Is an out-of-state corporation that owns a limited partnership interest in a partnership doing business in New York subject to New York franchise tax?

Plain-English summary

Heller Bros. Packing Corp., a Florida corporation that does not otherwise do business in New York, owns a 5.8824% limited partnership interest in West 54th Street Partners LP, which owns commercial rental property in New York. Heller invested $500,000 and says neither it nor its officers, directors, or affiliates have any other connection with the partnership. The question: does owning that limited partnership interest make Heller subject to New York's Article 9-A franchise tax?

Yes. Under 20 NYCRR 1-3.2(a)(6), a foreign corporation is treated as doing business, employing capital, owning property, or maintaining an office in New York if it is a limited partner in a partnership (other than a portfolio investment partnership) that is doing business in New York and it participates in or controls any part of the partnership's business. The regulation deems that participation to exist when the corporation holds a 1% or more limited partnership interest, or a basis (under IRC section 705) over $1 million. Because Heller's 5.8824% interest exceeds 1% and the partnership does business in New York, Heller is subject to the franchise tax under Tax Law section 209.1.

What this means for you

A limited partnership interest can pull a foreign corporation into New York tax

Owning even a passive limited partnership interest in a partnership that does business in New York can make an out-of-state corporation taxable here, whether or not the corporation has any employees, office, or property of its own in the State.

The 1% / $1 million bright line

The regulation deems a foreign corporate limited partner to be participating in the partnership's business -- and therefore doing business in New York -- when its interest is 1% or more, or its basis exceeds $1 million. Interests held by the corporation's affiliated group, officers, and directors are added together to test these thresholds.

Portfolio investment partnerships are treated differently

The rule applies to partnerships "other than a portfolio investment partnership." This opinion involved an operating partnership that owned New York rental real estate, not a passive portfolio investment partnership.

Common questions

Q: Does a small, passive limited partnership interest create New York franchise tax?
A: Yes, if the interest is 1% or more (or basis over $1 million) and the partnership is doing business in New York. Heller's 5.88% interest crossed the line.

Q: Does it matter that the corporation has no other New York connection?
A: No. The qualifying limited partnership interest by itself is enough under 20 NYCRR 1-3.2(a)(6); no separate office, payroll, or property is required.

Q: Are affiliates' interests counted toward the thresholds?
A: Yes. The interests of the corporation's affiliated group and of officers and directors are added together when testing the 1% and $1 million thresholds.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (Article 9-A franchise tax)
- 20 NYCRR 1-3.2(a)(6) (foreign corporation that is a limited partner; 1% / $1 million participation thresholds)
- IRC section 705 (basis of a partner's interest)

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_1c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(1)C
Corporation Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C960919C

On September 19, 1996, a Petition for Advisory Opinion was received from
Heller Bros. Packing Corp., P.O. Box 770249, Winter Garden, Florida 34777-0249.
The issue raised by Petitioner, Heller Bros. Packing Corp., is whether it
is subject to tax under Article 9-A of the Tax Law because of its ownership of
a limited partnership interest in a limited partnership doing business in New
York State.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is a Florida corporation not doing business in New York State.
Petitioner owns a 5.8824 percent limited partnership interest in West 54th Street
Partners LP ("West"). West owns commercial rental property in New York State.
Petitioner invested $500,000 in West. Petitioner maintains that neither it nor
its officers, directors, or affiliates have any connection with West.
Section 209.1 of the Tax Law imposes an annual franchise tax on a domestic
or foreign corporation for the privilege of exercising its corporate franchise,
or 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, for all or any part of each of its fiscal or calendar
years.
Section 1-3.2(a)(6) of the Business Corporation Franchise Tax Regulations
("Article 9-A Regulations") provides, in part, that:
(i) 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. A foreign
corporation is engaged in such manner in the business activities or
affairs of the partnership if one or more of certain factual
situations, including but not limited to the following, exist during
the taxable year or, except for clause (a) of this subparagraph, any
previous taxable year.
(a) The foreign corporation has a one percent or more interest
as a limited partner in a partnership and/or the basis of the
foreign corporation's interest in the limited partnership,
determined pursuant to section 705 of the Internal Revenue Code, is

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TSB-A-97(1)C
Corporation Tax

more than $1,000,000. For purposes of determining whether the level
of interest in the partnership or level of basis of the interest in
the partnership is met, the percentage of interest in the
partnership and basis of interest in the partnership of members of
the foreign corporation's affiliated group, of officers or directors
of the foreign corporation or of officers or directors of members of
the foreign corporation's affiliated group are added to the foreign
corporation's interest in the partnership or the basis of its
interest in the partnership, respectively....
The provisions of section 1-3.2(a)(6)(i)(a) of the Article 9-A Regulations
apply to taxable years ending on or after July 11, 1990.
In this case, Petitioner states that it owns a 5.8824 percent limited
partnership interest in West.
Pursuant to section 1-3.2(a)(6)(i)( a) of the
Article 9-A Regulations, Petitioner 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. Since the limited partnership
is doing business in New York State, Petitioner is doing business, employing
capital, owning or leasing property or maintaining an office in New York State
because of its ownership interest in the limited partnership.
Accordingly,
pursuant to section 209.1 of the Tax Law, Petitioner is subject to the franchise
tax imposed under Article 9-A of The Tax Law.

DATED: January 2, 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.