Is a nonresident limited partner's loss on liquidating a partnership New York source income when the partnership sold its New York building the day before?

Plain-English summary

A real-estate limited partnership with over 12,000 partners (many nonresidents) sold off its U.S. properties; its last asset was a New York building, sold November 1, 2016. The partnership paid New York tax on the gain. The next day, November 2, 2016, it distributed the net proceeds and the partners' interests were liquidated, producing a capital loss for each limited partner under IRC § 731(a)(2). The partnership asked whether that liquidation loss is New York source income for its nonresident limited partners.

The Office of Counsel concluded the loss is not New York source. A nonresident's gain or loss on a partnership interest is New York source only if the partnership owns New York real property worth at least 50% of its assets on the date the interest is sold or exchanged (Tax Law § 631(b)(1)(A)). Here, the partnership had already sold its only New York building on November 1, and the limited-partner interests were liquidated on November 2 — so on the liquidation date the partnership owned no New York real property. The loss therefore isn't attributable to New York real property and isn't connected with New York sources. (The Department expressed no view on the partnership's "functional liquidation on the sale date" theory.)

What this means for you

Nonresident investors in real-estate partnerships

Whether a gain or loss on your partnership interest is taxed by New York turns on what the partnership owns on the date your interest is sold or liquidated — not on what it owned earlier. If the New York property is gone by then, the interest-level loss (or gain) generally isn't New York source.

Accountants and partnership advisors

Apply the § 631(b)(1)(A) 50%-real-property test as of the disposition date. Timing matters: a sale of the underlying New York property before the partners' interests are liquidated can move the interest-level result outside New York. (Gain on the property sale itself remains New York source and was taxed here.)

Common questions

Q: The partnership owned a New York building for years. Why isn't the loss New York source?
A: The test looks at the date the partnership interest is liquidated. By then the building was already sold, so the partnership held no New York real property.

Q: Was the gain on the building sale taxed by New York?
A: Yes. The partnership recognized gain on the November 1 sale and paid New York tax on it. The separate question here was the partners' liquidation loss.

Q: Does the one-day gap really change the result?
A: Under the statute's disposition-date test, yes — the partnership owned no New York real property on the November 2 liquidation date.

Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner. Use it as guidance and confirm your own facts.

Citations and references

Statutes and regulations:
- Tax Law § 631(a)(1); § 631(b)(1)(A), (A)(1)
- IRC § 731(a)(2); § 705(a)(2)(B); Treas. Reg. § 1.704-1(b)(2)(iv)(i)(2)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income-ao-2020.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a20-3i.pdf

Original ruling text

New York State Department of Taxation and Finance Office of
Counsel
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE

TSB-A-20(3)I
Income Tax
February 10, 2020

ADVISORY OPINION
The Department of Taxation and Finance (“Department”) received a Petition for
Advisory Opinion from [ REDACTED ] (“Petitioner”). Petitioner asks whether the loss realized
by its nonresident individual limited partners upon the liquidation and dissolution of Petitioner is
derived from or connected with New York sources under Tax Law §§ 631(a)(1) and 631(b)(1).
We conclude that the loss is not derived from or connected with New York sources.
Facts
Petitioner is a limited partnership formed under the laws of another state as an affiliated
investment entity of a national real estate investor and investment manager. Petitioner was
formed to invest in U.S. real estate. Petitioner has more than 12,000 limited partners, many of
whom are nonresident individuals. At formation, Petitioner incurred syndication costs that were
not deductible or amortizable for federal or NY income tax purposes.
Petitioner invested in U.S. real estate and owned land and improvements in several states.
Petitioner sold its real estate holdings and states that it liquidated on November 1, 2016. The
last asset sold was a New York building that Petitioner owned and actively managed for over two
years. In connection with the ownership of the building, each limited partner’s distributive share
of income, gain, loss and deduction had been reported as attributable to a business carried on by
Petitioner in New York under Tax Law §§ 631 and 632. The closing date of the sale of the
building was November 1, 2016.
After the sale of the building, Petitioner recognized a taxable gain and paid any required
estimated taxes relating to its New York source income associated with the building’s sale on
behalf of its limited partners. At the time of the sale, the building was the only material asset
held by Petitioner, other than any undistributed cash remaining from the disposition of other land
and improvements. All of the cash was held for less than two years at the time of the sale of the
building through the winding up of Petitioner.
After the building was sold, Petitioner states it wound up its operations and liquidated.
The net proceeds from the sale were transferred on the date of sale to a bank account in a foreign
country maintained by an affiliate of Petitioner’s general partner (“Affiliate”). Affiliate
distributed the net proceeds to its limited partners on November 2, 2016, the day after the
building was sold. Petitioner states that the proceeds were distributed on November 2, 2016, one

