NY TSB-A-96(11)C Corporation Tax 1996-04-01

Is an LLC taxed as a partnership a 'portfolio investment partnership,' and is a foreign corporate member subject to Article 9-A by reason of its membership?

Short answer: New York follows the LLC's federal classification, so an LLC taxed as a partnership is a partnership for New York tax. An LLC that meets the IRC section 851(b)(2) gross-income requirement and is not a section 1236 dealer in stocks or securities is a 'portfolio investment partnership' under 20 NYCRR 1-3.2(a)(6)(iii)(d). A foreign corporate member that does not participate in management is treated like a limited partner: if the LLC is a portfolio investment partnership, the foreign member is not doing business in New York merely by being a member; if it is not, the member must apply the limited-partner rules of 20 NYCRR 1-3.2(a)(6) to decide whether it is doing business here.

Disclaimer: This is an official New York State Department of Taxation and Finance Advisory Opinion (TSB-A), issued by the Office of Counsel at a taxpayer's request. It is limited to the facts set forth in it and binds the Department only with respect to the petitioner to whom it was issued, and only if that petitioner fully and accurately described all relevant facts; another taxpayer cannot rely on it. It reflects the law, regulations, and Department policy in effect when issued and may since have changed. Taxpayer-identifying details are redacted. New York State and local sales taxes are administered centrally by the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New York tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

FGIC CMRC Corp. will be a member of Trinity Funding Company, LLC, an LLC taxed as a partnership federally that sells investment contracts and invests the proceeds in a portfolio of fixed-income securities. FGIC asked (1) whether the LLC is a "portfolio investment partnership" under 20 NYCRR 1-3.2(a)(6)(iii)(d), and (2) whether a foreign corporate member (a non-managing "Preferred Member") is subject to Article 9-A just by being a member.

The Department held:

New York follows the federal classification. An LLC taxed as a partnership federally is a partnership for New York tax (Tax Law section 208.1; TSB-M-94(6)I/(8)C). So it is consistent to treat an LLC that meets the IRC section 851(b)(2) gross-income requirement and is not a section 1236 dealer in stocks or securities as a portfolio investment partnership.
A non-managing foreign member is treated like a limited partner. Because a Preferred Member does not participate in management, it stands in the position of a limited partner under 20 NYCRR 1-3.2(a)(6).
If the LLC is a portfolio investment partnership, the foreign member is not doing business, employing capital, owning property, or maintaining an office in New York merely by reason of its membership.
If the LLC is not a portfolio investment partnership, the member must apply the limited-partner rules of 20 NYCRR 1-3.2(a)(6) -- including the 1%-interest / $1 million-basis thresholds -- to determine whether it is doing business in New York.

This is the foundational LLC-classification / portfolio-investment-partnership opinion that later opinions (e.g., the limited-partner-nexus opinion TSB-A-97(1)C) build on.

What this means for you

New York classifies an LLC the way the IRS does

An LLC taxed as a partnership federally is a partnership in New York; one taxed as a corporation is a corporation. The state does not run a separate classification test.

The portfolio-investment-partnership exception protects passive foreign members

If a partnership (or partnership-LLC) meets the IRC section 851(b)(2) gross-income test and is not a section 1236 securities dealer, it is a portfolio investment partnership, and a foreign corporate limited partner/member is not pulled into New York tax merely by holding its interest.

Otherwise, the limited-partner thresholds apply

If the entity is not a portfolio investment partnership, a foreign corporate member is treated like a limited partner and must apply the 20 NYCRR 1-3.2(a)(6) tests (including the 1% / $1 million thresholds) to decide whether it is doing business in New York.

Common questions

Q: How is an LLC classified for New York tax?
A: It follows the federal classification -- partnership, corporation, or disregarded entity.

Q: What makes an LLC a "portfolio investment partnership"?
A: Being taxed as a partnership, meeting the IRC section 851(b)(2) gross-income requirement, and not being a section 1236 dealer in stocks or securities.

Q: Is a foreign member taxable in New York by reason of its membership?
A: If the LLC is a portfolio investment partnership, no. If it is not, the member applies the limited-partner doing-business rules (including the 1% / $1 million thresholds).

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 2 (definitions of "limited liability company" and "partnership and partner"); section 208.1 (corporation includes an association, including an LLC)
- 20 NYCRR 1-3.2(a)(6)(i) (foreign corporation that is a limited partner; doing business); 20 NYCRR 1-3.2(a)(6)(iii)(d) (portfolio investment partnership)
- IRC section 851(b)(2) (gross-income requirement); IRC section 1236 (dealer in securities)
- Department Memorandum TSB-M-94(6)I and (8)C; see also limited-partner nexus, TSB-A-97(1)C

Source

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (11) C
Corporation Tax
April 1, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C950221A

