virtually identical to those of the taxable period or periods covered by the petition, action or proceeding... (4) Any other cause for delinquency which would appear to a person of ordinary prudence and intelligence as a reasonable cause for delay and which clearly indicates an absence of willful neglect may be determined to be reasonable cause. Ignorance of the law, however, will not be considered as a basis for reasonable cause.

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Subdivision (e) of section 102.7 of the Personal Income Tax Regulations provides that: (e)(1) Except as provided for in subparagraph (2)(ii) of this subdivision, an inability to timely obtain and assemble essential information (including wage and tax statements or returns of information from an employer or payor) required for the preparation of a complete New York State income tax return, shall not be a basis for reasonable cause. (2)(i) Where an inability to timely obtain and assemble essential information required for the preparation of a complete New York State income tax return exists and extensions of time for filing such return are available pursuant to section 151.1 of this Title, such extensions of time for filing must be obtained, a return which reflects the known tax liability must be filed on or before the extended due date for filing and any balance of tax must be paid with the return on that portion of the tax liability which can be ascertained and shown on such return. The relevant facts affecting that portion of the tax liability which cannot be ascertained must be fully disclosed with the timely filed New York State income tax return. When such liability is ascertained, an amended New York State income tax return must be immediately filed together with any additional tax due. (ii) However, where a taxpayer: (a) makes a timely application for an extension of time to file the New York State income tax return; (b) makes a good faith effort to properly estimate the tax due in accordance with section 151.2 of this Title; and (c) pays with the application for extension of time for filing any unpaid balance of the tax as estimated; an inability for reasons beyond the taxpayer's control to obtain and assemble essential information may constitute reasonable cause for failure to file a New York State income tax return and for failure to pay the amount shown as tax on such return, where such inability precluded the taxpayer from properly estimating the tax as finally determined (see section 151.2[a][3][i] of this Title) thereby invalidating the extensions of time for filing the New York State income tax return. In support of this ground as a basis for reasonable cause, the taxpayer or the taxpayer's representative must indicate what information was unavailable and explain the reason or reasons why such information was unavailable, despite reasonable efforts by or on behalf of the taxpayer to obtain the missing information. It must further be explained how the original estimation of tax was derived and what, if any, allowances were included in the estimation to provide for the unknown tax liability.

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Accordingly, for purposes of Article 22 of the Tax Law, Petitioner is required by section 658(c) to file a partnership return. If such return is not filed or is filed late, Petitioner is subject to the penalty for failure to file a partnership return pursuant to section 685(h)(2) of the Tax Law, unless Petitioner can show that such failure is due to reasonable cause. Reasonable cause must be determined under the rules provided in section 102.7 of the Personal Income Tax Regulations. Meeting the requirements for reasonable cause for federal income tax purposes has no bearing on the New York State determination of reasonable cause. However, for New York State income tax purposes, the determination of reasonable cause 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).

DATED: July 12, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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