Is a Delaware business trust that is classified as a partnership for federal income tax purposes treated as a partnership, and not as a corporation, for New York Article 9-A franchise tax?
Plain-English summary
Diversified Futures Trust I is a Delaware business trust formed to trade commodity futures, forwards, and options for its interestholders. Its trustee is a Delaware bank with only ministerial duties; the business is run by a managing owner (Prudential Securities Futures Management) that has at least a 1% interest and general-partner-like liability, while public investors hold 99% as limited interests with limited-partner-style rights. The trust expects to be classified as a partnership -- not an association taxable as a corporation -- for federal income tax purposes under the Treasury "check-the-box"-era classification regulations.
The question: is it then a partnership (not a corporation) for New York Article 9-A franchise tax?
Yes. Section 208.1 defines "corporation" to include an association within IRC section 7701(a)(3), a joint-stock company or association, a publicly traded partnership treated as a corporation under IRC section 7704, and any business conducted by trustees where ownership is evidenced by certificate. Chapter 61 of the Laws of 1989 added "association" and PTPs to section 208.1 specifically to tax as New York corporations those entities that are taxed as corporations federally -- the legislative aim was to track federal classification. So where a business trust is treated as a partnership rather than an association for federal purposes, it does not come within the section 208.1 definition of "corporation," and it is not subject to Article 9-A. Because Diversified Futures Trust I is a federal partnership, it is not a New York corporation and owes no Article 9-A tax.
What this means for you
New York entity classification follows the federal characterization
Section 208.1, as amended in 1989, deliberately mirrors federal law: an entity taxed as a corporation (association or section 7704 PTP) federally is a New York corporation; one taxed as a partnership is not.
A business trust is not automatically a corporation
Even a trust "conducted by trustees with certificated interests" is outside Article 9-A if it is a partnership -- not an association -- for federal income tax purposes.
Confirm the federal classification first
The result turns on the entity actually being treated as a partnership federally (here, supported by the managing owner's 1% interest, liability, and net-worth commitments). If it were a federal association, the New York answer would flip.
Common questions
Q: My business trust is a partnership for federal tax. Do I owe New York Article 9-A franchise tax?
A: No. A trust that is a partnership (not an association) federally is not a corporation under section 208.1 and is not subject to Article 9-A.
Q: What did the 1989 amendment change?
A: It added associations (IRC 7701(a)(3)) and publicly traded partnerships (IRC 7704) to the definition of corporation, to tax as New York corporations the entities taxed as corporations federally.
Q: Could the same trust ever be a New York corporation?
A: Yes -- if it were classified as an association taxable as a corporation, or a section 7704 publicly traded partnership treated as a corporation, federally.
Citations and references
Statutes, regulations, and authorities:
- Tax Law section 209.1 (Article 9-A franchise tax on corporations)
- Tax Law section 208.1 (definition of corporation -- includes an association within IRC section 7701(a)(3) and a publicly traded partnership treated as a corporation under IRC section 7704)
- IRC section 7701(a)(3) (association); IRC section 7704 (publicly traded partnership)
- Chapter 61 of the Laws of 1989 (amended section 208.1 to tax associations and publicly traded partnerships as corporations)
- Treasury Regulations sections 301.7701-1 through 301.7701-4 (entity classification)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1994.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a94_14c.pdf
Original ruling text
New York State Department of Taxation and Finance
Taxpayer Services Division
Technical Services Bureau
TSB-A-94 (14) C
Corporation Tax
October 14, 1994
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C940607A
On June 7, 1994, a Petition for Advisory Opinion was received from Diversified Futures
Trust I, c/o Prudential Securities Futures Management, Inc., Financial Square, 6th Floor, New York,
New York 10272.
The issue raised by Petitioner, Diversified Futures Trust I, is whether an entity organized as
a Delaware Business Trust, which is classified as a partnership for Federal income tax purposes, will
be treated as a partnership and not as an association taxable as a corporation for New York State
franchise tax purposes.
Petitioner has been formed as a business trust under Chapter 38 of Title 12 of the Delaware
Code. Petitioner will be operated in accordance with the terms of a trust agreement ("Trust
Agreement"). Petitioner will receive an opinion of legal counsel admitted to practice in the State of
Delaware confirming that the provisions of the Trust Agreement will be effective under Delaware
law to establish the rights and obligations of the holders of interests in Petitioner ("Interestholders")
among themselves and with the public at large.
