If a New York real estate partnership contributes each of its properties to its own single-member LLC, does the partnership still file one combined NY partnership return, or must each LLC file its own return and pay the LLC filing fee?

Plain-English summary

Petitioner, referred to as "Hirth Real Estate Entities," is a domestic general partnership (the "Partnership") with approximately 90 partners, each of whom is either an individual or a trust for an individual's benefit. The Partnership owns about 25 separate commercial real estate properties. It wants to restructure by forming one single-member LLC for each property - roughly 25 LLCs in all - and contributing one property to each LLC, so that after the restructuring the Partnership becomes the sole member of every LLC. None of the LLCs will elect to be taxed as an "association" (i.e., as a corporation) under Treas. Reg. § 301.7701-3(c), so under the default federal check-the-box rule in § 301.7701-3(b)(1) each LLC is disregarded as an entity separate from its owner, the Partnership.

The Department confirmed that New York's classification of an LLC follows its federal classification (citing its prior opinions in McDermott, Will & Emery and FGIC CMRC Corp, and Department Memorandum TSB-M-94(6)I and (8)C). Because each LLC is disregarded federally and its sole owner is a partnership, each LLC is treated as a branch or division of that partnership rather than as a separate taxpayer. Tax Law § 658(c) requires a partnership to file one New York partnership return reporting all of its items of income, gain, loss, and deduction - and, under this disregarded-entity framework, that single return also captures the items generated by each wholly-owned, disregarded single-member LLC.

Applying that framework, the Department answered all four questions the same way: (1) yes, each single-member LLC is treated as owned solely by the Partnership, which reports all of the LLCs' income, gain, loss, and deduction items on its own single NY partnership return; (2) no, the LLCs are not required to file separate NY partnership returns of their own; (3) yes, the Partnership is the sole member of each LLC, and the Partnership's individual partners are not considered members of any LLC; and (4) neither the Partnership nor its partners are liable for the Tax Law § 658(c)(3) annual LLC filing fee, because that fee applies only to an LLC that is "treated as a partnership" with New York-source income, and a disregarded single-member LLC has no separate tax existence to be treated as a partnership.

What this means for you

Real estate owners considering an LLC-per-property structure

Contributing each property in a portfolio to its own single-member LLC for liability-isolation purposes does not, by itself, multiply your New York filing obligations. As long as none of the LLCs elect corporate ("association") tax treatment, each remains a disregarded branch or division of its sole member for both federal and New York purposes - the parent partnership keeps reporting everything on one consolidated NY partnership return, just as it did before the restructuring.

Accountants and tax professionals preparing multi-entity real estate returns

When a partnership client forms wholly-owned single-member LLCs to hold individual properties, you do not need to prepare separate NY partnership returns for each LLC, and you should not treat the underlying individual partners as "members" of those LLCs. You also do not need to collect the Tax Law § 658(c)(3) annual LLC filing fee for these disregarded entities - that fee is reserved for LLCs that are themselves treated as partnerships with New York-source income, which does not describe a wholly-owned disregarded single-member LLC.

Common questions

Q: Does putting each property into its own single-member LLC create 25 new sets of NY filing obligations?
A: No. Because none of the LLCs elect association (corporate) status, each is disregarded as separate from the Partnership under the federal check-the-box regulations, and New York follows that classification. The Partnership continues to file one combined NY partnership return covering all of the LLCs' income, gain, loss, and deduction items.

Q: Why don't the individual partners of the Partnership become "members" of the LLCs?
A: The Partnership itself - not its underlying partners - is the sole member of each LLC, since the Partnership is the entity contributing the real estate and holding the membership interest. The opinion confirms the partners are not considered members of any LLC owned by the Partnership.

Q: Does the Tax Law § 658(c)(3) annual LLC filing fee apply to these LLCs?
A: No. That fee applies only to an LLC that is "treated as a partnership" and has New York-source income, gain, loss, or deduction. A disregarded single-member LLC is not treated as a partnership - it has no separate tax existence - so neither the LLCs, the Partnership, nor its partners owe the fee.

Q: Does New York's LLC tax classification always follow the federal check-the-box classification?
A: Yes, according to the Department's established position at the time, citing its own prior opinions (TSB-A-96(19)C and TSB-A-96(11)C) and Department Memorandum TSB-M-94(6)I and (8)C: an LLC's classification for New York State tax purposes follows the classification it receives for federal income tax purposes.

Q: What happens if one of the LLCs later elects to be taxed as a corporation?
A: The opinion's conclusions rest on the premise that none of the LLCs make the Treas. Reg. § 301.7701-3(c) election to be classified as an association taxable as a corporation. If an LLC made that election, it would no longer be disregarded, and the analysis in this opinion - including the exemption from the § 658(c)(3) filing fee - would not apply to it.

