New York Challenges 631(d) Treatment

By Christopher C. Vescio

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New York State recently challenged the application of New York State Tax Law section 631(d) to tax income of nonresidents who have ownership equity in a resident limited liability company (LLC) that is taxed as a partnership for both federal and New York State purposes.

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.

Christopher C. Vescio, CPA, is manager at the Stamford, Conn., office of McGladrey & Pullen, LLP.  




















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