Fourteen natural gas distribution and pipeline companies jointly create a single special-purpose 'project entity' to hold one gas-import contract with a Canadian exporter (instead of each company separately obtaining its own import permits and contracts), take momentary legal title to the imported gas at the US-Canada border, and immediately pass that title to the fourteen owner-companies at cost, with no profit or loss to the entity itself. Is this project entity subject to New York's section 186 franchise tax on gas companies, or its section 186-a tax on furnishing utility services?

Plain-English summary

This is the origin ruling recovering the "Boundary Gas" line already represented in this corpus by TSB-A-82(16)C, which follows up on this exact ruling. Fourteen New York, New Jersey, and New England natural gas companies -- thirteen distributors and one interstate pipeline company -- jointly formed Boundary Gas, Inc. as a Delaware "project entity" to import natural gas from Canada. Rather than each of the fourteen companies separately negotiating its own gas purchase contract and filing its own set of regulatory applications with Canadian and U.S. authorities (which would have meant 14 contracts and 42 separate regulatory filings, repeated for every routine review), the fourteen companies consolidated everything into Boundary: one purchase contract with the Canadian exporter, TransCanada, and one resale agreement reselling the gas back to the fourteen owner-companies at Boundary's exact cost.

Boundary's role in the actual movement of gas was minimal by design. It took bare legal title to the imported gas for only the instant needed to establish it as the technical "importer," at the point the gas crossed into the U.S. -- then immediately transferred that title to its fourteen stockholders. Boundary never took physical possession of the gas (which moved directly through an unrelated interstate pipeline company's facilities), never owned or operated any pipes or facilities of its own, and was managed directly by its stockholders with no Board of Directors. Payments for the gas didn't even flow through Boundary -- an independent escrow agent handled disbursements to TransCanada. Under the resale agreement, Boundary's charges to its stockholders exactly equaled its own cost, so it earned neither profit nor loss.

The Department held Boundary was NOT subject to Tax Law § 186 (the franchise tax on gas companies "formed for or principally engaged in" supplying gas through mains or pipes), relying on Matter of McAllister Bros. v. Bates -- a case holding that a corporation which holds only bare title to operating assets, without any actual control or supervision over their use, isn't "in the business" the statute targets. Boundary neither owned nor controlled any mains or pipes and held momentary title only to facilitate the pass-through. Nor was Boundary subject to § 186-a (the tax on furnishing utility services to ultimate consumers): its sales were for RESALE to its stockholders, not their ultimate consumption, so under 20 NYCRR § 501.9(a) none of its receipts counted as taxable "gross operating income" -- and its total gross operating income would never exceed the statute's own $500 minimum threshold in any event.

What this means for you

A "project entity" formed purely to consolidate contracts and regulatory filings can escape utility taxation entirely

If your industry group forms a joint special-purpose entity to hold a single contract or permit on behalf of many owner-companies -- rather than each dealing separately with a supplier or regulator -- that entity's lack of actual operational control (no facilities, no profit margin, no independent business judgment) can keep it outside New York's utility franchise taxes, even though it technically takes legal title to a regulated commodity.

Momentary, instantaneous title-holding is not the same as "being in the business" of supplying a utility service

Courts and the Department look past the formal structure of a transaction (Boundary technically became the legal "importer") to the substance: who actually controls, operates, and profits from the underlying activity.

Sales for resale, not ultimate consumption, generally escape section 186-a

If your entity's gas (or other covered utility service) sales are structured as sales to a purchaser who will resell rather than consume the product, that resale character can keep those receipts out of the section 186-a tax base.

Common questions

Q: If our joint venture holds legal title to a regulated commodity even briefly, are we automatically a taxable utility?
A: Not necessarily -- as this ruling shows, momentary title-holding without actual operational control, ownership of delivery infrastructure, or profit motive did not make Boundary Gas a taxable section 186 gas company.

