New York City: Corporation Owed City Tax on Gain from Sale of Partnership Interest

The New York City Tax Appeals Tribunal recently sustained a City General Corporation Tax (GCT) assessment on the capital gain from the sale of a partnership interest. The taxpayer at issue, a corporation, held a majority interest in a limited partnership that, in turn, held a minority interest in an LLC engaged in business in New York City. The LLC’s activity had been reported on the corporation’s prior year GCT returns, but upon the sale of the LLC in 2010, the taxpayer excluded the capital gain in determining its entire net income. After an audit and appeal, an ALJ determined the capital gain should have been included in the corporate partner’s entire net income because the capital gain was derived from the sale of the LLC that conducted business activity in the City.

Under New York City law, GCT is imposed on corporations doing business in the City. Further, under 19 RCNY § 11-06(a), a corporation is deemed to be doing business in the City if it owns a limited partnership interest in a partnership that is doing business in the City. For federal income tax and GCT purposes, the LLC was classified as a partnership. The Tribunal noted that for all tax years that the taxpayer owned an interest in the LLC, the taxpayer properly treated the LLC as a partnership on its GCT returns. On its 2010 GCT return, the taxpayer disclosed that it was limited partner in a limited partnership that received New York City source income from a partnership doing business in New York City and acknowledged that it was subject to tax in the City solely as a result of such ownership. The Tribunal found that these disclosures, along with the fact that the taxpayer had paid tax on its share of the LLC’s income on prior year GCT returns, was an admission that the taxpayer had nexus with the City.

The Tribunal also addressed the taxpayer’s references to non-binding decisions in other taxing jurisdictions holding that limited partners who lacked managerial control over an in-state partnership business were not subject to tax in those states. Specifically, the Tribunal analyzed the holding in Swart v. FTB, a California Court of Appeal decision holding that ownership of a passive 0.2 percent interest in a manager-managed California LLC did not constitute doing business in the state. The Tribunal noted that Swart gave significant weight to the de minimis nature of the ownership interest involved and failed to address the conduit nature of the taxation of partnerships, whereby a partnership’s income is taxable only to its corporate or individual partners. The Tribunal concluded that Swart was not applicable because the GCT relies on the federal income tax definition of a partnership, while Swart relied too heavily on the legal relationships involved. Please contact Russ Levitt with questions on Matter of Goldman Sachs Petershill Fund Offshore Holdings Corp.