Bryan R. Sullivan asked, on behalf of a nonresident commodities trader referred to as 'Client B,' whether rental income from leasing memberships ('seats') in New York commodities exchanges is New York-source income taxable to a nonresident, and whether receiving that rental income would cause New York to also tax Client B's own commodities-trading profits for his own account.

Plain-English summary

Bryan R. Sullivan wrote to the Department on behalf of a nonresident commodities trader referred to as "Client B." Client B trades commodities solely for his own account - he isn't a dealer or broker - and over the years he acquired memberships ("seats") on four New York commodities exchanges: the New York Mercantile Exchange (NYMEX), the Commodity Exchange, Inc. (Comex), the New York Cotton Exchange (NYCE), and the Coffee, Sugar & Cocoa Exchange, Inc. (CS&C). Members pay lower trading fees than non-members, and because these exchanges generally require a clearing firm to hold two memberships each, Client B ended up owning two memberships on each of the four exchanges - eight in total - partly to support a Delaware S-corporation he formed to eventually clear his own trades. At any given time, some of those memberships might not be in active use, and Client B wanted to lease the extra ones to other traders to generate income, with leases expected to run roughly six to twelve months and to cover as many as four or five memberships at a time.

Two questions were at stake. First, is the rental income from leasing out unused exchange memberships New York-source income taxable to a nonresident? Second, does receiving that rental income - taxable or not - expose Client B's separate trading profits (earned trading commodities for his own account) to New York tax?

On the first question, the Department relied on the US Supreme Court's decision in New York ex rel. Whitney v. Graves, 299 US 366 (1937), which held that a New York exchange membership has a "business situs" in New York - it is an intangible right localized at the exchange where it is exercised and can be exercised nowhere else. Tax Law § 601(e) taxes a nonresident's New York-source income, and § 631(b)(1)(B) treats income from "a business, trade, profession or occupation carried on" in New York as New York-source. Income Tax Regulations § 131.4(a)(2) explains that a nonresident carries on a business in New York when affairs are conducted here "systematically and regularly," with "a fair measure of permanency and continuity" - not merely through occasional, isolated transactions. Because Client B planned to lease up to four or five memberships routinely, for six-to-twelve-month terms, relying on the leasing income as part of his income, the Department found that his leasing activity met that permanency-and-continuity standard. Combined with the memberships' New York business situs under Whitney, that meant the leasing itself was a business carried on in New York, making the rental income New York-source income under § 631(b)(1)(B) (consistent with Matter of Welles Murphey, Sr. and Ann Murphey, TSB-H-80(12)I, which held that gain on the sale of such a membership is likewise taxable).

On the second question, the Department turned to the separate safe harbor in Tax Law § 631(d): a nonresident (other than a dealer holding property for sale to customers) is not deemed to carry on a business in New York solely by purchasing and selling property, or writing stock-option contracts, for his own account. The Department had already told this same petitioner, in TSB-A-89(10)I (Feb. 1, 1989), that trading commodities purely for one's own account isn't a New York trade or business. That safe harbor doesn't disappear just because the trader also happens to have taxable New York rental income from leasing his memberships - the leasing business and the own-account trading are analyzed separately. So Client B's trading profits for his own account remained untaxed by New York, regardless of the taxable leasing income. (By contrast, in Kenneth S. Davidson Partners, TSB-A-88(11)I (June 28, 1988), a partnership that engaged in market-making activity beyond pure own-account trading was found to be carrying on a New York business, losing the § 631(d) safe harbor.) The opinion also noted that the New York City Nonresident Earnings Tax would not apply to Client B's membership-leasing income.

What this means for you

Nonresident traders leasing out exchange memberships

If you're a nonresident who owns a seat on a New York exchange and you lease out unused memberships to other traders on a recurring basis, expect the rental income to be treated as New York-source income - the leasing itself is a "business carried on" in New York because the membership has a business situs here and your leasing activity has real permanency and continuity. This is true even though you never set foot on the exchange floor to do the leasing.

Nonresident traders who also trade for their own account

Leasing your extra memberships does not put your own trading profits at risk. Tax Law § 631(d)'s safe harbor for buying and selling property (or writing option contracts) solely for your own account operates independently of your leasing activity. As long as you're not a dealer and your own trading is limited to your own account, that trading income stays outside New York's reach even while your leasing income is taxed.

