July 12, 1995

You have asked how *************** (the "taxpayer"), would be treated for Massachusetts tax purposes if it reorganizes as a Limited Liability Partnership ("LLP") under New York law. For the reasons stated below, we rule that the proposed LLP would be treated as a partnership and the members of the proposed LLP would be treated as partners in a partnership.

The taxpayer is a Massachusetts partnership engaged in the practice of law. The taxpayer has offices in Boston, New York, and Washington, D.C. It proposes to reorganize as an LLP under a recently enacted New York statute (L. 1994, c. 576). The New York LLP law treats LLP's as general partnerships except that the members of an LLP are afforded a form of limited liability. See N.Y. Consolidated Laws c. 39, § 10. The New York LLP law provides that no LLP member is personally responsible for the liabilities of the LLP unless (1) the liability arises out of the member's own misconduct or negligence in the performance of services on behalf of the LLP or (ii) the liability arises out of misconduct or negligence in the performance of services on behalf of the LLP by another LLP member or employee whom the member is directly responsible for supervising. N.Y. Consolidated Laws c. 39, § 26(b), (c).

The taxpayer asserts that the proposed LLP would be treated as a partnership for federal tax purposes- because it would have only one of the four characteristics that Treas. Reg. § 301.7701-2 employs to distinguish partnerships from corporations. Specifically, the proposed LLP would have limited liability, but would-lack the corporate characteristics of centralized management, continuity of life and free transferability of interests. However, the proposed LLP's federal classification as a partnership is not binding for Massachusetts tax purposes.

Generally, a business entity organized under the laws of another state and doing business in Massachusetts may be subject to tax as a corporate trust, a foreign corporation, or a partnership. For the following reasons we conclude that the proposed-LLP is a partnership within the meaning of G.L. c. 63, § 30.2. We base our conclusion on a combination of the following factors specific to the proposed LLP: [1]

First, the proposed LLP would have only one of the four federally recognized corporate characteristics:- limited liability. Although we view limited liability as a very important indication of corporate status since it can be conferred only by legislative act, we acknowledge that the proposed LLP would not have complete limited liability. Its members would still be fully liable for their own negligence or misconduct-as well as that of those they supervise. The degree of limited liability here, in the absence of any other corporate characteristics, is not sufficient to treat as a corporation an entity that is otherwise a partnership for state law purposes. This result is supported by the partnership treatment afforded by the Department to foreign limited partnerships that are treated as partnerships and not as corporations for federal tax purposes. These foreign limited partnerships may have as many as two of the federally recognized corporate characteristics, whereas the proposed LLP would have only one. [2] Moreover, the limited partners in foreign limited partnerships have limited liability for all of the obligations of the entity. In contrast, the members of a New York LLP are responsible for all liabilities relating to their own misconduct or that of those they supervise. Thus, members of a New York LLP have potentially greater liability exposure than the limited partners of a foreign limited partnership.

Second, the proposed LLP would be considered a partnership under New York law. Although another state's classification of an entity is hot controlling for Massachusetts tax purposes, we acknowledge that under New York law the proposed LLP would be governed as a general partnership in all respects other than in determining the members' liability for obligations of the business entity.

Third, the proposed LLP would be considered a general partnership under the Massachusetts Uniform Partnership Act and under Massachusetts partnership law. [3] See G.L. c. 108A, § 6; Meehan v. Valentine, 145 U.S. 611, 623 (1891); Rosenblum v. Springfield Produce Brokerage Co., 243 Mass. 111, 115-119 (1922); Mitchell v. Gruener, 251 Mass. 113, 123 (1925). Again, we do not view this characterization as controlling for tax classification purposes. However, we acknowledge that under Massachusetts partnership law, the proposed LLP would be treated as a general partnership in all respects with the possible exception of determining the members, personal liability for the obligations of the business entity.

Conclusion

Because the proposed LLP (i) would be a partnership and not a foreign corporation within the meaning of G.L. c. 63, § 30.2, (ii) would not be a corporate trust within the meaning of G.L. c. 62, § 1(j), and (iii) would be considered a partnership under New York and Massachusetts partnership law, we rule that it would be treated as a partnership and its members would be treated as partners for Massachusetts tax purposes.

Very truly yours,

/s/Mitchell Adams

Mitchell Adams
Commissioner of Revenue

MA:HMP:tc

LR 95-8



[1] We specifically do not address the tax treatment of any LLP other than the one the taxpayer proposes to form. Further, we do not address the Massachusetts tax treatment of foreign Limited Liability Companies (LLC's).

[2] We do not imply that a limited partnership that has the federal corporate characteristic of free transferability of interests will necessarily be treated as a partnership for Massachusetts tax purposes. such a limited partnership would be considered a corporate trust if the partners' beneficial interests in it are represented by transferable shares.

[3] We do not address the validity in Massachusetts of the New York LLP provisions purporting to limit the liability of LLP members.' In the absence of a Massachusetts statute limiting the liability of foreign LLP'S, it is not clear that Massachusetts law would recognize the limited liability conferred by the New York LLP statute.