When an Illinois partnership that does business both in and out of New York sells stock it held in an affiliated company, is a nonresident partner's share of that gain taxable as New York source income?

Plain-English summary

Ronald van der Horst, a nonresident of New York, was a partner in Flashner Medical Partnership, an Illinois partnership that performed administrative, management, and medical oversight services for 65 medical facilities across several states, including 13 facilities it owned outright in New York. All of the partnership's own administrative and oversight work was performed in Illinois. Separately, the partnership held a 20 percent stake in Avanti Health Systems Inc., which owned 52 medical facilities outside New York (Avanti had no New York offices); the partnership had earned that stock over time in exchange for providing oversight services to Avanti's facilities. In 1994 the partnership sold all of its Avanti stock and also sold its 13 New York facilities. The question was whether the gain from the Avanti stock sale counted as New York source income for a nonresident partner like van der Horst.

Under Tax Law § 631(b)(2), gain from the disposition of intangible property (like corporate stock) is New York source income only "to the extent that such income is from property employed in a business, trade, profession, or occupation carried on in New York State." The Department distinguished this case from an earlier Tax Appeals Tribunal decision, Horowitz, where a law firm's tax-shelter investments were all treated as New York source income because the firm had no offices outside New York and all of its income was New York income. Here, by contrast, the partnership carried on business both within and outside New York, so its income - including the Avanti gain - was subject to apportionment under 20 NYCRR 132.15 rather than automatically being treated as entirely New York source or entirely non-New York source.

Ultimately, the Department did not decide whether the Avanti stock gain (or what portion of it) was "employed in a business carried on in New York." It explained that an Advisory Opinion can only apply the law to a specified set of facts, and whether stock was actually employed in a New York business is a factual determination - one that mere ownership of the stock by the partnership does not resolve by itself. Because the question arose in the context of a pending audit, the Department said that factual determination, along with whether any apportionment method used was fair and equitable, would be made in that audit rather than in this opinion.

What this means for you

Nonresident partners in multistate partnerships

If you're a nonresident partner in a partnership that operates both inside and outside New York, don't assume that gains from selling intangible assets like stock are automatically New York source income (or automatically excluded) just because the partnership does some New York business. Under Tax Law § 631(b)(1)(B) and (2), the gain is New York source only to the extent the underlying property was actually employed in a business carried on in New York - a fact-specific inquiry, not a bright-line rule based on where the partnership happens to operate elsewhere.

Accountants and tax professionals advising on partnership stock sales

Where a client partnership holds investment-type stock in an affiliate while also running an operating business in New York, expect the Department to require books and records showing how income and gain are apportioned under 20 NYCRR 132.15(b) and (c). If those records don't clearly support an allocation, the Department can fall back on the formula-based apportionment factors in 132.15(d) through (f). Be prepared for this kind of factual question to be resolved through audit rather than through an advance advisory opinion.

Common questions

Q: Did the Department decide whether the Avanti stock gain was taxable to van der Horst as New York source income?
A: No. The Department expressly declined to resolve that factual question in the Advisory Opinion, stating it would be determined in the context of the pending audit.

Q: Why didn't the mere fact that the partnership sold New York medical facilities in the same year make the stock gain New York source income too?
A: Under Tax Law § 631(b)(2), gain from intangible property like stock is New York source only to the extent the property itself was employed in a business carried on in New York - that's a separate inquiry from whether the partnership also owned and sold real operating facilities in New York.

Q: How is this case different from the Horowitz decision the Department cited?
A: In Horowitz, the law firm had no offices outside New York and all of its income was New York source, so its shelter investments were treated as New York income. Here, the partnership conducted business both within and without New York, so its income - including the Avanti gain - must instead be apportioned rather than automatically treated as entirely New York source.

Q: If the partnership's books don't clearly show how much of its income is New York source, what happens?
A: Under 20 NYCRR 132.15(c), the Department will determine the New York-source proportion by applying the formula-based apportionment percentages described in 132.15(d) through (f).

Q: Does simply owning stock through a partnership that also does business in New York make the stock "employed" in a New York business?
A: No. The opinion states that mere ownership of the stock by the partnership is not conclusive that the stock was employed in a business carried on in New York.