Accountants and tax professionals advising multi-state commodities traders

When a nonresident client has multiple New York exchange memberships and both trades and leases them, separate the two income streams for New York purposes: apply § 631(b)(1)(B) and the Whitney business-situs analysis to leasing income, and apply the § 631(d) own-account safe harbor to trading income. Watch for facts that push a client's activity beyond "purchase and sale for own account" - such as market-making, as in Kenneth S. Davidson Partners - since that can convert what would otherwise be exempt trading profits into a taxable New York business.

Common questions

Q: Does leasing my exchange memberships put my own trading profits at risk of New York tax?
A: No. This opinion holds that leasing memberships is a separate activity from trading for your own account. The § 631(d) safe harbor protects a nonresident's own-account purchases and sales of property regardless of whether that same nonresident also has taxable New York income from leasing exchange memberships.

Q: Why is rental income from leasing an exchange seat treated as New York-source income if the trader never appears on the exchange floor to lease it?
A: Under Whitney v. Graves, the membership itself is intangible property with a business situs in New York - it can only be exercised at that exchange. Because Client B's leasing was conducted with a fair measure of permanency and continuity (leasing several memberships routinely, on six-to-twelve-month terms, relying on the income), that leasing activity constituted a business carried on in New York under § 631(b)(1)(B), regardless of where the trader was physically located.

Q: Would occasional, one-off leasing of a spare membership be treated the same way?
A: The regulation (Income Tax Regs § 131.4(a)(2)) distinguishes systematic, regular activity with permanency and continuity from "the occasional consummation of isolated transactions." This opinion's holding turned on Client B's plan to lease multiple memberships repeatedly over multi-month terms and rely on the income - a truly isolated, one-time lease might be analyzed differently, though the opinion doesn't address that scenario.

Q: Does forming a corporation to clear trades change the tax analysis for the underlying trading or leasing income?
A: Not for the issues addressed here. Client B's Delaware S-corporation was formed to potentially clear his trades and was expected to hold membership privileges once it becomes a clearing member, but the opinion's holdings on New York-source leasing income and the § 631(d) own-account safe harbor are stated in terms of Client B's individual activities, not the corporation's.

Q: Does the New York City Nonresident Earnings Tax apply to this leasing income?
A: No. The opinion specifically states that the New York City Nonresident Earnings Tax does not apply to Client B's income from leasing his exchange memberships.

Citations and references

• Tax Law § 601(e) - imposes New York personal income tax on a nonresident individual's New York-source taxable income
• Tax Law § 631(a) - defines the New York source income of a nonresident individual as items connected with New York sources
• Tax Law § 631(b)(1)(A)-(B) - New York-source income includes income from New York real/tangible property ownership and from a business, trade, profession or occupation carried on in New York
• Tax Law § 631(d) - safe harbor: a nonresident (other than a dealer) is not deemed to carry on a New York business solely by purchasing and selling property, or writing stock-option contracts, for his own account
• Income Tax Regulations § 131.4(a)(2) - defines "business, trade, profession or occupation carried on" in New York using an office/desk-space and permanency-and-continuity test
• New York ex rel. Whitney v. Graves, 299 US 366 (1937) - a New York stock/commodity exchange membership is intangible property with a "business situs" localized at the exchange
• Matter of Welles Murphey, Sr. and Ann Murphey, Dec St Comm, Jan. 2, 1980, TSB-H-80(12)I - gain on the sale of a New York exchange membership is subject to New York personal income tax
• TSB-A-89(10)I (Feb. 1, 1989) - prior opinion to the same petitioner holding that trading commodities solely for one's own account is not a New York trade or business
• Kenneth S. Davidson Partners, TSB-A-88(11)I (June 28, 1988) - a partnership engaged in market-making activity beyond pure own-account trading was found to be carrying on a New York business

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_7i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90 (7) I
Income Tax
May 31, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I891205B

