New York Advisory Opinion TSB-H-80(242)I: Is a limited partnership organized to acquire stock, make investments, and hold financial assets solely for its own account subject to New York's unincorporated business tax?

Plain-English summary

Industrial Capital Group was a limited partnership organized to acquire capital stock of companies, finance and invest in those companies in exchange for securities and other business interests, buy and sell such investments, hold assets in bank accounts and deposits, and acquire, hold, or dispose of interest-bearing securities and other financial assets. All of its investments were made solely for the partnership's own benefit, and it didn't buy or sell investments on behalf of customers. Industrial Capital Group asked whether it owed New York's unincorporated business tax (UBT).

This opinion was issued the same day as a companion ruling for a different limited partnership organized at the same Park Avenue address with virtually identical purposes and facts (Hoffman & Co., TSB-H-80(243)I), and reaches the identical result on identical reasoning. Tax Law section 703(a) broadly defines "unincorporated business" to include a partnership's trade, business, or occupation. But the regulations narrow that in two relevant ways. First, 20 NYCRR 203.1(b) generally treats ordinary investment and reinvestment of a taxpayer's own funds (and collecting income from it) as not carrying on a business - though it carves back in for investments in an operating unincorporated business where actively running that business is necessary to realize on the investment, even if only limited effort goes into it. Second, 20 NYCRR 203.12(a) excludes an entity from UBT liability solely for buying and selling property (real or personal) for its own account, unless it's a dealer holding property primarily for sale to customers.

Because Industrial Capital Group's activities consisted entirely of investing its own funds without operating any underlying business that required active management to realize value, and because it performed no functions for customers, the Department concluded it had no UBT liability.

What this means for you

Limited partnerships organized purely as investment vehicles

A partnership that buys, holds, and sells stock, securities, and other financial assets solely for its own benefit - without operating an underlying business or serving customers - generally falls outside New York's unincorporated business tax under the own-account investment exclusion.

Partnerships considering whether their activities cross into "operating a business"

The key line is whether the partnership merely holds and trades passive investments, or instead invests in a way that requires actively running an operating business to realize the investment's value - the latter would trigger UBT liability even with minimal time devoted to it.

Accountants structuring or advising investment limited partnerships

Confirm the partnership has no customers and isn't invested in an operating business requiring active management before relying on the own-account exclusion - both facts were essential to this ruling's conclusion, as they were in the same-day companion ruling for a nearly identical partnership.

Common questions

Q: Does a limited partnership organized solely to hold and trade investments owe New York's unincorporated business tax?
A: Not under this ruling's facts - a partnership investing purely for its own account, with no customers and no operating business requiring active management, falls within the own-account investment exclusion.

Q: What would make such a partnership subject to the tax instead?
A: Investing in an operating unincorporated business where actively carrying on that business is necessary to realize on the investment (even with limited effort), or performing functions for customers rather than investing solely for the partnership's own benefit.

Q: Is this ruling connected to any other opinion issued around the same time?
A: Yes - the Department issued a virtually identical opinion the same day for a similarly-structured limited partnership at the same address (Hoffman & Co., TSB-H-80(243)I), reaching the same conclusion on the same reasoning.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1980.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/h80_242i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-80-(242)-I
Income Tax
August 26, 1980

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I800403B

On April 3, 1980, a Petition for Advisory Opinion was received from the
Industrial Capital Group, 345 Park Avenue, New York, New York 10022.
The issue raised is whether the limited partnership is subject to New York
State Unincorporated Business Income Tax.
Industrial Capital Group is a limited partnership. The partnership is
organized to acquire capital stock of companies; to finance the acquisition of,
and to make investments in, such companies, in return for securities and other
business interests of any and all types; to sell, exchange, and otherwise dispose
of such investments; to invest the assets of the partnership in various bank
accounts or other time or demand deposits, and to purchase or otherwise acquire,
hold, sell, transfer, exchange or otherwise dispose of, or realize upon, interest
bearing securities and other financial assets; to make and perform all contracts
and engage in all activities and transactions necessary or convenient or
incidental to the foregoing; and other purposes as are necessary to protect or
enhance the assets of the partnership.
All investments are made solely for the benefit of the partnership. The
partnership does not engage in the purchase or sale of investments on behalf of
customers.
Subsection (a) of section 703 of the Tax Law provides: "General.--An
unincorporated business means any trade, business or occupation conducted,
engaged in or being liquidated by an individual or unincorporated entity,
including a partnership or fiduciary or a corporation in liquidation, but not
including any entity subject to tax under article nine, nine-a, nine-b, nine-c...
of the tax law...."
Section 203.1(b) of the regulations provides: "Ordinarily, the engaging in
activities relating to the investment and reinvestment of a taxpayer's own funds
and the receipt or collection of income therefrom or the consummation of isolated
or incidental transactions connected with such investment activities will not be
considered to be the carrying on of a trade, business or occupation. However, a
taxpayer who or which invests funds in the purchase of an operating
unincorporated business... or other unincorporated activity of the type where the
carrying on of business is necessary to realizing on the investment will be
deemed to be engaged in the conduct of a taxable trade, business or occupation,
even though only a limited amount of time, thought and energy may be devoted to
the activity by an individual taxpayer or by the members of a partnership or
other unincorporated entity...."
Section 203.12(a) of the regulations provides: "Notwithstanding the
provisions of section 203.1 of this Part, an individual or unincorporated entity,
other than a dealer holding property primarily for sale to customers in the
ordinary course of his or its trade or business, shall not be deemed engaged in
an unincorporated business solely by reason of the purchase and sale of property
(real or personal) for his or its own account...."

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

2
TSB-H-80-(242)-I
Income Tax
August 26, 1980
The Tax Law states than an individual is not subject to the Unincorporated
Business Income Tax based on the purchase and sale of property solely for his own
account. The partnership cannot in any way perform functions for customers or
enter into transactions which invest funds in an unincorporated business or
activity.
Accordingly, since all investments are made solely for the benefit of the
partnership and the partnership does not engage in the purchase or sale of
investments on behalf of customers, the Industrial Capital Group has no liability
for the New York State Unincorporated Business Income Tax.

Dated: June 30, 1980

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau