Last April, the New York State Tax Appeals Tribunal issued a decision holding that a nonresident partner in a partnership that owned New York City real property could not source to New York a loss from his disposition of the partnership interest. Matter of Craig A. Olsheim, DTA No. 824218 (N.Y.S. Tax App. Trib., Apr. 10, 2014). Despite having prevailed in the case, the Department filed a motion for reargument seeking correction of certain aspects of the decision. On November 13, 2014, the Tribunal granted the Department’s motion in an order and opinion, and issued an amended decision upholding the Tribunal’s original decision that a nonresident partner properly included his share of the gain from the partnership’s 2005 sale of a New York office building in his New York source income, but improperly included the loss from his 2005 disposition of an interest in that same partnership. However, the Tribunal modified certain aspects of its analysis consistent with the Department’s motion. Matter of Craig A. Olsheim, DTA No. 824218 (N.Y.S. Tax App. Trib., Nov. 13, 2014).
The underlying case involved a nonresident individual, Craig A. Olsheim, who was a limited partner in a partnership whose sole asset was an office building located in New York City. Because he had inherited his partnership interest, Mr. Olsheim’s “outside basis” in his partnership interest (based on its fair market value) was more than his pro rata share of the partnership’s “inside basis” in the office building. In 2005, the partnership sold the office building and then dissolved. Mr. Olsheim reported his pro rata share of the partnership’s gain from the sale of the building on his New York State nonresident personal income tax return and claimed a capital loss resulting from the dissolution of the partnership. After an audit, the Department issued a Notice of Deficiency, disallowing the loss on the grounds that it was not New York source income or loss.
An ALJ had held that Mr. Olsheim improperly included the loss from the disposition of his partnership interest in his New York source income. The Tribunal then affirmed the ALJ’s determination, explaining that whereas New York source income includes gain from the sale of real property located in the State, at the time of the partnership’s liquidation in 2005, the disposition of an interest in a partnership was considered a disposition of intangible personal property. Intangible property is sourced to New York only to the extent that the intangible is employed in a “business, trade, profession or occupation carried on” in New York. Tax Law § 631(b)(2). In its April 2014 decision, the Tribunal examined whether the partnership was engaged in a business carried on in New York, found that there was no evidence in the record that it was, and disallowed the loss. After the Department filed a Notice of Motion Motion for Reargument, the Tribunal issued an order and opinion granting the motion.
In its amended decision, the Tribunal held that its earlier inquiry as to whether the partnership was employed in a business, trade, profession, or occupation in New York was incorrect. The Tribunal clarified that the correct inquiry is whether the partnership interest, not the partnership, is employed in a business in New York.
Regardless, the Tribunal concluded that in the matter before it, such an analysis was not possible because Mr. Olsheim had not introduced any evidence regarding how his interest in the partnership was employed in a New York trade or business. Accordingly, the Tribunal upheld its original determination.
In its separate order and opinion the Tribunal also struck the portion of its decision holding that Mr. Olsheim would have been permitted to include the loss as part of his New York source income had the dissolution taken place after the 2009 enactment of Tax Law § 631(b)(1)(A)(1), which now provides that nonresidents must include as New York source income gain or loss from an interest in certain partnerships that hold real property, on the grounds that it was not necessary or helpful to the resolution of the issues in the case, and was pure dicta.
While the change of the inquiry from whether the partnership is employed in a business a in New York, to whether the partnership interest is employed in a business in New York did not affect the outcome of this case, this is an important distinction. For example, if Mr. Olsheim had otherwise conducted business in New York and used his interest in the partnership as loan collateral as part of that business, presumably his partnership interest would have been employed in business carried on in New York, and he could have claimed the loss from his sale of that interest on his New York nonresident personal income tax return. In contrast, the fact that the partnership itself carried on business in New York, without more, would not have been enough to allow Mr. Olsheim to claim the loss on his New York nonresident personal income tax return. Since May 7, 2009, however, gain or loss from a sale or exchange of an interest in a partnership, LLC, S corporation, or non-publicly traded C corporation with 100 or fewer shareholders is considered to be from New York sources if 50% or more of the entity’s assets consist of real property located in New York State.