New York Advisory Opinion TSB-A-81(2)I: Is a proposed limited partnership that trades financial commodity futures solely for its own account subject to New York's unincorporated business tax, and are its nonresident limited partners subject to New York personal income tax on their distributive share?

Plain-English summary

Bache Commodities Management Company, a Delaware corporation, planned to organize the Chancellor Financial Futures Fund Limited Partnership under Delaware law, registered to do business in New York as a foreign limited partnership with its principal office at 100 Gold Street in Manhattan. Bache Management would serve as the sole general partner (delegating trading authority to Waldner Financial Corporation), with a number of limited partners investing alongside it. The Partnership's only activity would be buying and selling financial commodity futures contracts for its own account, hoping to profit from price changes - it would have no customers, would not act as a dealer, and would not hold any assets for sale to customers.

The Department asked two questions: whether the Partnership itself would owe New York's unincorporated business tax (UBT), and whether its nonresident limited partners would owe New York personal income tax on their share of the Partnership's gains and losses.

On the UBT question, Tax Law section 701(a) taxes the unincorporated business income of any unincorporated business carried on in New York, and section 703(a) defines that broadly to include partnerships. But section 703(d) carves out an individual or entity that buys and sells property (or writes stock options) purely for its own account, so long as it isn't a dealer holding property for sale to customers. Because the Partnership's sole activity was own-account futures trading with no dealer function and no customers, it fell squarely within that carve-out and owed no UBT.

On the nonresident-partner question, sections 631(a) and 632(a)-(d) tax a nonresident only on New York-source income - income tied to New York real or tangible property, or to a business, trade, profession, or occupation carried on in New York. Income from intangible property (like futures contracts) only counts as New York-source if it's connected to a New York business the taxpayer carries on - and section 632(d) separately excludes a nonresident's own-account trading (short of dealer activity) from counting as "carrying on" a business in the state at all. Since the Partnership's activity was own-account trading, a nonresident limited partner's distributive share of its income wasn't New York-source income, and so wasn't subject to New York personal income tax.

What this means for you

Investment fund sponsors organizing a commodity- or securities-trading partnership

A partnership that trades solely for its own account (no customers, no dealer role) generally falls outside New York's unincorporated business tax, regardless of whether it's organized as a domestic or foreign limited partnership doing business in New York.

Nonresident limited partners in a trading-only fund

Your distributive share of an own-account trading partnership's gains and losses generally isn't New York-source income and isn't subject to New York personal income tax, even if the partnership's principal office and trading activity are based in New York.

Anyone structuring a fund that also does dealer-type business

This exclusion turns on the fund staying purely a trading-for-its-own-account vehicle; if the entity instead acts as a dealer holding property for sale to customers, both the UBT exclusion and the nonresident-partner income exclusion described here would no longer apply.

Common questions

Q: Does a hedge fund or commodity pool that only trades for its own account owe New York's unincorporated business tax?
A: Not if its only activity is buying and selling property (including futures or stock options) for its own account and it isn't a dealer holding property for sale to customers - that activity is specifically excluded from the UBT.

Q: If I'm a nonresident limited partner in a New York-based trading fund, do I owe New York income tax on my share of the gains?
A: Not under this ruling's facts - if the fund's activity is own-account trading (not dealer activity) and your share isn't tied to New York real or tangible property, it isn't treated as New York-source income for a nonresident.

Q: Does it matter that the general partner delegated trading authority to another company?
A: Not to this analysis - the ruling turned on the nature of the Partnership's activity (own-account trading, no customers, no dealer function), not on which company actually executed the trades.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a81_2i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81 (2) I
Income Tax
May 26, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I801210A

