As a general matter (not tied to one company's specific facts), does a foreign corporation become subject to New York's corporate franchise tax merely by becoming a limited partner in a limited partnership that does business in New York?

Plain-English summary

Unlike most advisory opinions, this one was requested on a purely hypothetical basis by a law firm (Sullivan and Cromwell, on behalf of an unnamed client or clients) rather than tied to one company's specific transaction: a hypothetical limited partnership ("LPS") doing business in New York, with a hypothetical foreign corporation ("CLP") as a limited partner that otherwise has no New York contacts at all. The question was whether CLP becomes subject to Article 9-A franchise tax purely because LPS itself is doing business, employing capital, owning property, or maintaining an office in New York — the general rule a Department regulation seems to state for "corporate partners."

This appears to be the Department's foundational ruling establishing the modern doctrine (issued about two weeks before the substantively identical opinions TSB-A-88(10)C and TSB-A-88(11)C applied it to real companies). It walks through the same analysis: the 1954 Attorney General opinion that automatically imputed a general partner's activities to limited partners via an assumed agency relationship is outdated, given three decades of case law establishing that limited partners are passive investors with no true agency relationship to general partners. A limited partner doesn't directly own partnership assets, doesn't maintain an office through the partnership, and isn't "employing capital" in New York merely by making a passive investment — its position is comparable to a nonresident shareholder, whom the Court of Appeals has held cannot be taxed based solely on the underlying corporation's activities. So CLP, as a genuinely passive limited partner, isn't doing business, employing capital, owning/leasing property, or maintaining an office in New York merely because LPS is.

What this means for you

Foreign corporations considering a limited partnership investment in New York

This is the Department's clearest general statement of the passive-limited-partner rule, phrased hypothetically rather than around one company's facts — useful as a reference point for how the Department frames the doctrine generally, though it still can't be relied upon as binding precedent for your own situation.

Accountants and tax professionals

As in the companion opinions TSB-A-88(10)C and TSB-A-88(11)C, this ruling explicitly excludes three situations from the passive-investor safe harbor: (1) limited partners in name only who actually take an active role, (2) a controlling limited partnership interest, and (3) circumstances where the partnership's New York business is integrally related to the limited partner's own regular business. Any of those would still create doing-business and employing-capital nexus.

Common questions

Q: Why was this ruling requested hypothetically rather than for a specific transaction?
A: The opinion doesn't say why, but requesting a ruling on a hypothetical fact pattern is a recognized way to get Department guidance on a general legal question without committing to a specific transaction's facts — though the resulting opinion still only binds the Department as to the facts presented.

Q: Is this the same rule as in TSB-A-88(10)C and TSB-A-88(11)C?
A: Yes — all three opinions, issued within about six weeks of each other in early-to-mid 1988, apply the identical reasoning and reach the identical conclusion, abandoning the 1954 Attorney General opinion.

Q: Can a taxpayer cite this ruling as binding precedent?
A: No. Even though it addresses a general hypothetical, it still binds the Department only as to the facts of this specific petition and cannot be relied upon by other taxpayers as precedent.

Citations and references

Statutes and regulations:

• Tax Law § 209.1 (Article 9-A franchise tax nexus bases)
• Franchise Tax Regulation 20 NYCRR § 1-3.2(a)(5) (partnership doing business rule); § 1-3.2(c) (employing capital)
• 1954 Opinions of the Attorney General 221 (no longer followed)
• Matter of AT&T v. State Tax Commission, 61 N.Y.2d 393 (1984)
• Matter of Ausbrooks v. Chu, 66 N.Y.2d 281 (1985)
• New York Partnership Law Article 8

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a88_5c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (5)C
Corporation Tax
March 10, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C870518B

On May 18, 1987, a Petition for Advisory Opinion was received from Randall K.C. Kau, c/o
Sullivan and Cromwell, 125 Broad Street, New York, New York 10004.
The issue raised is whether a foreign corporation which is not otherwise subject to the
corporate franchise tax imposed under Article 9-A of the Tax Law becomes subject to such tax solely
by virtue of its becoming a limited partner in a limited partnership which is doing business in New
York.
FACTS:
The issue raised is a hypothetical based upon the following. LPS, a limited partnership, is
doing business in New York State. LPS was formed under New York's or another state's version of
either the Uniform Limited Partnership Act (UPLA) or the Revised Uniform Limited Partnership
Act. (See, e.g., Article 8 of the New York Partnership Law.) A foreign corporation, CLP, is a limited
partner in LPS. CLP, otherwise, is not doing business in New York, nor is CLP doing any of the
other activities specified in section 209.1 of the New York Tax Law which would subject it to New
York's Article 9-A corporate franchise tax.
APPLICABLE LAW:
Section 209.1 of Article 9-A of the New York Tax Law imposes an annual franchise tax on
domestic or foreign corporations for the privilege of exercising a corporate franchise, doing business,
employing capital, owning or leasing property in a corporate or organized capacity, or maintaining
an office, in New York State. In interpreting this section, Franchise Tax Regulation 20 NYCRR §
1-3.2(a)(5) sets forth a general rule which holds that if a partnership is exercising any of the
privileges of section 209.1, then all of its corporate partners are subject to the tax imposed by Article
9-A.
ANALYSIS:
The broad issue presented here is whether CLP is subject to the Article 9-A franchise tax. But
the pivotal issue is whether, as a matter of law, a limited partner is doing business if the limited
partnership is. Within the context of the Article 9-A franchise tax, the New York Attorney General,
in a December 28, 1954 Opinion, answered both of those questions in the affirmative. See, 1954
Opinions of the Attorney General 221. However, since 1954, limited partnerships have multiplied,
resulting in a much more refined judicial philosophy concerning the status of the limited partner. In
light of these developments, it is now clear that the rationale employed by the Attorney General has
not withstood the test of time and that the 1954 Opinion itself should no longer be followed insofar
as it relates to corporate limited partners.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

FRANK J. PUCCIA, DIRECTOR

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER

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The heart of the 1954 Opinion is the belief that the common law doctrine of agency is at all
times mutually inherent, as a matter of law, in the relationship between limited partners and general
partners. The soundness of the agency rationale is essential for the validity of the 1954 Opinion. As
authority for this assertion, the 1954 Opinion relied chiefly on two New York cases: People ex rel
Badische Anilin & Soda Fabrik v. Roberts, 152 NY 59 (1897)(1 dissent); and Matter of Chapman
v. Browne, 268 AD 806 (3d Dept 1944), mot lv app den, 293 NY 933 (1944).
Were it applicable, the agency doctrine would lead to the conclusion that limited partners
inevitably are doing business wherever the general partners are doing business. However, the agency
doctrine simply has no place in analyzing the status of the typical limited partner who remains
passive in the business:
"As the Official Comment to § 1 of the Uniform [Limited
Partnership] Act makes clear, a limited partner, though so called by
custom, is not 'in any sense' either a partner or a principal in the
business or transactions of the partnership .... See 6 Uniform Laws
Annotated, Uniform Limited Partnership Act § 1 .... Succinctly put,
a limited partnership interest in a business is in the nature of an
investment .... He is an investor in the partnership venture, without
authority to participate in the management of the business .... Hence,
the general rule would appear to be that the principal-agent
relationship which exists between the parties of an ordinary
partnership is not per se present between general and limited partners
in a limited partnership."
Klein v. Weiss, 284 Md 36, 395 A. 2d 126, 136 (1978), citing Riviera Congress Assoc. v. Yassky,
25 AD 2d 291 (lst Dept. 1966), aff'd 18 NY 2d 540 (1966); Ruzicka v. Rager, 305 NY 191 (1953);
Lynn v. Cohen, 359 F. Supp. 565 (SDNY 1973); Freedman v. Tax Review Board of Philadelphia,
212 Pa Super 442 (1968) (unanimous 7/0 opinion), aff'd by an equally divided court (3/3)(dissent
not grounded in agency law), 434 Pa 282 (1969); and 60 Am. Jur. 2d Partnership § 379 (1972).
The Lynn case, a diversity action, focused on the territorial power of New York to attain in
personam civil jurisdiction over a nonresident limited partner via the New York long-arm statute as
limited by the Due Process Clause of the Fourteenth Amendment to the Federal Constitution. The
district court held that the limited partner's investment in partnerships producing movies in New
York did not, of itself, constitute the "transacting of any business" in New York, through an agent,
within the meaning of the long-arm statute. On this point, Lynn said:
"Plaintiffs argue that by investing in the partnerships, both of
which were producing movies in New York, the defendant transacted
business in New York. In making this argument, plaintiffs assume
that a general partner engaged in the business of a limited partnership
acts as the 'agent' of the limited partners within the meaning of CPLR
§ 302(a).

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This assumption is unfounded. Being strictly a creature of statute, a
limited partnership resembles a corporation more closely than it does
an ordinary partnership. Ruzicka v. Rager, 305 NY 191 (1953); NY
Partnership Law, Art 8 (McKinney's Consol. Laws, c. 39, 1948). The
principal-agent relationship which exists between the partners of an
ordinary partnership is not present between the limited and general
partners of a limited partnership. Moreover, the actual relationship
between plaintiffs and defendant created by the partnership agreement
does not meet the standards of agency established by the courts of
New York in construing the long-arm statute. Under the standards,
the defendant principal must exercise 'domination and control' over
the activities of the plaintiff agent in order to come within the statute.
Hodom v. Stearns, 32 AD 2d 234, appeal dismissed, 25 NY 2d 722
(1969). The cases make clear that the amount of 'domination and
control' required is considerably more than defendant Cohen
exercised over the plaintiffs under the partnership agreements."
359 F. Supp. at 567.
Lynn has been cited with approval by several courts, including those in New York. See, e.g.,
Oncology Associates v. McGraw-Hill Corp., 109 AD 2d 616 (lst Dept 1985).
Moreover, the "passive investor/no agency" rationale of Lynn has been subscribed to by other
courts nationwide when faced with the identical civil jurisdiction issue. See, Oriental Imports &
Exports v. Maduro & Curiel's, 701F. 2d 889 (llth Cir 1982) (applying Florida law); Klein v. Mega
Trading Ltd., 416 So. 2d 866 (Fla 3d DCA 1983); Ga-Pak Lumber Co., Inc. v. Nalley, 337 So. 2d
1270 (Mississippi 1976); and Norman v. Kal, 88 Ill App 3d 81 (lst District 1980).
In addition, the instant agency issue appears in contexts besides civil jurisdiction, with the
same result.
For example, the analogous issue has arisen several times in the area of Federal diversity
jurisdiction. Will a limited partner's state of citizenship impede diversity? The Federal circuits are
sharply split on this question, with some courts holding that diversity is destroyed solely because
such a bright-line rule of jurisdiction regarding unincorporated associations is perceived to be the
intent of Congress. See, 13B C. Wright, A. Miller and E. Cooper, Federal Practice and Procedure:
Jurisdiction 2d, § 3630 (collecting cases). However, the cases which disagree with the bright-line
approach are usually then forced to confront an additional argument: it is asserted that a limited
partner's citizenship in the same state as an adverse party will destroy diversity whenever the
partnership is suing or is being sued, for it is claimed that general partners are inherently general
agents for the limited partners and vice versa. Ail of the courts which have faced this anti-diversity
argument have rejected it.

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See, e.g., Colonial Realty Corp. v. Bache & Co., 358 F. 2d 178 (2d Cir 1966), cert den, 385 US 817
(1966). As one Federal court said in this regard, at times quoting the Official Comments to the
ULPA:
"Though a general partner has general agency authority to
bind partnership assets and other general partners . . . he cannot bind
limited partners .... [A general partner] is not in any sense a general
agent for the limited partners. [The Official Comments say, in part:]
'First, in the draft the person who contributes the capital, though in
accordance with custom called a limited partner, is not in any sense
a partner. [However, he] may become a partner.' Thus, a limited
partnership such as the one involved herein, which has only one
general partner, is not a true partnership under California law, and the
label 'partnership' is less descriptive of its legal relations than 'sole
proprietorship' would be."
Wroblewski v. Brucher, 550 F. Supp. 742, 747 (WD Okla 1982). Compare the observation of the
First Department in Skolny v. Richter (139 AD 534, 537 (1910)), wherein the court, in ruling that
a limited partner, unlike a general partner, owes no fiduciary duty to fellow partners, permitted
limited partners to invest in a competing partnership. The court stated: "Similarity of terminology
does not always establish identity in meaning or in the rules of law affecting the subjects similarly
named".
In fact, in the face of the modern trend summarized above, only one case could be found
which, like the Third Department's 1944 Chapman case (supra), held general partners to be inherent
general agents of the limited partners: Donroy, Ltd. v. United States, 301F. 2d 200 (9th Cir 1962).
And that case has been sharply criticized by other courts, including the court in Wroblewski v.
Brucher, supra, 550 F. Supp. at 746 n. 6, as well as the California Supreme Court which, in declining
to follow Donroy, held that the Ninth Circuit had badly misconstrued California law on the subject
of limited partners. See, Evans v. Galardi, 16 Cal 3d 300 (1976)(citing Skolny v. Richter, supra).
Even the Ninth Circuit itself has, apparently, abandoned the partnership/agency rationale of Donroy.
See, Estate of Meyer v. Commissioner, 58 TC 311 (1972), nonacq., 1975-1C. B. 3, aff'd per curiam,
503 F. 2d 556 (9th Cir 1974).
It is obvious that the overwhelming weight of the modern authorities in a variety of areas of
law has crippled the foundation on which the 1954 Opinion of the Attorney General rests. The 1944
Chapman case, which explicitly held that agency principles apply so as to taint limited partners as
being engaged in business wherever the partnership is so engaged, was an extremely succinct
opinion, completely devoid of cited authority. Its agency-based rationale stands virtually alone and
quite weak viewed against the more recent decisions discussed above.
Therefore, in the instant case, it cannot be said that CLP is doing business in New York for
purposes of section 209.1 of the franchise tax. The 1954 Opinion should no longer be followed. In

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this regard, note that "an opinion of the Attorney General is an element to be considered but is not
binding on the courts". Matter of AT&T v. State Tax Commission, 61 NY 2d 393, 404 (1984).
The remaining bases for potential jurisdiction under section 209.1 are easily disposed of.
Even if LPS owns property in New York, it cannot be said, for purposes of jurisdiction, that
CLP thereby owns property in New York. General partners do not own direct pro rata shares of each
partnership asset. Matter of Havemeyer, 17 NY 2d 216 (1966). The same is true for limited partners.
Matter of Ausbrooks v. Chu, 66 NY 2d 281, 288 (1985)(partnership A which is a limited partner in
partnership B has no direct ownership interest in partnership B's assets). (That is not to say, though,
that computational matters, such as the factors used in computing the business allocation percentage,
may not employ a pass-through approach -- assuming jurisdiction is otherwise established. See, Tax
Law section 210.3(a); 20 NYCRR 4-6.5.)
For like reasons, CLP is not "maintaining an office" in New York even though LPS is.
Nor is CLP "employing capital" in New York. In general, employing capital refers to the use
of assets in maintaining or aiding the corporate enterprise or activity in New York (20 NYCRR 1­
3.2(c)). There are circumstances where the investment of corporate monies in a New York State
enterprise will constitute "employing capital" in the state (see, Matter of AT&T v. State Tax
Commission, supra, 61NY2d at 402). However, an investment which is strictly passive is not
sufficient (see , People ex rel Union Ferry Co. v. Roberts, 66 AD 157, 160 (3d Dept. 1901)). As has
been clearly demonstrated, CLP is merely a passive investor. As such, it is not employing capital in
New York State.
CLP's status is akin to that of a preferred shareholder. If CLP were employing capital for
purposes of the jurisdictional bases of section 209.1, then the same would have to be said for a
nonresident shareholder of a corporation which resembles LPS in its New York operations. Yet the
Court of Appeals has held that to subject a nonresident shareholder to the franchise tax upon the
basis of the corporation's activities within New York "would be an unreasonable exercise of the
power of taxation". People v. American Bell Telephone Co., 117 NY 241, 255 (1889). There is no
indication that the 1969 legislation which expanded the nexus standards of Article 9-A of the Tax
Law to include "employing capital" was intended to cover purely passive investments such as in the
present
case.
It should be emphasized that this opinion is restricted to a partnership interest, in the
circumstances described above, which is owned by a foreign corporation in the capacity of a limited
partner. That is to say, this opinion does not extend to a foreign corporate general partner in the
above circumstances. Moreover, limited partners in name only, i.e., limited partners who shed their
passive role and who in fact take an active part in the partnership should be treated as the general
partners they really are, for purposes of the franchise tax. Cf., New York Partnership Law section

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96; Micheli Contracting Corp. v. Fairwood Associates, 68 AD 2d 460 (3d Dept 1979); Estate of
Meyer, supra, 58 TC at 314. Similarly, if a foreign corporation acquires a limited partnership interest
under circumstances whereby the business carried on by the partnership in New York is integrally
related to the regular business of the foreign corporation, such foreign corporate limited partner
should be considered to be both doing business and employing capital in New York. See, People ex
rel Badische Anilin & Soda Fabrik v. Roberts, supra, 152 NY 59. See also, People ex rel union Ferry
Co. v. Roberts, supra, 66 AD at 160; Matter of AT&T v. State Tax Commission, supra, 61NY2d at

402. The key to nontaxability is that the limited partnership holding be a passive, disinterested
     investment.
     CONCLUSION:
     Ownership of a limited partnership interest, in a limited partnership which is doing business
     in New York, by a foreign corporation which is otherwise not subject to the New York Article 9-A
     corporate franchise tax, will not in itself cause such foreign corporate limited partner to be doing
     business, employing capital, owning or leasing property or maintaining an office in New York and,
     thus, such foreign corporate limited partner is not subject to the Article 9-A franchise tax.

DATED: March 10, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.