Q: Does selling gas (or a similar commodity) to our own owner-companies for their resale, rather than direct consumption, matter for section 186-a?
A: Yes -- section 186-a's "gross operating income" specifically excludes receipts from sales for resale, as opposed to sales for the purchaser's ultimate consumption.

Citations and references

Statutes and guidance:

• Tax Law § 186
• Tax Law § 186-a
• 20 NYCRR § 501.9(a)
• Matter of McAllister Bros. v. Bates, 272 App. Div. 511 (bare title-holder without operational control is not "in the business")

Related rulings:

• TSB-A-82(16)C -- the same petitioner's follow-up ruling addressing a change in stockholder accounting for consumption vs. resale, confirming this ruling's conclusion still holds

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/h81_24c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81 (24)C
Corporation Tax
April 10, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C80l201A

On December l, 1980 a Petition for Advisory Opinion was received from Dickstein, Shapiro
and Morin on behalf of Boundary Gas, Inc., 2101 L Street, N.W., Washington, D.C. 20037.
THE ISSUE
The issue raised by Petitioner is whether Boundary Gas, Inc., under the circumstances
described below, is subject to the franchise tax on water-works companies, gas companies, electric
or steam heating, lighting and power companies imposed under section 186 of the Tax Law, or the
tax on the furnishing of utility services imposed under section 186-a of the Tax Law.
THE FACTS
The facts set forth by Petitioner, and upon which this Advisory Opinion will be based, are
as follows. Boundary is a close corporation organized on July 7,1980 under the laws of the State of
Delaware. Boundary was created in conjunction with the development of a project to import natural
gas from Canada. The gas import project (hereinafter referred to as the "Project") is being undertaken
by fourteen companies located in New York, New Jersey and New England. The fourteen Project
companies are the sole stockholders of Boundary. Thirteen of the companies are natural gas
distribution companies; one is an interstate natural gas pipeline company. The gas to be imported
would enter the United State at a point on the border between Canada and New York.
The creation of Boundary was for a limited and specific purpose. Natural gas imports from
Canada are regulated and controlled by the Government of Canada and the United States
Government. In order to import Canadian natural gas, the Canadian exporter must obtain an export
permit from the Canadian National Energy Board ("NEB"), and the United States importers must
obtain import permits and other authorizations from the Economic Regulatory Administration
("ERA") and Federal Energy Regulatory Commission ("FERC") in the United States. Under ordinary
circumstances, a company proposing to import gas from Canada would enter into a gas purchase
contract with the exporter, which would then form the basis for regulatory applications to the NEB,
ERA and FERC. In the case of the Boundary Project, however, that approach would result in
fourteen separate gas purchase contracts and fourteen sets of filings at the NEB, ERA and FERC.
There would, in other words, be forty-two separate regulatory applications and proceedings. The
need for fortytwo filings would be repeated each time routine regulatory review became necessary
during the term of the Project. In addition, there would be other burdens associated with
administering fourteen separate gas purchase contracts. By way of example, routine reports
submitted to government agencies must be filed for each supply contract. Inventory record keeping
requirements also would be multiplied by a factor equal to the number of supply contracts.
In order to avoid the proliferation of regulatory proceedings and administrative burdens, the
fourteen Project companies created Boundary as a consolidating "project entity." Under that concept,

