Does an out-of-state corporation that holds a passive limited-partnership interest in a New York cogeneration project owe New York franchise tax, and if so, is it taxed under the general Article 9-A rate or the utility-specific Article 9/section 186 rate?

Plain-English summary

PEC Fort Drum, Inc., a Florida corporation with no office, property, or capital of its own in New York, held an indirect 10% foreign-corporate-limited-partner interest in the Black River Limited Partnership, a tiered Delaware limited partnership that owns and operates a 49.9-megawatt coal-fired cogeneration plant near Fort Drum, New York -- selling steam and hot water to the U.S. Army under long-term contracts and electricity to Niagara Mohawk Power Corporation. Petitioner's 10% stake arrived through three layers of partnership ownership (88.89% x 75% x 15%), assigned from its parent company. Petitioner described itself as a passive investor with no liability for partnership obligations.

The nexus question turned on Regulations section 1-3.2(a)(6), which treats a foreign corporate limited partner as "doing business" in New York (and taxable under Article 9-A) if it's engaged, directly or indirectly, in participating in or dominating/controlling the partnership's affairs -- tested against a detailed list of factual triggers. Petitioner conceded several applied: its 10% interest exceeded the 1%-or-more threshold and its basis exceeded $1,000,000 (clause (a)); more than 50% of its assets were the limited-partnership interest (clause (d)(ii)); the partnership interest was its only business and arguably "integrally related" to it (clause (e)(ii)); and it held some limited voting rights (clause (f)(ii)). Based on those factors, the Department found Petitioner was doing business in New York and subject to Article 9-A tax.

But Article 9-A isn't necessarily the final word. Tax Law section 209.4 excludes from Article 9-A any corporation taxed under section 186 of Article 9 -- the utility franchise tax on corporations principally engaged in supplying water, steam, gas, or electricity. Since the partnership's business is exactly that, and each corporate partner acts as the partnership's agent (citing The Partners of Buffalo Telephone Company, TSB-A-89(3)C), a corporate limited partner that is itself "principally engaged" -- meaning more than 50% of its own receipts come from that partnership business -- would be taxed under section 186 instead. Whether Petitioner crosses that 50% threshold is a fact question the Department couldn't resolve in the abstract; if it does, Petitioner owes section 186 tax, not Article 9-A tax.

What this means for you

Corporations holding passive stakes in New York partnerships or joint ventures

A "passive investor" label in your partnership agreement doesn't control the tax outcome. Regulations section 1-3.2(a)(6) lists many independent triggers -- ownership percentage/basis thresholds, asset concentration, integrally-related business, even limited voting rights -- any one of which can establish New York nexus for a foreign corporate limited partner, regardless of your day-to-day involvement in management.

Investors in utility, energy, or cogeneration partnerships specifically

If the underlying partnership's business is supplying water, steam, gas, or electricity, don't assume Article 9-A automatically applies once nexus is found -- section 186 of Article 9 may apply instead (a different tax base) if your receipts from that business exceed 50% of your total receipts for the year, and Article 9 corporations are excluded from Article 9-A entirely.

Accountants and tax professionals

Track and be ready to substantiate: (1) percentage interest and IRC section 705 basis in the partnership, (2) what share of the corporate partner's total assets and receipts the partnership interest represents, and (3) whether the partnership's business is "integrally related" to the partner's own. The 50%-of-receipts "principally engaged" determination can only be made at year end.

Common questions

Q: Does owning less than a majority interest in a New York partnership avoid franchise tax nexus?
A: Not necessarily. A 1%-or-more interest with basis over $1,000,000, or several other factors in Regulations section 1-3.2(a)(6), can independently establish nexus even for a small minority limited partner.

Q: If my corporation has New York nexus through a partnership, is it always taxed under Article 9-A?
A: No -- if the partnership's business is one taxed under Article 9 (like utilities), and the corporate partner is "principally engaged" in that same business (over 50% of its receipts), section 186 of Article 9 applies instead, and Article 9-A is excluded.

