NY TSB-A-97(26)C Corporation Tax 1997-07-07

Is a federal S corporation that is a corporate member of an LLC doing business in New York subject to the Article 9-A franchise tax, and is it taxed as a C corporation?

Short answer: Yes, with the tax computed as a C corporation. An LLC treated as a partnership for federal income tax is a partnership for New York; its corporate members are corporate partners. If the S corporation's role is like a general partner, it is subject to Article 9-A because the LLC is doing business in New York (20 NYCRR 1-3.2(a)(5)); if it is like a limited partner, it is subject to Article 9-A only if it participates in or controls the LLC's business (1-3.2(a)(6)). Because the corporation has not made the New York section 660(a) S election, it is treated as a C corporation for Article 9-A -- though a late or missed election may now be recognized for reasonable cause under section 660(b)(5).

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

Stone Commodities Corp, a federal S corporation, is a member of an LLC doing business in New York City. The LLC is treated as a partnership for federal income tax. Stone asked whether it is subject to the New York business corporation franchise tax and how it is taxed.

For New York, an LLC takes the same classification it has federally: an LLC treated as a partnership federally is a partnership for New York tax (TSB-M-94(6)I/(8)C). So the LLC's corporate members are corporate partners. Two attribution rules apply:

If Stone's role as a member is like a general partner, then because the LLC is doing business in New York, Stone is subject to Article 9-A (20 NYCRR 1-3.2(a)(5)).
If Stone's role is like a limited partner, then Stone is subject to Article 9-A only if it participates in, dominates, or controls any part of the LLC's business (1-3.2(a)(6); FGIC CMRC).

If Stone is subject to Article 9-A under either rule, it is treated as a C corporation for Article 9-A purposes because it has not made the New York S election under section 660(a). (The opinion notes that new section 660(b)(5) lets the Commissioner recognize a late or missing S election for reasonable cause.)

What this means for you

An LLC's New York status follows its federal status

An LLC taxed as a partnership federally is a partnership in New York, so its corporate members are corporate partners.

Partnership attribution can pull a member into Article 9-A

A general-partner-like member is taxable because the LLC is doing business; a limited-partner-like member is taxable only if it participates in or controls the business.

No New York S election means C corporation treatment

A federal S corporation that has not elected New York S status is taxed as a C corporation under Article 9-A -- though a late election may be honored for reasonable cause.

Common questions

Q: Does being a federal S corporation avoid New York franchise tax?
A: No. If the member is subject to Article 9-A, it is taxed as a C corporation unless it makes the New York S election.

Q: When is an LLC member subject to Article 9-A?
A: When its role is like a general partner (the LLC is doing business), or like a limited partner that participates in or controls the business.

Q: Can a missed New York S election be fixed?
A: Section 660(b)(5) allows the Commissioner to recognize a late or missed election for reasonable cause.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 208.1 (corporation includes an association, including an LLC)
- Tax Law section 208.1-A (definition of New York S corporation)
- Tax Law section 209.1 (Article 9-A franchise tax)
- Tax Law section 660(a) (New York S corporation election)
- Tax Law section 660(b)(5) (late or missed S election for reasonable cause)
- 20 NYCRR 1-3.2(a)(5) (corporate general partner of a partnership doing business is taxable)
- 20 NYCRR 1-3.2(a)(6) (corporate limited partner participating in the partnership is taxable)
- FGIC CMRC Corp, TSB-A-96(11)C (April 1, 1996)
- Stone Commodities Corp, TSB-A-97(26)C (date in opinion)

Source

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(26)C
Corporation Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C970707A

