New York State Tax Appeals Tribunal Finds Passive Ownership Interest In Partnership Doing Business In State Creates Nexus

The New York State Tax Appeals Tribunal has held that out-of-state corporations that had passive ownership of a partnership conducting business in the state had nexus for purposes of New York corporation franchise tax.1 Even though the corporations did not conduct business in New York in their own capacity, their ownership interest in the partnership was sufficient to establish nexus.

Background

The taxpayers were out-of-state holding companies organized under Delaware law. They did not conduct business in New York but they had a membership interest in an LLC ("LLC").2 LLC indirectly held a one percent general partnership interest and a 58.1 limited partnership interest in a limited partnership ("LP1") that filed partnership returns in New York. LP1 directly held a 99 percent limited partnership interest and through disregarded entities a one percent general partnership interest in another limited partnership ("LP2"), which conducted business, owned property and made sales in New York. Thus, LLC ultimately held a general partnership interest in LP2. For certain federal income tax purposes, LP2 was a disregarded entity. No tax was imposed on LP2's income until it passed through to the corporate members of LLC, the ultimate recipients of New York income.

The taxpayers filed forms claiming that they did not have tax liability in New York, but they indicated that they participated in a partnership, limited liability company/partnership or joint venture doing business in New York.3 The Division of Taxation audited the taxpayers and found that they were subject to New York corporation franchise tax. On appeal, the Administrative Law Judge ("ALJ") determined that the taxpayers were properly assessed tax as indirect recipients of New York income. Specifically, the ALJ held that the taxpayers, as members of the corporate general partner, LLC, which ultimately held a general partnership interest in LP2, a firm which did business in New York, were required to pay corporation franchise tax.

Taxpayers Owning Indirect Partnership Interest Subject to Tax

The Tax Appeals Tribunal affirmed the ALJ and held that the taxpayers had nexus with New York. Under New York law, LLCs that are treated as partnerships for federal income tax purposes are treated as partnerships under New York tax law.4 A corporation is subject to corporation franchise tax if it does business in the state, employs capital in the state, owns or leases property in the state or maintains an...