E. Parker Brown II asked whether, under Personal Income Tax Regs § 131.5, a nonresident partner's distributive share of a partnership's interest income - earned on a promissory note secured by a purchase-money mortgage taken back on the sale of New York commercial property - constitutes income derived from or connected with New York sources.

Plain-English summary

E. Parker Brown II, of the Hiscock & Barclay law firm in Syracuse, asked the Department about a New York general partnership with two partners that had owned a single parcel of commercial property in New York State. The partnership sold the property but, instead of taking full cash payment, took back a purchase-money mortgage and promissory note from the buyer: the buyer would pay interest on the purchase price for five years, then a balloon payment of the entire principal. After the sale closed, the partnership had no office, conducted no business, and held no asset other than that note - it existed purely as a passive vehicle to collect interest, which a realty company collected and distributed to the partners (the realty company also paid the property's real estate taxes out of an escrow fund). The question was whether the interest income the partnership distributed to a nonresident partner counted as income derived from or connected with New York sources.

The Department answered no. Tax Law § 632(a)(1) provides that a nonresident partner's New York-source income includes only the portion of the partner's distributive share that is itself "derived from or connected with New York sources," determined under rules consistent with Tax Law § 631. Personal Income Tax Regs § 131.5(b), interpreting § 631, draws a key distinction: when a nonresident sells New York real or tangible personal property and, as a result, receives intangible property (like a note) that generates interest, that interest is attributable to the intangible note itself - not to the underlying real property sale - so it is generally not New York-source income. The regulation carves out one exception: if the note or instrument is itself employed in a business, trade, profession, or occupation carried on in New York, the interest would then be New York-source income.

The Department also noted the general rule that the New York-source determination for a nonresident partner is no different than for any other nonresident individual: if an item of income would not be New York-source income to an individual receiving it directly, it does not become New York-source income merely because it passes through a partnership to that individual as a partner. Applying that here, the partnership had no New York office, conducted no business, and held no asset besides the note - it was purely a passive collection vehicle. So if the note's interest had been received directly by a nonresident individual, it would not have been New York-source income under § 131.5(b), since the note is intangible property distinct from the real property that was sold, and it was not being used in any New York business. Because the same result applies whether the interest is received directly or through a partnership, the Department concluded the interest distributed to the nonresident partner was not income derived from or connected with New York sources.

What this means for you

Nonresident partners or investors holding seller-financing notes on NY property

If you are a nonresident who sold New York real property and took back a note (a purchase-money mortgage), the interest that note generates is generally treated as income from the intangible note itself, not from the New York real estate - so it is generally not taxable to you by New York, whether you hold the note directly or receive your share of the interest through a partnership. That treatment depends on the note not being used in any business carried on in New York; a note actively employed in a New York trade or business would flip that result.

Real estate sellers structuring installment sales through a partnership

If a partnership's only remaining connection to New York, after selling its real property, is the interest stream on a purchase-money note, the partnership's passive, no-office, no-other-asset status matters. This opinion treated that kind of shell-like, purely passive collection arrangement as no different from a nonresident individual holding the note directly. If a partnership keeps an office, conducts other business, or otherwise looks like an active New York operation, the analysis could come out differently.

Accountants advising multi-state partnerships with nonresident partners

When sourcing a nonresident partner's distributive share under Tax Law § 632(a)(1), remember that the sourcing rules track what would apply if the partner earned that specific item of income directly - the partnership form does not itself convert non-New York-source income into New York-source income, or vice versa. For interest generated by a note received on a New York property sale, check Personal Income Tax Regs § 131.5(b)'s intangible-property rule and its business-use exception before concluding either way.

Common questions

Q: Does selling NY property on an installment note and collecting interest through a partnership create NY tax exposure for out-of-state partners?
A: Generally no, according to this opinion - as long as the note itself is not used in a business carried on in New York and the partnership is not otherwise conducting business in the state. The interest is attributed to the note (intangible property), not to the underlying New York real property that was sold, so it falls outside New York-source income under Personal Income Tax Regs § 131.5(b).

Q: Why does it matter that the interest comes from a "note" rather than directly from the real estate sale?
A: Personal Income Tax Regs § 131.5(b) distinguishes between the property that was sold (New York real or tangible property) and the property received in exchange (an intangible note). Interest income is sourced to the intangible instrument that generates it, not to the real estate that was given up, unless that instrument is itself put to use in a New York business.