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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Boundary (acting on behalf of its stockholders) would enter into one gas purchase contract with
TransCanada (the Canadian exporter), and Boundary would file single applications with ERA and
FERC for authority to import the gas purchased under that contract. Boundary would also enter into
a single gas sales agreement with its fourteen stockholders to resell the imported gas to the
stockholders, and would file a single application with FERC for authority to resell the gas in
interstate commerce. Petitioner contends that although the transactions are structured in terms of
sales, "it is clear that the contracts do not include 'sales' in the traditional tax sense."
Boundary's limited purpose is stated to be reflected in its Certificate of Incorporation and the
contracts to which it has agreed in principle with the Canadian gas exporter. With regard to
Boundary's Certificate of Incorporation, Article Eight specifies that Boundary is controlled
exclusively and totally by its stockholders; it does not have a Board of Directors. In addition, Article
Four, Section 6 of the Certificate of Incorporation bars Boundary from selling gas to any entity which
is not a stockholder of Boundary. Thus, Boundary is permanently precluded from selling gas to any
entity which has not agreed to be bound by the restrictive contracts and agreements required of all
Boundary stockholders. This preclusion is reinforced by a stockholders' Memorandum of Agreement
which specifies certain restrictions on the transfer of stock and certain requirements for Boundary's
contractual relations with the Canadian gas exporter. One of these requirements is unanimous
approval by the stockholders of all contracts and regulatory authorizations.
To satisfy regulatory requirements, the form of Gas Purchase Contract agreed to by Boundary
specifies that Boundary will take title to the contract gas on the United States Canadian international
border, thereby establishing Boundary as the importer. However, Boundary is simultaneously to
transfer title to the gas to its fourteen stockholders. In other words, Boundary will hold title to the
gas only for the instant required to establish it as the importer. Under the Gas Purchase Contract,
Boundary will receive only bare legal title to the gas; Boundary will not take physical possession of
the gas. This is so because Boundary will neither own nor operate any facilities of any nature
whatsoever. The gas will physically be delivered to a United States interstate pipeline company
("Tennessee") with which each of the fourteen Boundary stockholders will have a transportation
contract. This pipeline company is not itself a stockholder of Boundary, nor is it related to or
affiliated with any of the stockholders. Boundary will itself have no contractual arrangements with
the transporting pipeline company, other than a simple Operating Agreement authorizing direct
communications between the United States transporting pipeline company and the Canadian
exporter. Petitioner contends that aside from the fact that Boundary holds bare legal title to the gas
for an instant, the arrangements for movement of the gas imported under the Gas Purchase Contract
are essentially no different than if the fourteen Boundary stockholders had contracted directly with
the Canadian exporter.
The form of Gas Sales Agreement agreed to by Boundary and its stockholders repeats the
provisions outlined above regarding passage of title and the physical movement of the gas. The Gas
Sales Agreement further specifies that all gas purchased by Boundary under the Gas Purchase
Contract must be resold to the Boundary stockholders in proportion to their ownership interests in
Boundary. Finally, the Gas Sales Agreement provides that Boundary's charges to the stockholders
for the gas will be exactly equal to Boundary's cost of the gas. In other words, Boundary is merely
to pass through any cost of gas and thus to show neither profit nor loss on the transactions.