On February 21, 1995, a Petition for Advisory Opinion was received from FGIC CMRC
Corp., 115 Broadway, New York, New York 10006.
The issues raised by Petitioner, FGIC CMRC Corp., are (1) whether a limited liability
company ("LLC") that is taxable as a partnership for Federal income tax purposes, will be treated
as a "portfolio investment partnership" within the meaning of section 1-3.2(a)(6)(iii)(d) of the
Business Corporation Franchise Tax Regulations ("Article 9-A Regulations"), and (2) whether a
foreign corporation that is a member of an LLC that is taxable as a partnership for Federal income
tax purposes, will be subject to tax under Article 9-A of the Tax Law by reason of being a member
of the LLC that is doing business, employing capital, owning or leasing property or maintaining an
office in New York State.
Petitioner submits the following facts as the basis of this Advisory Opinion.
Petitioner will be a member of Trinity Funding Company, LLC (the "Company"), an LLC
that will be organized pursuant to the New York Limited Liability Company Law. A wholly
owned, special purpose subsidiary of JH Holdings, Inc. ("JH Holdings") will serve as managing
member of the Company and will be primarily responsible for the management of the Company's
affairs. Both Petitioner and the investing subsidiary of JH Holdings will be New York State and New
York City taxpayers. Petitioner represents that the Company will be treated as a partnership for
Federal income tax purposes.
The Company will issue common membership interests ("Common Membership Interests")
and preferred membership interests ("Preferred Membership Interests"). The Common Membership
Interests will be owned by Petitioner and the investing subsidiary of JH Holdings. The Preferred
Membership Interests will be owned by certain foreign corporations (the "Preferred Members").The
Preferred Members will not participate in the management of the Company.
The Company will sell investment contracts ("Investment Contracts") to third party
purchasers ("Investors"). The Investment Contracts will provide a fixed rate of return to the
Investors. The Company will invest the proceeds of the Common Membership Interests, the
Preferred Membership Interests and the Investment Contracts in a portfolio of fixed-income
securities that will pay a return sufficient to allow the Company to satisfy its obligations with respect
to the Preferred Membership Interests and the Investment Contracts. Petitioner represents that the
Company will satisfy the gross income requirement of section 851(b)(2) of the Internal Revenue
Code (the "IRC"). Petitioner further represents that the Company will not be a dealer (within the
meaning of section 1236 of the IRC) in stocks or securities.

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TSB-A-96 (11) C
Corporation Tax
April 1, 1996

Section 2 of the Tax Law provides the definition of certain terms used in the Tax Law, and
was amended by Chapter 576 of the Laws of 1994 which added the following:
5. The term "limited liability company" means a domestic limited
liability company ora foreign limited liability company, as defined in
section one hundred two of the limited liability company law.
6. "Partnership and partner," unless the context requires otherwise,
shall include, but shall not be limited to, a limited liability company
and a member thereof, respectively.
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 IRC, including an LLC.
Accordingly, an LLC that is treated as a corporation for Federal income tax purposes is
treated as a corporation for New York State tax purposes. An LLC that is treated as a partnership for
Federal income tax purposes, is treated as a partnership for New York State tax purposes. (See,
Department of Taxation and Finance Memorandum, TSB-M-94(6)I and (8)C, October 25, 1994.)
Section

1-3.2(a)(6)(i)

the

Article

9-A

Regulations

states:

[a] foreign corporation is doing business, employing capital, owning
or leasing property or maintaining an office in New York State if it is
a limited partner of a partnership, other than a portfolio investment
partnership, which is doing business, employing capital, owning or
leasing property or maintaining an office in New York State and if it
is engaged, directly or indirectly, in the participation in or the
domination or control of all or any portion of the business activities
or affairs of the partnership ....
Section

1-3.2(a)(6)(iii)(d)

the

Article

9-A

Regulations

states:

[t]he term "portfolio investment partnership" means a limited
partnership which meets the gross income requirement of section
851(b)(2) of the Internal Revenue Code... The term portfolio
investment partnership shall not include a dealer (within the meaning
of section 1236 of the Internal Revenue Code) in stocks or securities.
An LLC that is treated as a partnership for Federal income tax purposes is treated as a
partnership for New York State tax purposes. Therefore, it is consistent to treat an LLC that meets
the gross income requirement of section 851(b)(2) of the IRC and is not a dealer (within the meaning
of section 1236 of the IRC) in stocks or securities as a portfolio investment partnership for purposes
of section 1-3.2(a)(6)(iii)(d) of the Article 9-A Regulations.

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TSB-A-96 (11) C
Corporation Tax
April 1, 1996

In this case, a Preferred Member, because it does not participate in the management or
operations of the LLC, is substantially in the same position as a limited partner of a limited
partnership. Therefore, the treatment provided in section 1-3.2(a)(6) of the Article 9-A Regulations
to a foreign corporation that is a limited partner of a partnership should be extended to a foreign
Preferred Member.
Accordingly, since the Company is treated as a partnership for Federal income tax purposes,
it is treated as a partnership for New York State tax purposes. If the Company meets the gross
income requirement of section 851(b)(2) of the IRC and the Company is not a dealer, within the
meaning of section 1236 of the IRC, in stocks or securities, the Company will be treated as a
"portfolio investment partnership" for purposes of section 1-3.2(a)(6)(iii)(d) of the Article 9-A
Regulations.
Additionally, pursuant to section 1-3.2(a)(6)(i) of the Article 9-A Regulations, if the
Company is treated as a portfolio investment partnership, a foreign corporation which is a Preferred
Member of the Company is treated as a limited partner and will not be treated as doing business,
employing capital, owning or leasing property or maintaining an office in New York State because
of its membership in the Company.
However, if the Company is not treated as a portfolio investment partnership, a foreign
corporation which is a Preferred Member of the Company is treated as a limited partner and the
Preferred Member must apply the rules contained in section 1-3.2(a)(6) of the Article 9-A
Regulations to determine if it is treated as doing business, employing capital, owning or leasing
property or maintaining an office in New York State because of its membership in the Company.

DATED: April 1, 1996

NOTE:

/s/
DORIS S. BAUMAN
Director
Technical Services Bureau

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