Citations and references

• Tax Law § 658(c) - requires a partnership to file one New York State partnership return reporting all items of income, gain, loss, deduction, and other required information, including the items of a wholly-owned, disregarded single-member LLC
• Tax Law § 658(c)(3) - imposes an annual filing fee only on a domestic or foreign LLC that is treated as a partnership and has New York-source income, gain, loss, or deduction
• Treas. Reg. § 301.7701-3(b) and § 301.7701-3(b)(1) - default federal classification rule under which a single-owner eligible entity is disregarded as separate from its owner absent a contrary election
• Treas. Reg. § 301.7701-3(c) - the election an eligible entity must affirmatively make to be classified as an association taxable as a corporation
• TSB-M-94(6)I and (8)C, October 25, 1994 - Department memoranda establishing that New York follows federal LLC classification and describing the annual filing fee
• TSB-A-96(19)C, McDermott, Will & Emery, July 24, 1996 - prior advisory opinion holding that NY LLC classification follows federal classification
• TSB-A-96(11)C, FGIC CMRC Corp, April 1, 1996 - prior advisory opinion holding that NY LLC classification follows federal classification

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a97_7i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(7)I
Income Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I970513F

On May 13, 1997, a Petition for Advisory Opinion was received from Hirth
Real Estate Entities, 210 West 70th Street, Suite 1003, New York, New York 10023.
The issues raised by Petitioner, Hirth Real Estate Entities, are (1)
whether each LLC described herein will be treated as a single member LLC owned
by the Partnership and the Partnership will include the income and loss items for
all of the LLCs on its New York State partnership return, (2) whether the LLCs
will be required to file separate New York State partnership returns, (3) whether
the Partnership will be the sole member of each LLC and whether the partners will
be considered members of any LLC owned by the Partnership, and (4) whether the
Partnership or its partners will be liable for the New York State LLC annual
member filing fee under section 658(c)(3) of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
A domestic general partnership ("Partnership") currently has approximately
90 partners. Each partner is an individual or a trust for the benefit of an
individual. The Partnership currently owns approximately 25 separate commercial
real estate properties ("real estate".)
The Partnership wants to create an LLC for each piece of real estate. Once
each LLC is formed, the Partnership will contribute one real estate property to
each LLC. After the proposed transactions have been completed, the Partnership
will be the sole member of approximately twenty-five domestic LLCs. Each LLC
will own one real estate property previously owned by the partnership.
None of the LLCs will elect to be treated as an association separate from
the Partnership. Therefore, for federal income tax purposes, under section 301.
7701-3(b) of the Treasury Regulations, each LLC will be disregarded as an entity
separate from its owner, the Partnership.
Under section 301.7701-3(b)(1) of the Treasury Regulations, the default
classification of an entity that has a single owner is that it is not an entity
separate from its owner. If the entity wants to be classified as an association,
it must make the election pursuant to section 301.7701-3(c) of the Treasury
Regulations.
It has been established that the classification of an LLC for New York
State tax purposes will follow the classification accorded the LLC for federal
income tax purposes. (See, McDermott, Will & Emery, Adv Op Comm T & F, July 24,
1996, TSB-A-96(19)C; FGIC CMRC Corp, Adv Op Comm T & F, April 1, 1996, TSB-A­
96(11)C; and Department of Taxation and Finance Memorandum, TSB-M-94(6)I and
(8)C, October 25, 1994.)
Therefore, New York State will follow the federal
classification of a single member LLC under section 301.7701-3 of the Treasury
Regulations.

-2­
TSB-A-97(7)I
Income Tax

Following federal conformity with respect to classifying LLCs, a single
member LLC which is a domestic eligible entity that does not make the election
for federal income tax purposes pursuant to section 301.7701-3 of the Treasury
Regulations to be classified as an association taxable as a corporation, the LLC
will not be classified as an entity separate from its owner. If its owner is a
partnership, the LLC will be considered a branch or division of the partnership.
Section 658(c) of the Tax Law provides that a partnership shall file its
New York State partnership return for each taxable year setting forth all items
of income, gain, loss and deduction and other pertinent information as required.
This would include the income, gain, loss and deduction items of a single member
LLC where the partnership is the single member and the LLC is not treated as a
separate entity for federal and New York State tax purposes.
Section 658(c)(3) of the Tax Law provides that every domestic and foreign
LLC that is treated as a partnership and has any income, gain, loss or deduction
derived from New York sources, is subject to an annual filing fee. Since a
single member LLC is not treated as a partnership, it would not be required to
pay the annual filing fee under section 658(c)(3) of the Tax Law. (See,
Department of Taxation and Finance Memorandum, TSB-M-94(6)I and (8)C, October 25,
1994.)
In this case, if the single member LLCs owned by the Partnership do not
make the election to be classified as associations pursuant to section 301.7701-3
of the Treasury Regulations, each LLC will be treated as single member LLC owned
solely by the Partnership for New York State income tax purposes. The partners
of the Partnership will not be considered members of any of the LLCs. Pursuant
to section 658(c) of the Tax Law, the Partnership will include the income, gain,
loss and deduction items of all of the LLCs on its New York State partnership
return.
The LLC's will not be required to file separate New York State
partnership returns. Neither the Partnership nor its partners will be liable for
the LLC annual member filing fee under section 658(c)(3) of the Tax Law.

DATED: August 6, 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.