Q: Would the answer change if the partnership had an office or conducted other business in New York?
A: Yes, potentially. This opinion turned on the fact that the partnership had no office, conducted no business, and held no asset besides the note - making it a purely passive collection vehicle. Personal Income Tax Regs § 131.5(b)'s exception applies where the instrument generating the interest is employed in a business, trade, profession, or occupation carried on in New York; an active partnership operation could change the sourcing result.

Q: Does it matter that the interest was collected by a realty company and paid out from an escrow arrangement?
A: No - the mechanics of collection (a realty company collecting payments and paying real estate taxes from an escrow fund) did not change the character or source of the income. What mattered was the underlying legal source of the interest (the note) and whether that note was used in a New York business.

Q: Is the sourcing rule different for a nonresident partner than for a nonresident individual who holds the note directly?
A: No. The Department confirmed that Tax Law § 632(a)(1) sources a nonresident partner's distributive share the same way it would source that same item of income if received directly by a nonresident individual. If the income would not be New York-source in the partner's own hands, passing it through a partnership does not change that.

Citations and references

• Tax Law § 632(a)(1) - a nonresident partner's New York-source income includes only the portion of the partner's distributive share that is itself derived from or connected with New York sources, determined under rules consistent with Tax Law § 631
• Personal Income Tax Regs § 131.5(b) (interpreting Tax Law § 631) - interest generated by intangible property (e.g., a note) received on the sale of New York real or tangible personal property is generally not New York-source income, unless the instrument is employed in a business, trade, profession, or occupation carried on in New York

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a90_1i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90 (1) I
Income Tax
January 3, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

Petition No. I891106A

On November 6,.1989 a Petition for Advisory Opinion was received from E. Parker Brown
II, Hiscock & Barclay, Financial Plaza, P.O. Box 4878, Syracuse, New York 13221.
The issue raised by Petitioner, E. Parker Brown II, is whether pursuant to Section 131.5 of
the Personal Income Tax Regulations partnership distributions of interest income derived from a note
secured by a purchase money mortgage to a partner who is a nonresident individual constitutes
income derived from or connected with New York sources.
A New York general partnership, holding title to one parcel of commercial property in New
York State, sells the property, taking back a purchase money mortgage and a promissory note. The
note obligates the buyer of the property to make interest payments on the purchase price for five
years, followed by a balloon payment of the entire amount of principal.
The partnership, consisting of two partners, has no office or other facility, conducts no
business, and has no asset other than the aforementioned promissory note. During the period
following the sale of the property, the partnership exists purely as a passive investment vehicle to
receive interest attributable to the note. The interest itself is collected by a realty company and
distributed to the partners. The realty company also pays real estate taxes on the property from an
escrow fund set up for that purpose.
Section 632(a)(1) of the Tax Law provides:
In 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 his federal adjusted gross income, as such portion shall
be determined under regulations of the tax commission consistent
with the applicable rules of section six hundred thirty-one.
Section 131.5(b) of the Personal Income Tax Regulations, in interpreting Section 631 of the
Tax Law, provides:
Generally, where a nonresident individual sells real or tangible
personal property located in New York State and, as a result of
such sale receives intangible personal property (e.g., a note) which
generates interest income, such interest income is not attributable
to the sale of the real or tangible personal property but is
attributable to the intangible personal property. Therefore, such
interest income to a nonresident does not constitute income derived

-2­
TSB-A-90 (1) I
Income Tax
January 3, 1990
from or connected with New York State sources. However, where
the instrument used to generate interest income as a result of a sale of
real or tangible personal property located in New York State is
employed in a business, trade, profession or occupation carried on in
New York State, such interest income does constitute income derived
from or connected with New York State sources.
In general, the rules which determine whether or not an item of income is derived from or
connected with New York sources are no different for nonresident partners than for other nonresident
taxpayers. Thus in accordance with Section 632(a)(1) of the Tax Law if an item of income would
not be derived from or connected with New York sources for a nonresident individual than said item
of income would not be considered to be derived from or connected with New York sources for a
nonresident partner.
In the instant case under the facts as set forth above if the interest payments on the note had
been received by a nonresident individual, they would have been considered not to have been income
derived from or connected with New York sources in accordance with the meaning and intent of
Section 131.5(b) of the Personal Income Tax Regulations. Therefore if such interest payments are
received by a nonresident partner they must accordingly be considered not to have been income
derived from or connected with New York sources.

DATED: January 3, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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