Q: Can this ruling be relied on by another corporate limited partner in a similar cogeneration deal?
A: No. It binds the Department only for PEC Fort Drum, Inc. on these specific ownership percentages, basis figures, and partnership facts.

Citations and references

Statutes and regulations:

• Tax Law section 209.1, 209.4 (Article 9-A tax; exclusion for Article 9 taxpayers)
• Tax Law section 186 (Article 9 franchise tax on water/steam/gas/electricity suppliers)
• Business Corporation Franchise Tax Regulations section 1-3.2(a)(6)(i), (ii) (foreign corporate limited partner nexus factors)

Prior authority cited:

• Matter of McAllister Bros., Inc. v Bates, 272 App Div 511, 517 (3d Dept 1947)
• The Partners of Buffalo Telephone Company, Adv Op, Comm T&F, February 22, 1989, TSB-A-89(3)C
• Joseph Bucciero Contracting Inc., Adv Op, St Tax Comm, August 27, 1981, TSB-A-81(5)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a91_5c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91(5)C
Corporation Tax
February 14, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C890616A

On June 16, 1989, a Petition for Advisory Opinion was received from PEC Fort Drum, Inc.,
c/o George M. Temple, Esq., Florida Progress Corporation, 270 First Ave. South, P.O. Box 33042,
St. Petersburg, Florida 33733.
The issue raised by Petitioner, PEC Fort Drum, Inc., is whether it is subject to New York
State franchise tax where it has an ownership interest in a limited partnership doing business in New
York State.
Petitioner is a corporation incorporated under the laws of the State of Florida. It has its
principal offices in St. Petersburg, Florida. Petitioner's immediate parent company is Progress Energy
Corporation whose office address is the same as Petitioner's. Petitioner is a member of an affiliated
group of companies as defined under section 1504 of the Internal Revenue Code. The common
parent of the affiliated group is Florida Progress Corporation whose offices are also located in St.
Petersburg, Florida. Neither Petitioner, nor any other member of the affiliated group conducts or
does business in the State of New York. Neither Petitioner, nor any member of the affiliated group,
maintains an office, owns or leases property, or employs capital in the State of New York.
Petitioner participates as a foreign corporate limited partner in the Black River Limited
Partnership (hereinafter the "Partnership") which is a tiered partnership. The Partnership was
organized December 23, 1986, under the Delaware Revised Uniform Limited Partnership Act, and
operates in New York State.
Petitioner has a 10 percent limited partnership interest in the Partnership. Petitioner's 10
percent limited partnership interest was assigned to Petitioner by its immediate parent company,
Progress Energy Corporation. Progress Energy Corporation purchased the 10 percent limited
partnership interest on December 30, 1988, and assigned such interest to its subsidiary, Petitioner,
on May 9, 1989. This 10 percent interest is calculated in the following manner:
•

Petitioner owns 88.89 percent as a foreign corporate limited partner in the
Westmoreland - Fort Drum Limited Partnership, a Delaware limited partnership,
which is a tier of the Partnership.

•

The Westmoreland - Fort Drum Limited Partnership owns 75 percent of Dominion
Energy - Fort Drum Associates, a Virginia partnership. Dominion Associates - Fort
Drum Partnership (also a tier of the Partnership) owns 15 percent of the Partnership.
Thus, Petitioner owns a 10 percent foreign corporate limited partnership interest in
the Partnership (88.89 percent X 75 percent x 15 percent equals 10 percent).

TP-9 (9/88)