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TSB-A-20(3)I
Income Tax
February 10, 2020

day after the closing of the New York property, because November 1, 2016 was a bank holiday
in the country where its limited partners were located.
Upon Petitioner’s liquidation, each limited partner is expected to recognize a capital loss
under Internal Revenue Code § 731(a)(2) in an amount equal to the excess of each limited
partner’s outside tax basis in Petitioner over the amount of liquidation proceeds received.
Petitioner states that part of the capital loss is expected to be attributable to unamortized
syndication costs that will reduce partners’ capital accounts under IRC § 705(a)(2)(B) and
Treasury Regulation § 1.704-1(b)(2)(iv)(i)(2).
Analysis
Tax Law § 631(a)(1) provides that the New York source income of a nonresident
individual includes the individual’s net amount of items of income, gain, loss and deduction
entering into the individual’s federal adjusted gross income that is derived from or connected
with New York sources, including his or her distributive share of partnership income, gain, loss
and deduction. Tax Law § 631(b)(1)(A) provides that items income, gain, loss and deduction
derived from or connected to New York sources include items attributable to the ownership of
any interest in real or tangible personal property in the state. The term “real property located in
this state” includes an interest in a partnership that owns real property that is located in New
York and has a fair market value that equals or exceeds fifty percent of all the assets of the entity
on the date of sale or exchange of the taxpayer’s interest in the entity. “Only those assets that the
entity owned for at least two years before the date of the sale or exchange of the taxpayer’s
interest in the entity are to be used in determining the fair market value of all the assets of the
entity on the date of sale or exchange.” Tax Law § 631(b)(1)(A)(1). “The gain or loss derived
from New York sources from the taxpayer’s sale or exchange of an interest in an entity that is
subject to [these provisions] is the total gain or loss for federal income tax purposes from that
sale or exchange multiplied by a fraction, the numerator of which is the fair market value of the
real property … located in New York on the date of the sale or exchange and the denominator of
which is the fair market value of all the assets of the entity on the date of the sale or exchange.”
Id.
As stated in the facts above, Petitioner sold its last “material asset,” a building in New York, on
November 1, 2016. At the time of sale, Petitioner recognized a gain on the sale of the building
and paid estimated taxes relating to the NY source income associated with the sale on behalf of
the limited partners. After the building was sold, Petitioner wound up its affairs, settled its
accounts, and liquidated. 1 Petitioner asks whether each limited partner’s loss, required to be
recognized for federal tax purposes upon liquidation, will be recognized for New York tax
purposes under Tax Law § 631(b)(1)(A) as a loss derived from New York sources that is
attributable to the ownership of an interest in real property in New York.

Petitioner states that, upon the sale of the building, Petitioner was considered “functionally liquidated” and dissolved
when it transferred its net proceeds to an account maintained by Affiliate. Therefore, Petitioner claims it should be
treated as being liquidated on the date of sale and its limited partners should be treated as having sold their partnership
interests. The Department expresses no opinion as to whether Petitioner is considered to be functionally liquidated on
that date.
1

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TSB-A-20(3)I
Income Tax
February 10, 2020

As stated above, Tax Law § 631(b)(1)(A) provides that items of loss are attributable to
New York sources if those items are attributable to the ownership of any interest in real property
in New York. This includes an interest in a partnership that owns real property that is located in
New York and has a fair market value that equals or exceeds fifty percent of all the assets of the
entity on the date of sale or exchange of the taxpayer’s interest in the entity. In this case,
Petitioner sold its interest in the New York building on November 1, 2016, and transferred the
net proceeds from that sale to Affiliate. Thereafter Petitioner was liquidated and the net proceeds
were delivered to the limited partners on November 2, 2016. Therefore, any recognized loss by
Petitioner’s limited partners from their interests in Petitioner are not attributable to the
Partnership’s ownership of real property in New York because Petitioner did not own New York
real property on November 2, 2016, the date on which those partnership interests were liquidated
and distributed by the partnership to the partners.

DATED: February 10, 2020

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

NOTE:

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.