On July 7, 1997, a Petition for Advisory Opinion was received from Stone
Commodities Corp., 30 So. Wacker Drive - Suite 1300, Chicago, Illinois 60606.
The issue raised by Petitioner, Stone Commodities Corp, is whether an
Illinois business corporation which is a member of an Illinois limited liability
company which is authorized to and is conducting a portion of its business in New
York City is subject to the New York State Business Corporation Franchise Tax
under Article 9-A of the Tax Law and subject to the New York City General
Corporation Tax.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is an Illinois business corporation that was organized in 1970.
For federal income tax purposes, the corporation has elected to be taxed under
Subchapter S and reports its taxable income on a calendar year basis.
Petitioner is a member of Saul Stone and Company LLC (the "LLC"). The LLC
was organized under the Illinois Limited Liability Company Act. The LLC acts as
the clearing member for trades executed on commodities exchanges located both in
Chicago, Illinois, and New York, New York. The LLC is authorized to do business
in New York State. The LLC files a Partnership Return (Form 1065) for federal
income tax purposes, and, correspondingly, files comparable state and local
income tax returns with the appropriate authorities in Illinois and New York.
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.)

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Corporation Tax

Section 209.1 of Article 9-A of the Tax Law imposes the business
corporation franchise tax on every corporation, unless specifically exempt, for
the privilege of exercising its 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.
Section 208.1-A of the Tax Law provides that the term "New York S
corporation" means, with respect to any taxable year, a corporation subject to
tax under Article 9-A of the Tax Law for which an election is in effect pursuant
to section 660(a) of the Tax Law for the year. A federal S corporation that is
not a New York S corporation is subject to the same corporation franchise taxes
that the corporation would incur if it were a general business corporation.
In this case, Petitioner is a federal S corporation that is a member of an
LLC that is doing business in New York State.
The LLC is treated as a
partnership for federal income tax purposes. 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, the corporate members of the LLC are treated as
corporate partners of a partnership.
Section 1-3.2(a)(5) of the Business Corporation Franchise Tax Regulations
("Article 9-A Regulations") provides that if a partnership is exercising any of
the privileges of section 209.1, then all of its corporate general partners are
subject to the tax imposed by Article 9-A of the Tax Law.
Therefore, if
Petitioner's activities as a foreign corporate member of the LLC are like the
activities of a general partner in a partnership, Petitioner is subject to tax
under Article 9-A pursuant to section 1-3.2(a)(5) of the Article 9-A Regulations
because the LLC is doing business in New York State.
Section 1-3.2(a)(6) of the Article 9-A Regulations provides that 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. Therefore, if Petitioner's
activities as a foreign corporate member of the LLC are like the activities of
a limited partner in a partnership, Petitioner may be subject to tax under
Article 9-A if Petitioner meets the conditions of section 1-3.2(a)(6) of the
Article 9-A Regulations. (FGIC CMRC Corp, Adv Op Comm T & F, April 1, 1996, TSBA-96(11)C.)
If Petitioner is subject to tax under Article 9-A of the Tax Law, either
pursuant to section 1-3.2(a)(5) or (6) of the Article 9-A Regulations, Petitioner
would be treated as a C corporation for purposes of Article 9-A because
Petitioner has not made the election under section 660(a) of the Tax Law to be

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treated as an S corporation. (It should be noted that Chapter 389 of the Laws
of 1997 added section 660(b)(5) of the Tax Law to enable the Commissioner of
Taxation and Finance, upon a showing of reasonable cause, to recognize a late S
election (or no election) as an election timely made for the taxable year. This
provision applies with respect to elections for taxable years beginning after
December 31, 1982. The determination of whether reasonable cause exists is not
within the scope of this advisory opinion.)
The determination of whether Petitioner is more like a general partner or
more like a limited partner is a factual determination that is 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.Twenty-fourth; 20 NYCRR 2376.1(a).
The New York City General Corporation Tax is not administered by the New
York State Department of Taxation and Finance. Therefore, it is not within the
scope of this Advisory Opinion to make any determinations with respect to such
tax. Inquiries regarding the New York City General Corporation Tax should be
submitted to the New York City Finance Department.

DATED: December 4, 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.