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The purpose of the Partnership is to acquire, own, develop, and operate the 49.9 megawatt
coal-fired cogeneration system at the United States Army facility at Fort Drum, near Watertown,
New York.
The Partnership's business activity is to sell, pursuant to long-term contracts, hot water and
steam to the U.S. Army facility at Fort Drum and electricity to Niagara Mohawk Power Corporation.
The Partnership is managed and the conduct of its business is controlled solely by the general
partners of the Partnership. The Partnership's interests are not publicly traded and no limited partner
owns a majority interest in the Partnership. Petitioner's participation as a foreign corporate limited
partner is that of a passive investor, and it has no personal liability with respect to liabilities and
obligations of the Partnership.
Section 209.1 of Article 9-A of the 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, section 1-3.2(a)(6) of the Regulations sets
forth a rule which holds that if a partnership is exercising any of the privileges of section 209.1, then
its foreign corporate limited partner is subject to the tax imposed by Article 9-A if such foreign
corporate limited partner is engaged directly or indirectly in the participation in or the domination
or control of all or any portion of the business activities or affairs of the partnership.
Section 1-3.2(a)(6) of the Business Corporation Franchise Tax Regulations (hereinafter the
"Regulations") states:
(6)(i) A foreign corporation is doing business, employing capital, owning or leasing property
or maintaining an office in New York State if it is a limited partner of a partnership which is doing
business, employing capital, owning or leasing property or maintaining an office in New York State
and if it is engaged, directly or indirectly, in the participation in or the domination or control of all
or any portion of the business activities or affairs of the partnership. A foreign corporation is
engaged in such manner in the business activities or affairs of the partnership if one or more of
certain factual situations, including but not limited to the following, exist during the taxable year or,
except for clause (a) of this subparagraph, any previous taxable year ­
(a) The foreign corporation has a one percent or more interest as a limited partner in a
partnership and/or the basis of the foreign corporation's interest in the limited partnership,
determined pursuant to section 705 of the Internal Revenue Code, is more than $1,000,000. For
purposes of determining whether the level of interest in the partnership or level of basis of the
interest in the partnership is met, the percentage of interest in the partnership and basis of interest
in the partnership of members of the foreign corporation's affiliated group, of officers or directors
of the foreign corporation or of officers or directors of members of the foreign corporation's affiliated

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group are added to the foreign corporation's interest in the partnership or the basis of its interest in
the partnership, respectively.
(b) An officer, employee, or director of the foreign corporation or an officer, employee, or
director of a member of an affiliated group which includes such foreign corporation or a member of
such an affiliated group, is a general partner of the partnership.
(c) The foreign corporation or a member of an affiliated group which includes the foreign
corporation is a five percent or more stockholder in a general partner of the partnership.
(d) One or more officers, employees, directors or agents of the foreign corporation, or of a
member of an affiliated group which includes such foreign corporation, perform acts usually
performed by a general partner.
(e) The foreign corporation becomes a limited partner after one or more officers, employees,
directors or agents of such corporation, or of a member of an affiliated group which includes such
foreign corporation, negotiates the terms of the partnership agreement instead of merely accepting
an existing agreement.
(f) There is substantial communication between one or more officers, employees, directors
or agents of the foreign corporation, or of a member of an affiliated group which includes such
foreign corporation, and the general partner regarding the business activities or affairs of the
partnership.
(g) The foreign corporation, a member of an affiliated group which includes such foreign
corporation, or an officer, employee, or director of the foreign corporation or of a member of such
an affiliated group, guarantees payment of one or more loans to the partnership.
(h) The foreign corporation, a member of an affiliated group which includes such foreign
corporation, or an officer, employee, or director of the foreign corporation or of a member of such
an affiliated group, makes loans to the partnership.
(i) The foreign corporation is a limited partner which for purposes of section 469 of the
Internal Revenue Code is materially participating in the partnership as defined in section 1.469­
5T(e)(2) of the Federal income tax regulations (26 CFR 1.469-ST(e)(2)). For purposes of this clause,
references to "taxpayer" in such section 469 shall be deemed to mean any person, as defined in
section 7701(a)(1) of the Internal Revenue Code.
(j) The foreign corporation entered into the limited partnership arrangement not for a valid
business or economic purpose, but for the principal purpose of avoiding or evading the payment of
tax.