The purpose of Petitioner is to trade, buy, sell, spread and otherwise acquire, hold and
dispose of commodity futures, forward and option contracts for the account of the Interestholders.
The trustee of Petitioner is a Delaware commercial bank, which may be replaced by the Manager
(defined below) at any time. The trustee has no operational or managerial responsibilities with
respect to Petitioner; no business will be conducted by the trustee. Instead, the duties of the trustee
are solely ministerial.
The duty and authority of the trustee to manage the business and affairs of Petitioner has been
delegated to, and the conduct of Petitioner's investment activities is controlled and conducted
exclusively by, one of the Interestholders, Prudential Securities Futures Management Inc., as
managing owner ("Manager"). The principal office of the Manager is located in New York, New
York.
The Manager is liable for the obligations and expenses of Petitioner, to the extent that they
exceed and are not satisfied out of the assets of Petitioner, to the same extent that the Manager would
be so liable if Petitioner were a partnership formed under the Delaware Revised Uniform Limited
Partnership Act and the Manager was the general partner of such partnership.
The Manager has substantial assets other than its interest in Petitioner. In addition, the
Manager initially will have a net worth, consisting of assets other than its interest in Petitioner, of
10 Percent of the total capital contributions made by Interestholders to Petitioner, and is obligated
not to take any affirmative action to reduce its net worth below an amount that is sufficient
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TP-9 (9/88)
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to satisfy the net worth requirements in section 4.07 of Rev Proc 89-12, 1989-1 CB 798. (Rev Proc
89-12 sets forth certain guidelines that are applied by the Internal Revenue Service in determining
whether to issue a ruling concerning the Federal income tax classification of a limited partnership).
Such safe harbor currently is that the net worth of the general partner must be at least 10 percent of
the total contributions made to the limited partnership.
Petitioner has two classes of beneficial interests: General Interests and Limited Interests. No
certificate evidencing an interest in Petitioner will be issued.
The holder of all the General Interests is the Manager. The Manager will have at all times
at least a one percent interest in each material item of Petitioner's income, gain, loss and deduction.
The Manager will contribute in cash to Petitioner an amount, which, when added to the total initial
capital contributions made to Petitioner by all the Interestholders, will be not less than one percent
of such total contributions. In addition, the Manager will contribute in cash to Petitioner an amount
equal to 1.01 percent of any additional capital contributions made to Petitioner by Limited
Interestholders.
Limited Interests will be sold to the public pursuant to a public offering registered with the
Securities and Exchange Commission. The Limited Interestholders will have a 99 percent interest
in Petitioner. The General and Limited Interestholders will have the same rights to receive
distributions from Petitioner and to be allocated a share of Petitioner's income, gain, loss and
deduction.
Limited Interestholders will have rights equivalent to those of limited partners in a limited
partnership. With few exceptions, Limited Interestholders will have no right or authority to
participate in management decisions and will not be liable under the terms and conditions of the
Trust Agreement and Delaware law for the debts and obligations of Petitioner.
The Manager may transfer its General Interests. Limited Interestholders, who own
substantially all the interests in Petitioner, can assign their interests in Petitioner to third parties but
the assignee cannot become a substitute participant except with the consent of the Manager, which
consent the Manager may grant or withhold in its sole discretion.
Petitioner will dissolve on December 31, 2014, unless dissolved at an earlier date. Petitioner
will dissolve automatically upon the bankruptcy, insolvency, dissolution, retirement or resignation
of the Manager, unless the Limited Interestholders consent to continue Petitioner. Neither the death,
insanity or bankruptcy of a Limited Interestholder nor the admission, withdrawal or substitution of
a Limited Interestholder will cause Petitioner to terminate.
Petitioner states that pursuant to sections 301.7701-1, 301.7701-2, 301.77013 and 301.7701-4
of the Treasury Regulations, it will be treated as a partnership rather than an association taxable as
a corporation for Federal income tax purposes. See, Rev Rul 88-79, 1988-2 CB 361.
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Section 209.1 of the Tax Law imposes the business corporation franchise tax on every
foreign corporation, unless specifically exempt, for the privilege of doing business, or of employing
capital, or of owning or leasing property in New York State in a corporate or organized capacity, or
of maintaining an office in New York State.
Section 208.1 of the Tax Law provides that the term "corporation" includes an association,
within the meaning of section 7701(a)(3) of the Internal Revenue Code ("IRC"), a joint-stock
company or association, a publicly traded partnership treated as a corporation for purposes of the
IRC pursuant to section 7704 thereof and any business conducted by a trustee or trustees wherein
interest or ownership is evidenced by certificate or other written instrument.
Chapter 61 of the Laws of 1989 amended section 208.1 Tax Law to include as a corporation,
an association within the meaning of section 7701(a)(3) of the IRC and a publicly traded partnership
treated as a corporation pursuant to section 7704 of the IRC. In the memorandum in support of
Chapter 61 of the Laws of 1989, the statement in support of the amendment of section 208.1 of
Article 9-A of the Tax Law states in part:
Associations and Publicly Traded Partnerships. The intent of these provisions is to
tax as corporations for State purposes certain non-stock associations and publicly
traded partnerships which are taxed as corporations for federal purposes. These
noncorporate entities engage in business activities traditionally conducted in
corporate or quasi-corporate form and enjoy some of the benefits of corporate form,
such as continuity of life, centralization of management, limited liability of owners
of the entity and free transferability of ownership interests, often widely held, in the
entity...
Associations. Associations and joint-stock companies are included within the
definition of the term "corporation" under the Internal Revenue Code and are
accordingly taxed as such... Article 9-A of the Tax Law imposes a franchise tax on
"business corporations," including "a joint-stock company or association and any
business conducted by a trustee or trustees wherein interest or ownership is
evidenced by certificate or other written instrument .... " Tax Law section 208.1. Thus
... Article 9-A and the Internal Revenue Code overlap in taxing as corporations (1)
true corporations and (2) joint-stock companies and joint-stock associations. In
addition, the Code taxes as corporations entities included under the rubric of
"associations." Associations are unincorporated organizations whose characteristics
are substantially similar to those of corporations. The term association as used in the
Code includes those business trusts which are subject to Article 9-A ... as businesses
"conducted by a trustee or trustees wherein interest or ownership is evidenced by
certificate or other written instrument." However, there are other business entities
which are taxed under the Code as associations but which are not subject to tax under
Article ... 9-A. This bill would bring such entities within the scope of Article ... 9-A
by adding the term "association" to the list of entities encompassed within the Article
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... 9-A definition of the term corporation.
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The term "association" is not defined in the Code itself, but is thoroughly explicated
in Federal regulations at 26 CFR section 301.7701-02 .... (Emphasis added.)
As shown in the memorandum in support of Chapter 61 of the Laws of 1989, the Legislature
recognized that the IRC taxes joint-stock companies and joint-stock associations as corporations, and
that the term "association" as used in the IRC includes those business trusts which are subject to
Article 9-A as businesses "conducted by a trustee or trustees wherein interest or ownership is
evidenced by certificate or other written instrument". The Legislative intent in amending section
208.1 of the Tax Law is to tax as corporations certain non-stock associations and publicly traded
partnerships that were not subject to tax under Article 9-A of the Tax Law but that are taxed as
corporations for Federal income tax purposes. Such amendment includes within the ambit of a
"corporation" all entities that meet the definition of an "association" under section 7701(a)(3) of the
IRC and publicly traded partnerships treated as corporations under section 7704 of the IRC.
Accordingly, where a business trust is treated as a partnership rather than an association
taxable as a corporation for Federal income tax purposes, such business trust does not come within
the ambit of a "corporation" for purposes of section 208.1 of the Tax Law and is not subject to tax
under Article 9-A of the Tax Law.
Herein, if Petitioner is an entity that does not meet the definition of an "association" under
section 7701(a)(3) of the IRC and is not treated as a corporation for Federal income tax purposes,
Petitioner is not a "corporation" under section 208.1 of the Tax Law and Petitioner is not subject to
tax under Article 9-A of the Tax Law.
DATED: October 14, 1994
s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division
NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.