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Under the forms of Gas Purchase Contract and Gas Sales Agreement, payments for gas are
to be deposited by the stockholders with an escrow agent pursuant to an Escrow Agreement. To the
extent that Boundary incurs any administrative or operating expenses (such as regulatory costs and
expenses, taxes and the like), those expenses are passed through on a dollar for dollar basis to the
stockholders. Payments for these non-gas charges do not pass through the escrow agent.
Disbursements of funds to TransCanada will be made by the escrow agent, based upon the invoice
from TransCanada to Boundary. Consistent with this insulation of Boundary from the funds paid for
the gas, the form of Gas Purchase Contract provides that TransCanada's claim in the event of any
default by Boundary lies directly against the Boundary stockholder whose actions caused Boundary's
default. While, for legal purposes, TransCanada may also proceed against Boundary, the Gas
Purchase Contract effectively limits any recovery to Boundary's paid-in capital (which is $10,000).
The Gas Purchase Contract, Gas Sales Agreement and the stockholders' Memorandum of Agreement
among Boundary stockholders also specify that in no event shall any stockholder be liable for any
obligations of another stockholder. In other words, Boundary is expressly precluded from being a
legal vehicle by which joint liability can be imposed upon the stockholders. Thus, the arrangements
for purchase and resale of gas are said by Petitioner to be legally equivalent to a situation wherein
each Boundary stockholder contracted directly and separately with TransCanada.
THE LAW
Section 186 of the Tax Law, contained in Article 9 thereof, imposes a franchise tax on "Every
corporation, joint-stock company or association, formed for or principally engaged in the business
of supplying water, steam or gas, when delivered through mains or pipes.." The tax is computed
as the sum of a percentage of gross earnings from all sources within the state and a percentage of
certain dividends paid.
Section 186-a of the Tax Law, also contained in Article 9 thereof, imposes a tax on the
furnishing of utility services. In the case of utilities not subject to the supervision of the Department
of Public Service, as is the case with respect to Boundary, the tax is equal to three per cent of the
"gross operating income" of every such utility doing business in New York which has an annual
gross operating income in excess of five hundred dollars. The term "utility" includes every "person,"
including every corporation, "... who sells gas... delivered through mains, pipes ...." The term "gross
operating income" means and includes"..... receipts received in or by reason of any sale, conditional
or otherwise, made for ultimate consumption or use by the purchaser...of gas.
THE OPINION
Section 186 of the Tax Law imposes a franchise tax on gas companies "formed for or
principally engaged in the business of supplying. . .gas, when delivered through mains or pipes ...."
In determining whether Petitioner constitutes such a "gas company" reliance may be placed on
Matter of McAllister Bros. v. Bates, 272 App. Div. 511. In McAllister a corporation was
incorporated under a charter authorizing it to conduct virtually any legitimate business, including a
marine transportation business. This corporation was in effect a successor to a partnership engaged
in marine transportation, all of the assets of which,
"including the fleet of vessels, were transferred to the new
corporation. For the purpose of avoiding any possible tort claims for

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Corporation Tax
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injuries arising out of petitioner's activities in marine corporations,
the McAllister Lighterage Line, Inc., was formed, and then accepted
the proposal and offer of the McAllister Brothers, Inc. to charter all
of its vessels and operating equipment for a period of twenty years,
the consideration being embodied in a resolution passed by the
directors of the petitioner on November 13, 1937, which read as
follows: ‘Resolved, that this corporation enter into a contract with
McAllister Lighterage Line, Inc. to charter each and every vessel
owned by McAllister Brothers, Inc. on a bare boat basis for the sum
equivalent to the net profits per annum accruing to the McAllister
Lighterage Line, Inc. from said operation at a minimum of $5,000 per
annum (net profits to be gross earnings, less overhead, salaries, taxes,
operating expenses) for a period of twenty (20) years.’
"Since November, 1937, McAllister Brothers, Inc., has had but one
employee on its payroll, namely, the president of its corporation. It
has control of no equipment. The McAllister Lighterage Line, Inc.
operates in excess of one hundred vessels of all types in the
transportation business and employs from three hundred to four
hundred men. It receives the gross income, and pays all expenses in
connection with its business. The petitioner does not have control
over the operation or use of this equipment. The petitioner's assets
consist of title to such equipment, cash and stock of other
corporations." Id. at 514.
The court held that the corporation was not a transportation company subject to tax under
sections 183 and 184 of the Tax Law. The court pointed out that "petitioner had parted with all
supervision and control of the vessels, holding only title." Id. at 516. In reality, the corporation had
assumed the position of one who leased property to another "over which he has no control or
supervision and no voice in the operating activity of" such a lessee. Id. at 516. The corporation, thus,
as a merely passive holder of title, was held not to be in the transportation business.
Precisely similar considerations apply in the instant matter. Petitioner herein is not a
corporation engaged in the business of selling gas through mains or pipes. Indeed, it neither owns
nor leases mains or pipes, nor does it exercise any other manner of control over such property. As
stated in the Operating Agreement between Petitioner and the pipeline companies which do deliver
the gas in question, "Boundary owns and operates no facilities." (Exhibit 4). All that Petitioner ever
owns is the gas, and that only instantaneously, for the mere purpose of facilitating the transfer from
the Canadian exporter to Petitioner's stockholders (the "Repurchasers"). Thus, Article XVI of the Gas
Sales Agreement between Petitioner and the Repurchasers (Exhibit 2, p. 22) provides as follows:
"ARTICLE XVI - POSSESSION OF AND TITLE TO GAS
Upon delivery of the gas by Boundary to Repurchasers at the Point of
Delivery, title to the gas shall pass from Boundary to Repurchasers
and Repurchasers shall take possession of such gas and shall be
deemed to be in control thereof. Boundary shall not be responsible for
such gas thereafter, regardless of anything which may be done,