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(ii) Other factual situations, during the taxable year or any previous taxable year, to be
considered as indications that a foreign corporation is engaged, directly or indirectly, in the
participation in or the domination or control of all or any portion of the business activities or affairs
of the partnership, include the following ­
(a) The foreign corporation, or a member of an affiliated group which includes such foreign
corporation, sells its products and/or services to the partnership.
(b) The foreign corporation, or a member of an affiliated group which includes such foreign
corporation, purchases the partnership's products and/or services.
(c) The foreign corporation, or a member of an affiliated group which includes such foreign
corporation, is engaged in a similar or identical business to that of the partnership.
(d) 50 percent or more of the foreign corporation's assets or those of a member of an affiliated
group which includes such foreign corporation are a limited partnership interest in the partnership.
(e) The business carried on by the partnership is integrally related to the business of the
foreign corporation or a member of an affiliated group which includes such foreign corporation.
(f) The foreign corporation exercises its voting rights as a limited partner to remove a general
partner, to approve the sale of the partnership assets, to amend the partnership agreement or to
dissolve the partnership.
(g) The foreign corporation, or a member of an affiliated group which includes such foreign
corporation, is interrelated with the partnership through one or more of the following factors:
(1) common management;
(2) common policy and directives including policy and directives relating to legal services,
assignment or transfer of executive personnel, determination and enforcement of procedures to
ensure compliance with the law, salary guidelines or uniform pay scale and/or labor relations
activities;
(3) common or inter-entity use of intelligent assets, such as patents, trademarks or
copyrights;
(4) common or inter-entity use of product distribution systems and/or warehouse functions;
(5) common or inter-entity use of facilities, equipment, or employees;

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February 14, 1991

(6) common or inter-entity personnel recruitment;
(7) common or inter-entity research and development activities;
(8) common or inter-entity marketing and/or advertising;
(9) common or inter-entity information processing and computer support, printing,
telecommunications, and/or other support services;
(10) common or inter-entity transfer or pooling of technical information;
(11) common or inter-entity pension plans and/or insurance plans; or
(12) common or inter-entity credit analysis and coordination of credit extension.
(iii) As used in this paragraph, the following terms have these meanings ­
(a) The term "one percent or more interest" means a distributive share of one percent or more
of a limited partnership's income, gain, loss, deduction, or credit determined pursuant to section 704
of the Internal Revenue Code.
(b) The term "inter-entity" means business activities or affairs carried on between a foreign
corporation which is a limited partner of a partnership, or a member of an affiliated group which
includes such foreign corporation, and such partnership.
(c) The term "affiliated group" shall have the same meaning as such term is defined in
section 1504 of the Internal Revenue Code, except that the term "common parent corporation" shall
be deemed to mean any person, as defined in section 7701(a)(1) of the Internal Revenue Code, and
except that references to nat least eighty percent" in such section 1504 shall be read as "fifty percent
or more". Such section 1504 shall be read without regard to the exclusions provided for in section
1504(b).
Petitioner states that, under section 1-3.2(a)(6)(i) of the Regulations, only clause (a) is
applicable to Petitioner and that the factors in clauses (b) through (j) have no relationship and are not
applicable to Petitioner or any member of its affiliated group.
Clause(a) of section 1-3.2(a)(6)(i) requests information as to the percentage interest the
foreign corporate limited partner has in the partnership and/or its basis in such partnership
determined pursuant to section 705 of the Internal Revenue Code. Petitioner has stated that it has
a 10 percent limited partnership interest in the Partnership. Petitioner also states that the basis of
Petitioner's interest in the limited partnership pursuant to section 705 of the Internal Revenue Code
is as follows:

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Corporation Tax
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•
•

Contribution to capital
Liabilities assumed
Total purchase price (basis)

$ 6,200,000
10,395,059
$16,595,059

Petitioner also states that under section 1-3.2(a)(6)(ii) of the Regulations, only clauses (c),
(d), (e) and (f) have any applicability to Petitioner and that the factual situations in clauses (a), (b),
(g) and the 12 sub-parts of clause (g) are not applicable to the Petitioner or any member of its
affiliated group.
Petitioner provides that section 1-3.2(a)(6)(ii) of the Regulations is applicable as follows:
Clause (c) ----- other members of Petitioner's affiliated group are engaged in a similar
or identical business to that of the Partnership;
Clause (d) ----- more than 50 percent of Petitioner's assets are a limited partnership
interest in the Partnership;
Clause (e) ----- may be applicable since Petitioner's only business interest is the
holding of a limited partnership interest in the Partnership and could be
considered integrally related to the Partnership on that basis;
Clause (f) ----- may be applicable because of Petitioner's limited voting rights.
Herein, the Partnership's purpose is to acquire, own, develop and operate a 49.9 megawatt
coal-fired cogeneration system in New York State and the Partnership's business activity is to sell,
pursuant to long-term contracts, hot water and steam to the U.S. Army facility at Fort Drum, New
York, and electricity to Niagara Mohawk Power Corporation. As such, the Partnership is doing
business in New York State.
Based on the applicability to Petitioner of the factual situations contained in section 1­
3.2(a)(6)(i) and (ii) of the Regulations, Petitioner is engaged, directly or indirectly in the participation
in or the domination or control of all or any portion of the business activities or affairs of the
Partnership. Accordingly, Petitioner is doing business, employing capital, owning or leasing
property or maintaining an office in New York State pursuant to section 209.1 of the Tax Law and
is subject to tax under Article 9-A. However, section 209.4 of the Tax Law, provides that a
corporation liable to tax under section 186 of Article 9 of the Tax Law is not subject to tax under
Article 9-A.
Section 186 of Article 9 of the Tax Law imposes a franchise tax, on a 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, or electricity, or principally engaged in two or more

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TSB-A-91(5)C
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February 14, 1991

such businesses, for the privilege of exercising its corporate franchise or carrying on its business in
such corporate or organized capacity in New York State.
To determine the classification and proper taxability of a corporation under either Article 9
or Article 9-A, an examination of the nature of the corporation's activities is necessary, regardless
of the purposes for which the corporation was organized. See Matter of McAllister Bros., Inc. v
Bates, 272 App Div 511, 517 (3d Dept 1947).
In The Partners of Buffalo Telephone Company, Adv Op, Comm T & F, February 22, 1989,
TSB-A-89(3)C, Buffalo Telephone Company, a general partnership, was engaged in a telephone
business in New York State and it was held that each corporate partner, as agent of the partnership,
was also engaged in a telephone business in New York State. Therefore, each corporate partner that
was principally engaged in such telephone business was subject to the tax under sections 183 and
184 of Article 9.
Accordingly, corporate general partners in a partnership are treated the same under both
Article 9-A and section 186 of Article 9 of the Tax Law. Therefore, it is appropriate to apply the
Article 9-A treatment of certain corporate limited partners contained in section 1-3.2(a)(6)(i) and (ii)
of the Regulations in a consistent manner to such corporate limited partners under section 186 of
Article 9 of the Tax Law.
Herein, Petitioner is engaged, directly or indirectly in the participation in or the domination
or control of all or any portion of the business activities or affairs of the Partnership. Since the
Partnership is in the business of supplying water, steam and electricity in New York State, each
corporate partner as agent of the partnership, is also engaged in the business of supplying water,
steam and electricity in New York State. Therefore, each corporate partner of the Partnership that
is principally engaged in such business is subject to tax under section 186 of Article 9.
Ordinarily, a corporation is deemed to be principally engaged in the activity from which more
than 50 percent of its receipts are derived. See, e.g. Joseph Bucciero Contracting Inc., Adv Op, St
Tax Comm, August 27, 1981, TSB-A-81(5)C. The determination of whether Petitioner is principally
engaged in the business of supplying water, steam or electricity is a question of fact not susceptible
of determination in an Advisory Opinion. An Advisory Opinion merely sets forth the applicability
of pertinent statutory and regulatory provisions to "a specified set of facts". Tax Law, §171, subd.
twenty-fourth; 20 NYCRR 901.1(a).

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Accordingly, if more than 50 percent of Petitioner's receipts are derived from the Partnership
business, it will be principally engaged in the business of supplying water, steam or electricity and
Petitioner will be subject to tax under section 186 of the Tax Law. If subject to tax under section
186, Petitioner will not be subject to tax under Article 9-A of the Tax Law.

DATED: February 14, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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