On December 8, 1980 a Petition for Advisory Opinion was received from Bache
Commodities Management Company, 100 Gold Street, New York, New York 10038.
The issues raised are:
1.) Whether the proposed limited partnership as described below will be subject to the
Unicorporated Business Income Tax imposed under Article 23 of the Tax Law, and
2.) Whether limited partners of the partnership who are not residents of New York will be
subject to the Personal Income Tax imposed under Article 22 of the Tax Law with respect to their
distributive share of the partnership's gains and losses.
Bache Commodities Management Co., a Delaware corporation, intends to organize the
Chancellor Financial Futures Fund Limited Partnership (hereinafter "the Partnership") under the
Delaware Limited Partnership Act. The Partnership will be qualified to do business in New York
State under Article 8-A (Foreign Limited Partnerships) of the New York Partnership Law. The
Partnership's principal office will be at 100 Gold Street, New York., New York 10038. The
Partnership will have one general partner, Bache Management, and a number of limited partners.
Bach Management will have sole responsibility for managing the Partnership, but will delegate
complete trading authority to Waldner Financial Corporation, pursuant to a management contract.
The sole activity of the Partnership will be the purchase and sale for its own account of
financial commodity contracts for the purpose of profiting from changes in the prices of such
contracts. Some of the Partnership's assets will be committed to a margin account for commodity
contracts. The income, if any, of the Partnership will be gains from the purchase and sale of financial
commodity contracts and interest on obligations in such margin account. The Partnership will not
be engaged in business as a dealer of financial commodity contracts or any other property and will
not hold any of its assets for sale to customers in the course of the Partnership's activities.
The General Partner will have sole discretion to allow or not to allow the transfer of limited
partnership interests. The Partnership will not be incorporated nor will the General Partner allow any
transfer that would cause the partnership to be taxable as a corporation for purposes of the Internal
Revenue Code.
Section 701(a) of the Tax Law imposes a tax on "...the unincorporated business taxable
income of every unincorporated business, wholly or partly carried on within this state.
Section 703(a) defines "unincorporated business" as:

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-81 (2) I
Income Tax
May 26, 1981
"... any trade, business or occupation conducted, engaged in or being liquidated by an
individual or unincorporated entity, including a partnership or fiduciary or a corporation in
liquidation....”
However, section 703(d) provides:
"An individual or other unincorporated entity, except a dealer holding property primarily for
sale to customers in the ordinary course of his trade or business, shall not be deemed engaged
in an unincorporated business solely by reason of the purchase and sale of property or the
purchase, sale or writing of stock option contracts, or both, for his own account, but this
subsection shall not apply if the unincorporated entity is taxable as a corporation for federal
income tax purposes."
Section 631(a) of the Tax Law provides:
"The New York taxable income of a nonresident individual shall be his New York adjusted
gross income less his New York deduction and New York personal exemptions, as
determined under this part."
Section 632(a) provides in part:
"The New York adjusted gross income of a nonresident individual shall be the sum of the
following:
(1) The net amount of items of income, gain, loss and deduction entering into his federal
adjusted gross income, as defined in the laws of the United States for the taxable year,
derived from or connected with New York sources, including:
(A) his distributive share of partnership income, gain, loss and deduction, determined under
section six hundred thirty-seven, and

Section 632(b) and (d) provides:
"(b) Income arid deductions from New York sources .--(1) Items of income, gain, loss and
deduction derived from or connected with New York sources shall be those items attributable
to:
"(A) the ownership of any interest in real or tangible personal property in this state; or
"(B) a business, trade, profession or occupation carried on in this state.
"(2) 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 this state."

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TSB-A-81 (2) I
Income Tax
May 26, 1981
(d) Purchase and sale for own account. -- A nonresident, other than a dealer holding property
primarily for sale to customers in the ordinary course of his trade or business, shall not be
deemed to carry on a business, trade, profession or occupation in this state solely by reason
of the purchase and saleof property or the purchase, sale or writing of stock option contracts,
or both, for his own account."
Accordingly, the Partnership will not be an unincorporated business subject to the
Unincorporated Business Income Tax imposed under Article 23 of the Tax Law because the sole
activity of the Partnership will be the purchase and sale of financial commodity contracts few its own
account and because the Partnership will not be engaged in business as a dealer of financial
commodity contracts or any other property and will not hold any of its assets for sale to customers
in the course of the Partnership's activities.
Furthermore, a limited partner who is a nonresident of New York will not be subject to the
Personal Income Tax imposed under Article 22 of the Tax Law with respect to such partnership
income because his distributive share of partnership income will not be attributable to the ownership
of any interest in real or tangible personal property in this State or to a business, trade, profession
or occupation carried on in this State.

DATED: May 4, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau