When a corporation sells products to an LLC it owns that is taxed as a partnership, how are those sales treated in the receipts factor of the corporate member?

Plain-English summary

New Venture Gear, Inc., a C corporation, planned to form a Michigan LLC (taxed as a partnership) that it would own 99% directly and 1% indirectly. New Venture would sell all of its New-York-manufactured products to the LLC, which would resell to third parties; the LLC's profits and apportionment factors would flow up to New Venture as a corporate member. The question: how are those intercompany sales treated in New Venture's receipts factor under Article 9-A?

An LLC taxed as a partnership federally is a partnership for New York, and its corporate member is treated like a corporate partner (20 NYCRR 4-6.5), which includes its proportionate part (its income/loss distribution percentage) of the partnership's receipts in the factor.

To avoid double counting, New Venture must exclude from both the numerator and denominator of its receipts factor the portion of its sales to the LLC that is, in effect, also reflected in its distributive share of the LLC's business receipts. That excluded portion equals the sales receipts multiplied by the percentage the LLC uses to distribute its ordinary income or loss to New Venture.

What this means for you

A corporate member of a partnership-taxed LLC reports like a corporate partner

Its receipts factor includes its own business receipts plus its proportionate part of the LLC's business receipts, with "proportionate part" meaning the LLC's income/loss distribution percentage to the member.

Sales to your own partnership are partly removed to avoid double counting

The portion of a corporate member's sales to the LLC that is also captured in its distributive share of the LLC's receipts is excluded from both the numerator and denominator of the receipts factor.

Compute the exclusion using the distribution percentage

Multiply the receipts from sales to the LLC by the percentage the LLC uses to distribute its ordinary income or loss to the member; that product is the amount excluded from the receipts factor.

Common questions

Q: How is a corporation that owns a partnership-taxed LLC treated for the receipts factor?
A: Like a corporate partner: it includes its own receipts plus its proportionate (distribution-percentage) share of the LLC's receipts.

Q: Are a corporation's sales to its own LLC counted in full in the receipts factor?
A: No. The portion also reflected in the member's distributive share of the LLC's receipts is excluded from both numerator and denominator to prevent double counting.

Q: How is the excluded amount calculated?
A: By multiplying the sales-to-LLC receipts by the percentage the LLC uses to distribute its ordinary income or loss to the corporate member.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 2 (LLC and partnership/partner definitions)
- Tax Law section 208.1 (corporation includes an association, including an LLC)
- 20 NYCRR 4-6.5 (corporate partner's receipts factor; proportionate part)
- FGIC CMRC Corp, TSB-A-96(11)C; Bruce Nadell, TSB-A-96(12)C (LLC and corporate-member treatment)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a97_13c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(13)C
Corporation Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C961219A

On December 19, 1996, a Petition for Advisory Opinion was received from New
Venture Gear, Inc., 1650 Research Drive, Troy, Michigan 48083.
The issue raised by Petitioner, New Venture Gear, Inc., is whether sales
of products manufactured in New York by a corporation to a Michigan LLC, 99
percent directly owned and one percent indirectly owned by the corporation, are
included in the numerator and denominator of the receipts factor where the LLC's
profits would be added to the corporation's profits for purposes of Article 9-A
of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Taxpayer, a C corporation, intends to form a Michigan LLC which will be
treated as a partnership for federal and state tax purposes. Taxpayer will own
99 percent of the LLC directly and one percent indirectly. When treated as a
partnership, the LLC's profits and apportionment factors would flow up to the
Taxpayer, a corporate member. All sales of products manufactured by the Taxpayer
will be made to the LLC which, in turn, will sell the products to third parties.
The LLC's operations will include selling of products to third parties,
administrative support to the Taxpayer, as well as research and development
activities benefiting the Taxpayer.
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 or a 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; FGIC CMRC Corp, Adv
Op Comm T & F, April 1, 1996, TSB-A-96(11)C; and Bruce Nadell, Adv Op Comm T &
F, May 2, 1996, TSB-A-96(12)C.)

-2­
TSB-A-97(13)C
Corporation Tax

Since an LLC that is treated as a partnership for federal income tax
purposes is treated as a partnership for New York State tax purposes, it is
consistent to treat a corporate member of an LLC like a corporate partner of a
partnership. (Bruce Nadell, supra.)
Section 4-6.5 of the Business Corporation Franchise Tax Regulations
("Article 9-A Regulations") provides the rules relating to allocation by a
corporate partner of a partnership or joint venture. Section 4-6.5(a)(2)(ii) of
the Article 9-A Regulations provides that a taxpayer which is a partner of a
partnership computes the receipts factor of the business allocation percentage
and alternative business allocation percentage as follows:
the taxpayer's business receipts within New York State plus the
taxpayer's proportionate part of the partnership's business receipts
within New York State during the applicable partnership year divided
by the taxpayer's total business receipts within and without New
York State plus the taxpayer's proportionate part of the
partnership's business receipts within and without New York State
during the applicable partnership year (see Subpart 4-4 of this Part
- Receipts Factor of Business Allocation Percentage);
For purposes of section 4-6.5 of the Article 9-A Regulations, the term
proportionate part means the percentage which the partnership used to distribute
to the partner, its distributive share of partnership ordinary income in an
income year or partnership ordinary loss in a loss year.
In this case, Taxpayer will be a corporate member of an LLC. If the LLC
is treated as a partnership for federal income tax purposes, the LLC will be
treated as a partnership for New York State tax purposes and Taxpayer will be
treated like a corporate partner of a partnership.
In determining a
corporation's "business receipts and proportionate part of the partnership's
business receipts during the applicable partnership year" for purposes of the
receipts factor, the portion of business receipts from sales by the corporation
to the partnership that is, in effect, also reflected in the corporation's
distributive share of the partnership's business receipts is not included in
either the numerator or denominator of the factor.
Therefore, under the
circumstances presented, Taxpayer would exclude from the receipts factor a
portion of its receipts from the sales to the LLC, which portion is determined
by multiplying the receipts by the percentage that the LLC used to distribute to
Taxpayer, its distributive share of the LLC's ordinary income or loss for the
taxable year.

DATED:

June 26, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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