On December 5, 1989, a Petition for Advisory Opinion was received from Bryan R. Sullivan,
200 East Randolph Drive, Suite 7750, Chicago, Illinois 60601.
The issues raised by Petitioner, Bryan R. Sullivan, are whether the receipt, by a nonresident
individual, of rental income from the leasing of one or more memberships in New York commodities
exchanges would constitute New York source income taxable by New York and whether the receipt
of such rental income, whether or not taxable, would result in imposition of New York tax on the
nonresident's profits from trading for his own account.
Client B, who is a non-resident of New York, is a commodities trader. Client B trades solely
for his own account. He does not perform any services as a dealer or broker.
Client B enters into numerous trades for his own account. Over the past several years, Client
B has maintained Quotron machines at his home and at an office outside New York State. He
evaluated the information from the machines and other sources, and telephoned instructions for the
execution of trades on the floors of New York and Chicago commodities exchanges. In the future,
he anticipates appearing more frequently on the floor of the various New York exchanges to execute
his own trades.
Client B has always cleared his trades through various clearing firms. In an effort to reduce
his clearing expenses, he formed a Delaware corporation. The corporation is qualified to do business
in New York, and has leased an office in Manhattan. Client B is the corporation's sole shareholder.
The corporation has elected subchapter S status for federal income tax purposes. A similar election
has not been filed for New York tax purposes.
It is anticipated that the corporation will become a clearing firm on one of four New York
exchanges (i.e., New York Mercantile Exchange ("NYMEX"), Commodity Exchange, Inc.
("Comex"), New York Cotton Exchange ("NYCE"), and/or Coffee, Sugar, & Cocoa Exchange, Inc.
("CS&C")). The corporation's clearing operation will be evaluated sometime after six months. A
decision will be made whether to abandon the clearing operation, to maintain the clearing operation
on only one exchange, or to expand operations by applying for clearing memberships on one or more
additional exchanges. It is anticipated that the corporation will clear only the trades of Client B and,
possibly, his retirement plan.
The corporation also might provide clerk services to Client B and/or manage a trading
account for Client B. Client B will pay fees to the corporation in the event those services are
provided.
TP-9 (9/88)

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May 31, 1990

In addition to clearing fees paid to a clearing firm, a trader also pays fees to an exchange for
trades executed on the exchange. An exchange member is charged lower fees than is a non-member.
In order to obtain the right to these lower fees, Client B acquired memberships on NYMEX, Comex,
NYCE, and CS&C at various times. Client B also acquired an extra membership on one or more
of the exchanges for investment purposes.
In researching the possibility of forming a corporation to clear his trades, Client B discovered
that the exchanges generally require a clearing firm to hold interests in two memberships. In order
to meet that requirement, Client B acquired additional memberships. Thus, Client B now owns two
memberships on each of the four exchanges, NYMEX, Comex, NYCE, and CS&C. If the
corporation becomes a clearing member of an exchange, Client B will confer membership privileges
on the corporation with respect to both memberships.
From time to time, Client B might be holding one extra (i.e., the corporation will not be
applying to become a clearing firm) or two extra memberships (i.e., Client B will not be trading for
his own account, and the corporation will not be applying to become a clearing firm). Client B's and
the corporation's plans may change from time to time. In order to maximize income, Client B would
like to lease extra memberships at such times as either he and/or the corporation have no immediate
need to use the memberships. Client B could be leasing as many as eight memberships at a time, but
it is anticipated that Client B will lease, at most, four or five memberships and it is anticipated that
the leases will run from six to twelve months.
New York stock exchange seats have been characterized by the United States Supreme Court
as intangible property with a business situs in New York State. New York ex rel Whitney v Graves
299 US 366(1937). The Court therein noted that:
[w]hen we speak of a "business situs" of intangible property in the taxing
State we are indulging in a metaphor. We express the idea of localization by
virtue of the attributes of the intangible right in relation to the conduct of
affairs at a particular place... [T]he right may be identified with a particular
place because the exercise of the right is fixed exclusively or dominantly at
that place... [T]he localization for the purpose of transacting business may
constitute a business situs quite as clearly as the conduct of the business
itself. Here, we are dealing with an intangible right of a peculiar nature. It
embraces the privilege of a member to transact business on the Exchange as
well as a valuable right of property which is the subject of transfer with the
approval of the Exchange and may survive resignation, expulsion or death...
Its very nature localizes it at the Exchange. It is a privilege which can be
exercised nowhere else. The nature of that right is not altered by the failure
to exercise it...

