Applying New York law as it existed in 2005, a New York State Administrative Law Judge held that a nonresident partner properly included his share of the gain from the partnership’s sale of a New York office building in his New York source income, but improperly included the loss from his disposition of that same interest. Matter of Craig A. Olsheim, DTA No. 824218 (N.Y.S. Div. of Tax App., May 9, 2013).

The nonresident partner, Craig A. Olsheim, was a limited partner in a partnership whose sole asset was an office building located in New York City. Because he had recently inherited his partnership interest, Mr. Olsheim’s “outside basis” in the partnership interest (the fair market value of the partnership interest at the time he inherited it) and his “inside basis” in the interest (his pro rata share of the partnership’s adjusted basis in the office building) did not match. In 2005, the partnership sold the office building and completely dissolved.

Mr. Olsheim reported his pro rata share of the gain from the sale of the office building on his New York nonresident personal income tax return. As he did at the federal level, Mr. Olsheim also claimed a capital loss resulting from the difference between his outside basis and his inside basis. For federal purposes, the loss was considered to be from the sale or exchange of his partnership interest. After an audit, the Department issued a Notice of Deficiency disallowing the loss.

In 2005, New York law provided, as it does today, that the New York source income of a nonresident partner included the partner’s distributive share of all items of partnerships income, gain, loss and deduction entering into the partner’s federal adjusted gross income to the extent such items are derived from or connected with New York sources. Tax Law § 632(a)(1). While Tax Law § 631(b)(1)(A)(1) currently provides that nonresidents must include gain or loss from the sale of an interest in a partnership that holds real property located in New York State as New York source income, this provision was not added until 2009, and was not made retroactive. In 2005, the Division’s position on gain or loss from the sale or disposition of an interest in a partnership that holds real property in New York State was based on case law, and reflected in Technical Service Bureau Memorandum, TSB-M-92(2)I (N.Y.S. Dep’t of Taxation & Fin., Aug. 21, 1992), which explicitly provided that such gain or loss was not includible in New York source income.

The ALJ held that Mr. Olsheim improperly included the loss from the disposition of his partnership interest in 2005 in his New York source income. While noting it was unfortunate for Mr. Olsheim that the current statute did not go into effect until 2009, the ALJ rejected Mr. Olsheim’s argument that TSB-M-92(2)I was contrary to the established law at that time, noting that the enactment of Tax Law §631(b)(1)(A) was an acknowledgment that the established law at that time did not provide for the inclusion of such a loss.

Additional Insights

Although the law today is clear that the gain or loss from the sale of an interest in a partnership that only holds New York real property is includible in New York source income, that law only applies to sales made on or after May 7, 2009. It should be noted that the statute does not apply to all sales of interests in partnerships that hold New York real property. Specifically, it treats as New York source income only gain or loss from the sale of interests in partnerships that own New York real property having a fair market value greater or equal to 50% of the fair market value of all of the assets of the partnership on the date of the sale.