Citations and references

• Tax Law § 601(e) - imposes personal income tax on a nonresident individual's New York source taxable income
• Tax Law § 631(a) - defines New York source income of a nonresident, including distributive share of partnership items
• Tax Law § 631(b)(1)(B) - income attributable to a business, trade, profession, or occupation carried on in New York
• Tax Law § 631(b)(2) - gains from intangible personal property are New York source only to the extent employed in a business carried on in New York
• Tax Law § 632(a)(1) - determines the New York source portion of a nonresident partner's distributive share
• Tax Law § 171.Twenty-fourth and 20 NYCRR 2376.1(a) - limit an Advisory Opinion to applying law to a specified set of facts
• 20 NYCRR 132.15(b) and (c) - require apportionment/allocation of a multistate business's income to New York based on books and records or formula
• Richard F. and Diane L. Horowitz, Dec. Tax App. Trib., July 17, 1997, TSB-D-97(43)I - distinguished case involving a firm with no offices outside New York

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a00_5i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(5)I
Income Tax
September 6, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I990226B

On February 26, 1999, a Petition for Advisory Opinion was received from Ronald van der
Horst, 166 La Pier, Glencoe, Illinois 60022.
The issue raised by Petitioner, Ronald van der Horst, is whether the gain from the sale of
intangible assets owned by an Illinois partnership which conducts business both within and without
New York State is taxable as New York source income for a partner who is a nonresident of New
York.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Flashner Medical Partnership ("Partnership"), an Illinois partnership, performed
administrative, management and medical oversight services for medical offices in New York,
Illinois, Texas, Washington D.C., Virginia and Maryland. The medical offices had physicians on
staff to provide the medical services. All administrative, management and medical oversight
services were performed by Partnership in Illinois. These administrative, management and medical
oversight services were performed by Partnership for 65 medical facilities. This included 13 medical
facilities located in New York State that Partnership owned 100 percent, and 52 other medical
facilities located outside of New York owned by Avanti Health Systems Inc. ("Avanti"), in which
Partnership had acquired a 20 percent interest.
Partnership paid $1,653,425 in salaries to Illinois employees in 1994. Additionally, in 1994,
Partnership paid rent for premises outside of New York State in the amount of $95,415.
Petitioner, a resident of Illinois and a partner in Partnership, was Medical Director of all
medical offices and provided the medical oversight services for the partnership. Petitioner performed
those services in Illinois.
Partnership, in 1994, was the owner of 20 percent of the outstanding common shares of
Avanti which Petitioner states were held for investment purposes. Partnership performed its
administrative, management and medical oversight services for Avanti medical facilities for which
Partnership received a management fee. Partnership acquired the Avanti stock by receiving four
percent of Avanti stock for each year it provided the oversight services. Partnership also had a share
resource agreement with Avanti whereby it received an allocation of administrative expenses.
Avanti did not have any offices in New York State.

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In 1994, Partnership sold all of its shares of the Avanti stock. It also sold the 13 medical
facilities which it owned in New York.
Discussion
Section 601(e) of the Tax Law imposes a personal income tax for each taxable year on a
nonresident individual's taxable income which is derived from sources in New York State. The tax
is computed as if the individual were a resident, reduced by certain credits, and apportioned to New
York by the New York source fraction, the numerator of which is the individual's New York source
income and the denominator of which is the individual's New York adjusted gross income.
Section 631(a) of the Tax Law provides that the New York source income of a nonresident
individual includes the net amount of items of income, gain, loss and deduction entering into the
individual's federal adjusted gross income derived from or connected with New York sources,
including the individual's distributive share of partnership income, gain, loss and deduction,
determined under section 632 of the Tax Law.
Section 632(a)(1) of the Tax Law provides that "[i]n determining New York source income
of a nonresident partner of any partnership, there shall be included only the portion derived from or
connected with New York sources of such partner's distributive share of items of partnership income,
gain, loss and deduction entering into the individual's federal adjusted gross income. The
determination of such portion shall be consistent with section 631 of the Tax Law.
Section 631(b)(1)(B) of the Tax Law provides that items of income, gain, loss and deduction
derived from or connected with New York sources include those items attributable to a business,
trade, profession or occupation carried on in New York State.
Section 631(b)(2) of the Tax Law provides that income from intangible personal property,
including annuities, dividends, interest, and gains from the disposition of intangible personal
property, shall constitute income derived from New York sources only to the extent that such income
is from property employed in a business, trade, profession, or occupation carried on in New York
State.
In Richard F and Diane L Horowitz, Dec Tax App Trib, July 17, 1997, TSB-D-97(43)I, a
nonresident partner's share of the income derived from his New York law firm's investments in four
tax shelter partnerships was subject to New York State personal income tax because the investments
were made in the name of the firm, the firm had no offices outside New York and all of the firm's
income was New York source income. Although the partner contended that the investments were
made in the law firm's name for convenience purposes only and were, in reality, investments made
by a group of 17 individuals who were partners in the firm, there was no documentary evidence
indicating that the investments constituted anything other than ordinary income of the firm.

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In this case, Petitioner, a nonresident of New York, is a partner in Partnership which, unlike
Horowitz, supra, conducted business within and without New York for taxable year 1994.
Partnership was in the business of providing medical services at the 65 medical facility locations in
several states. The medical services were provided by physicians on site at the 65 locations.
Partnership also performed administrative, management and medical oversight services for those
medical facilities. All Partnership administrative, management and medical oversight services were
performed in Illinois. Partnership received income from the provision of the medical services.
Partnership also received fees for the performance of its administrative, management and medical
oversight services for the Avanti medical facilities, which were located outside of New York.
The gain from the sale of the Avanti stock was included in the items of income, gain, loss
and deduction of Partnership for 1994. Since Partnership carried on a business, trade, profession or
occupation both within and without New York during 1994, pursuant to section 132.15 of the
Personal Income Tax Regulations ("Regulations"), Partnership's items of income, gain, loss and
deduction attributable to such business, trade, profession or occupation must be apportioned and
allocated to New York on a fair and equitable basis in accordance with approved methods of
accounting. Section 132.15(b) and (c) of the Regulations provide:
(b) If the books of the business are so kept as regularly to disclose, to the
satisfaction of the [Commissioner of Taxation and Finance], the proportion of the net
amount of the items of income, gain, loss and deduction derived from or connected
with New York State sources, the New York State nonresident personal income tax
return of the taxpayer must disclose the total amount of such items, the net amount
of such items allocated to New York State, and the basis upon which such allocation
is made.
(c) If the books and records of the business do not disclose, to the satisfaction
of the [Commissioner of Taxation and Finance] , the proportion of the net amount
of the items of income, gain, loss and deduction attributable to the activities of the
business carried on in New York State, such proportion will, except as provided in
section 132.16 of the Regulations and section 112.7(b) of the Regulations, be
determined by multiplying (1) the net amount of the items of income, gain, loss and
deduction of the business by (2) the average of the percentages described in section
132.15(d) through (f) of the Regulations.
The determination of whether the gain, or a portion thereof, on the sale of the Avanti stock
is income from property that was employed in a business, trade, profession or occupation carried in
New York pursuant to section 631(b)(1)(B) and (2) of the Tax Law, is a factual matter that is not
susceptible of determination in an Advisory Opinion. An Advisory Opinion merely sets forth the
applicability of pertinent statutory and regulatory provisions to a "a specified set of facts. " Tax Law,
§ 171.Twenty-fourth; 20 NYCRR 2376.1(a). However, the mere ownership of the Avanti stock by

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Partnership is not conclusive that such stock was employed in a business, trade, profession or
occupation carried on in New York by Partnership. Inasmuch as the question presented here arises
within the context of an audit, the necessary factual determination will be made within such context,
in accordance with the principles outlined above.
Also, it is not within the scope of this advisory opinion to determine whether the method used
to allocate Partnership's items of income, gain, loss and deduction attributable to a business, trade,
profession or occupation carried on in New York State, under section 132.15(b) of the Regulations,
results in a fair and equitable attribution to the activities of such business, trade, profession or
occupation carried on in New York State. Such determination is a factual determination that would
have to be made within the context of the audit.

DATED: September 6, 2000

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.