Section
631(d) states that nonresidents are not considered to be
carrying on a business, trade, profession, or occupation
in the state solely by purchasing and selling property or
purchasing, selling, or writing stock option contracts for
their own account. Excepted are dealers holding property
primarily for sale to customers in ordinary trade or business.
The
state recently contended that a nonresident’s Form
K-1 share of trading activity income from a resident LLC
was taxable in New York and not excludable under section
631(d). The examination involved an undisclosed taxpayer,
a Connecticut resident who traded on his capital with the
New York LLC and reported other LLC compensation for services
as New York–sourced income while reporting investment
capital gains to Connecticut. The LLC manages only its partners’
money.
The
state cited the Advisory Opinion in Gompers & Blau
[TSB-A-88-(15)-I, September 16, 1988], in which a nonresident’s
income earned from trading securities in an account funded
by a partnership was deemed taxable. The partnership traded
securities for its own account, furnished the capital for
the account, and gave full authority to the taxpayer, who
received one-half of the profits generated by the account
in exchange for his services. That income was not exempted.
Trading account income was derived from managing property
investments of others and was taxable partnership income
resulting from services rendered.
The
taxpayer provided LLC data that supported a distinction
between the fact pattern in TSB-A-88-(15)-I and the relationship
between the LLC and the taxpayer. For example, the members
of the LLC did not manage the trading activities of the
LLC. Each member made a capital contribution and traded
for their accounts through the LLC utilizing the combined
capital contribution. The advisory opinion was based solely
on how Gompers & Blau conducted activities, and does
not apply under all circumstances, including those of the
taxpayer. Furthermore, partners are deemed to be trading
for their own accounts, to the extent the partnership engages
in trading for its own account.
The
case was closed as a “no-change” and the Department
of Finance and Taxation reserved the right to examine this
issue at the partnership level. The case applies only to
the specific fact pattern and does not establish precedent.