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Income Tax
May 31, 1990

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 equal to the tax computed as if the individual were a resident, reduced by certain credits and
multiplied by a fraction, the numerator of which is the individual's New York source income and the
denominator of which is the individual's federal adjusted gross income.
New York source income is determined under section 631 of the Tax Law. Such section
provides that:
(a) General. The New York source income of a nonresident individual shall
be the sum of 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...
(b) Income and 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 ....
Section 131.4(a)(2) of the Income Tax Regulations defines a "business, trade, profession or
occupation" for purposes of section 631(b) of the Tax Law as follows:
A "business, trade, profession or occupation" (as distinguished from personal
services as an employee) is carried on within New York State by a
nonresident when such nonresident occupies, has, maintains or operates desk
space, an office, a shop, a store, a warehouse, a factory, an agency or other
place where such nonresident's affairs are systematically and regularly carried
on, notwithstanding the occasional consummation of isolated transactions
without New York State. This definition is not exclusive. Business is carried
on within New York State if activities within New York State in connection

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Income Tax
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with the business are conducted in New York State with a fair measure of
permanency and continuity. A taxpayer may enter into transactions for profit
within New York State and yet not be engaged in a trade or business within
New York State. If a taxpayer pursues an undertaking continuously as one
relying on the profit therefrom for such taxpayer's income or part thereof,
such taxpayer is carrying on a business or occupation.
As determined by the United States Supreme Court in Whitney, supra., Client B's stock
exchange memberships have a business situs in New York and it is at such site that Client B
maintains such memberships and from which his affairs are systematically and regularly carried on.
Any gain on the sale of such memberships will be subject to personal income tax. (See Whitney,
supra, and Matter of Welles Murphey, Sr. and Ann Murphey, Dec St Comm, January 2, 1980, TSBH-80(12)I.)
Petitioner states that: "In order to maximize income, Client B would like to lease extra
memberships at such times as either he and/or the corporation have no immediate need to use the
memberships." Petitioner also states that "Client B could be leasing as many as eight memberships
at a time, but it is anticipated that Client B will lease, at most, four or five memberships and it is
anticipated that the leases will run from six to twelve months." Under such circumstances, Client
B's leasing activities are conducted in New York State "with a fair measure of permanency and
continuity" rather than from casual or incidental transactions. In addition, Client B relies "on the
profit therefrom for [his] income or part thereof."
Accordingly, the leasing of the stock exchange memberships would constitute the carrying
on a business or occupation in New York State and Client B's income from such leasing activities
would be New York source income under section 631(b)(1)(B) of the Tax Law.
Section 631(d) of the Tax Law provides:
(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
sale of property or the purchase, sale or writing of stock option contracts, or
both, for his own account.
In an Advisory Opinion previously issued to Petitioner (Adv Op Comm T&F, February 1,
1989, TSB-A-89(10)I) it was determined that where an individual's sole activities in New York
consisted of trading commodities for the individual's own account such activities would not be
deemed to be a trade or business for New York State income tax purposes and such trading profits
would not be subject to tax under section 631(d) of Article 22 of the Tax Law. However, in
Kenneth S. Davidson Partners, Adv Op Comm T&F, June 28, 1988, TSB-A-88(ll)I, it was

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determined that a partnership will not be considered to be purchasing and selling solely for its own
account if the partnership engages in other activities such as market making activities. Such
partnership would be deemed to be carrying on a trade or business within the state.
Accordingly, Client B's leasing of stock exchange memberships in New York State would
constitute a business, trade, profession or occupation in New York and the income from such leasing
activities would constitute New York source income under section 631(b)(1)(B) of the Tax Law.
However, Client B's purchase and sale of commodities for his own account is not deemed to be a
business, trade, profession or occupation in New York State and the profits from such activities are
not subject to personal income tax pursuant to section 631(d) of the Tax Law.
It should be noted that the New York City Nonresident Earnings Tax would not apply to
Client B's income from the leasing of stock exchange seats.

DATED: May 31, 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.