New York State Tax Appeals Tribunal Rejects Sourcing of Partnership Income to that Partnership’s Operating Location

The New York State Tax Appeals Tribunal (Tribunal) held that a taxpayer’s distributive share income from a partnership was intangible income properly sourced to the taxpayer’s residence and not to the location of the partnership’s underlying operations. In the Matter of Greenberg, the taxpayer was a New York resident partner in a partnership operating an investment fund from Connecticut. The taxpayer sought to credit her tax paid to Connecticut against her 2014 and 2015 New York State personal income tax liability. On audit, the New York State Department of Taxation and Finance (Department) disallowed the credit, asserting that a partner’s “carried interest” income (i.e., a partner’s compensation based on the performance of the fund’s investments) is sourced as intangible income to the taxpayer’s residence. The Department thus asserted that the taxpayer was not eligible for the credit because the income was sourced to the taxpayer’s New York residence and not to Connecticut where the partnership operated.

An Administrative Law Judge determined that the Department’s denial of the credit was proper. On appeal, the Tribunal affirmed. The Tribunal recited the rule that the credit is available only if the income is sourced outside New York under the rules applied to determine nonresidents’ income from sources within New York. The Tribunal found that these rules source a nonresident’s income from intangible property to New York only if “such income is from property employed in a business, trade, profession or occupation” in New York. [1] Accordingly, for a resident taxpayer’s income to be sourced outside New York, the intangible property must be employed in a business, trade, occupation or profession conducted in another state. [2]

Preliminarily, the Tribunal found that (1) the investment partnership’s activity occurred entirely in Connecticut; and (2) the taxpayer’s income was from intangible property. However, the Tribunal rejected the taxpayer’s assertion that her interest in the investment partnership was used in that partnership’s Connecticut operations. Citing the Department’s guidance, the Tribunal held that the property that produced the income was the partnership’s intangible investment property, which the Tribunal distinguished from the partner’s intangible partnership interest. [3] Further, the Tribunal found that the taxpayer had not proven that the investment fund’s operations constituted a business, trade, occupation or profession, citing New York’s rule that merely owning or selling property for one’s own account does not constitute the conduct of a business.

Matter of Greenberg, DTA No. 829737 (N.Y.S. Tax App. Trib. Nov. 22, 2023).

[1] N.Y. Tax Law § 631(b)(2).

[2] NYCRR 120.4(d).

[3] See TSB-M-92(3)(I) (Oct. 9, 1992).