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happen or arise with respect to such gas after delivery. Each
Repurchaser understands that delivery of the gas by Boundary to
Repurchasers shall occur simultaneously with Tennessee's receipt of
such gas from TransCanada for Boundary's account, and that
Boundary will neither own nor construct any facilities in connection
with this Agreement. Notwithstanding the fact that Boundary will
hold title to the gas for the instant necessary to transfer title to
Repurchasers, delivery of the gas by TransCanada into Tennessee's
facilities shall be deemed to be delivery of the gas by Boundary to
Repurchasers for purposes of determining as between Boundary and
Repurchasers when Repurchasers gain possession and control of the
gas."
It is clear from the foregoing that Petitioner has no connection with the as being sold other
than the holding of bare legal title thereto for an instant of time, and certainly no control or
supervision over the gas. With regard to the issue of control, it should be noted that Petitioner is
managed directly by its stockholders, the fourteen Repurchasers, rather than by a Board of Directors.
Bylaws, Article III (Exhibit l).
Petitioner is in reality, thus, a special purpose administrative service organization, one
designed to facilitate the development and administration of a natural gas import project. It is not
engaged in the business of supplying gas, and is thus not subject to the franchise tax on gas
companies imposed under section 186 of the Tax Law. Indeed, it is specifically provided that, as
stated in the Gas Sales Agreement, "it is the intention of the parties that the gas sold by Boundary
to the Repurchasers shall be sold at Boundary's cost including Boundary's expenses and shall not
produce a profit or a loss to Boundary. . . ." The broad powers contained in the Petitioner's corporate
charter do not defeat this analysis, because it is the nature of the business and not the chartered,
rights that determine the classification of a corporation under the franchise tax law. McAllister,
supra; People ex rel. Goodwin Sand & Gravel Co. v. Law, 207 App. Div. 567.
Section 186-a of the Tax Law imposes a tax on "utilities" which, as in the case of Petitioner,
are not subject to the supervision of the Department of Public Service. The term "utility," as used
in such context, refers to gas companies, inter alia, which sell gas to the ultimate consumer. Thus,
assuming, arguendo, that Boundary is a "utility" within the meaning of section 186-a of the Tax Law,
since it would be a utility not subject to the supervision of the Department of Public Service it
would be subject to tax under section 186-a only if it had an annual gross operating income in
excess of five hundred dollars. As used in the statutory provision, gross operating income means,
insofar as the definition is here germane, receipts from sales of gas "for ultimate consumption or use
by the purchaser." Applicable Regulations of the State Tax Commission provide as follows:
"Receipts from sales or services for ultimate consumption or use by the purchaser in this
State are taxable, but receipts from sales for resale, as distinguished from sales for consumption, are
not taxable.
"Question 37: The 'A' gas company in New York sells and delivers to the 'B' gas company
in New York two million cubic feet of gas, which the 'B' company resells to consumers. Are the
receipts from the sale of 'A' to 'B' taxable? Answer: No." 20 NYCRR 501.9(a). Inasmuch as

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Boundary's sales are not to purchasers for their ultimate consumption or use, but to purchasers which
purchase the gas for resale, none of Boundary's receipts would be includible in "gross operating
income." Accordingly, since Boundary will in no event have an annual gross operating income in
excess of five hundred dollars it will not be subject to the tax on the furnishing of utility services
imposed under section 186-a of the Tax Law.

DATED: April 9,1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau