If a securities-trading partnership has its main office, staff, and trading operations in New York, but trades only for its own account rather than as a dealer, is a nonresident general partner taxed by New York on the guaranteed payments and distributive share the partnership pays him - even when those payments pass through a second, tiered partnership first?

Plain-English summary

Paul E. Singer was one of two general partners of a securities-trading partnership ("P"). P had its principal office in New York, with a staff of fifteen to forty employees, and made thousands of trades each year in stocks, bonds, and options worth many millions of dollars. Critically, though, P made all of these trades for its own account: it wasn't a dealer, had no customers, and didn't "make a market" in any security. For federal tax purposes, P was a "trader in securities" but explicitly not a "dealer in securities."

P's two general partners were Singer himself (an individual and New York nonresident) and "B," a New Jersey limited partnership of which Singer was also a general partner. Each general partner received a guaranteed payment from P under IRC § 707(c) for services rendered in New York. B's only New York activity, if it had any, was performing those services for P. Singer, in turn, received both a guaranteed payment and a distributive share from B, on top of his own direct distributive share of P's profits and losses based on his equity interest in P.

The Department's analysis rested on two statutes working together. First, Tax Law § 632(a)(1) sources a nonresident partner's partnership income at the partnership level - meaning the question isn't where the individual partner happens to sit, but what the partnership itself does. Second, Tax Law § 631(d) provides a safe harbor: a nonresident who is not a dealer holding property for sale to customers isn't deemed to carry on a business in New York solely because he buys, sells, or writes options for his own account. Because P was not a dealer and traded solely for its own account, § 631(d)'s safe harbor applied to P - meaning P was not carrying on a business in New York, so none of P's income was New York-source, despite P's office, staff, and trading activity all being physically located in New York.

The Department then closed off an obvious end-run: could the tiered structure, or the "guaranteed payment for services" label, convert this into New York-source income anyway? No. Tax Law § 632(b)(1) requires the Department to ignore any partnership-agreement provision that characterizes payments as being "for services" or "for the use of capital" when sourcing a nonresident partner's income. So even though Singer's payments came to him indirectly through B (which itself received a guaranteed payment from P labeled as being for services), that "for services" label didn't matter - the underlying character of the income as trading income safe-harbored under § 631(d) survived the tiered structure intact. The bottom line: none of Singer's guaranteed payments or distributive share, however they were routed or labeled, constituted New York-source income.

What this means for you

Nonresident partners in securities-trading partnerships

If your partnership trades exclusively for its own account - no customers, no market-making, no dealer status - Tax Law § 631(d)'s safe harbor can shield all of the partnership's income from New York source treatment as to nonresident partners, even if the partnership's office and staff are based in New York. This is a significant exception to the ordinary rule that income is sourced to where a partnership's business is carried on.

Traders using guaranteed payments and tiered partnership structures

Structuring compensation as an IRC § 707(c) guaranteed payment "for services," or routing distributions through a second-tier partnership, doesn't itself create New York-source income where the underlying activity is safe-harbored trading. Tax Law § 632(b)(1) requires the Department to look past labels in the partnership agreement and through tiered structures to the true source of the income.

Accountants and tax professionals

Watch the line between a "trader" (within the § 631(d) safe harbor) and a "dealer" (outside it) - dealer status turns on whether the entity holds property primarily for sale to customers in the ordinary course of business, not on trading volume or the physical presence of an office and staff in New York. Also note the contrast with a professional-services partnership: in TSB-A-93(2)I, a law firm's guaranteed payments to a nonresident partner were held partly New York-source, precisely because practicing law isn't the kind of trading-for-own-account activity that § 631(d) protects. The safe harbor is activity-specific, not partner-specific.

Common questions

Q: Why didn't it matter that P's office and all fifteen to forty employees were physically located in New York?
A: Because Tax Law § 631(d) provides that a nonresident (other than a dealer) is not deemed to carry on a business in New York "solely by reason of" purchasing, selling, or writing options for his own account. The statute specifically overrides what would otherwise be the default rule that a business's physical presence and activity in New York makes its income New York-source. Trading for one's own account is carved out regardless of where the trading desk sits.

Q: What's the difference between a "trader" and a "dealer," and why does it matter?
A: A dealer holds property primarily for sale to customers in the ordinary course of business and typically "makes a market." P had no customers and made no market - it traded solely for its own account, which for federal tax purposes made it a trader, not a dealer. Only traders (not dealers) get the § 631(d) safe harbor; a dealer's income would be New York-source to the extent generated by New York activity.

Q: Singer's payments passed through a second partnership, B, which was paid a guaranteed payment "for services." Why didn't that convert the income into New York-source service income?
A: Tax Law § 632(b)(1) specifically directs the Department to disregard any partnership-agreement provision that characterizes payments as being "for services" or "for the use of capital" when determining the source of a nonresident partner's income. The label in the partnership agreement doesn't control; the underlying source characterization (non-New York, because of the § 631(d) safe harbor) carries through the tiered structure unchanged.

Q: Does this mean all guaranteed payments to nonresident partners are automatically non-New York-source?
A: No. This result depended entirely on P's underlying activity qualifying for the § 631(d) trading-for-own-account safe harbor. If the partnership had been a dealer, or had conducted a different kind of business (such as practicing law, as in the companion opinion TSB-A-93(2)I), the guaranteed payments for services performed in New York would likely have been New York-source income in whole or in part.

Q: Can other taxpayers rely on this opinion?
A: No. It is an Advisory Opinion binding only on the Department with respect to Singer, and only based on the specific facts he presented - that P was not a dealer, had no customers, and traded solely for its own account. A partnership with different facts, even one also engaged in securities trading, could reach a different result.

Citations and references

• Tax Law § 632(a)(1) - a nonresident partner's New York-source items are determined at the partnership level, based on the partnership's own activities
• Tax Law § 631(d) - the trading-for-own-account safe harbor: a nonresident who is not a dealer is not deemed to carry on business in New York solely by buying, selling, or writing options for his own account
• Tax Law § 632(b)(1) - in sourcing a nonresident partner's income, no effect is given to a partnership-agreement provision characterizing payments as being "for services" or "for the use of capital"
• IRC § 707(c) - defines "guaranteed payments" made to a partner for services or for the use of capital, determined without regard to partnership income

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a92_2i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-92(2)I
Income Tax
June 4, 1992

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I920323A

On March 23, 1992, a Petition for Advisory Opinion was received from Paul
E. Singer, c/o Kleinberg, Kaplan, Wolff & Cohen, P.C., 522 Fifth Avenue, 22nd
Floor, New York, New York 10036.
The issue raised by Petitioner, Paul E. Singer, is whether New York
nonresident general partners of a partnership trading for its own account, within
the meaning of section 631(d) of the Tax Law, are subject to New York personal
income tax on guaranteed payments (within the meaning of section 707(c) of the
Internal Revenue Code) received from the partnership.
Petitioner is one of the general partners of a partnership (hereinafter
referred to as "P"). P has its principal office in New York, including employees
(a staff of approximately fifteen to forty), equipment, etc. P engages in
thousands of trades each year involving millions of shares of stock, as well as
bonds, option contracts, etc. having an aggregate value worth many million of
dollars.
For federal income tax purposes, P is considered to be in a trade or
business (as a trader in securities) but is not considered a dealer in
securities. P's trading in securities are all for its own account. P does not
have customers and does not "make a market" in any securities.
P has two general partners. Each general partner receives payments from P
as a guaranteed payment under section 707(c) of the Internal Revenue Code. The
guaranteed payments are for services rendered in New York. Petitioner is an
individual who is a nonresident of New York. The other general partner of P is
a New Jersey limited partnership (hereinafter referred to as "B"). Petitioner is
a general partner of B. B's only activity in New York State (if any) is
performing services for P for which it receives a guaranteed payment.
Petitioner, as a general partner of B, receives a guaranteed payment and a
distributive share from B. In addition to the guaranteed payment for services
rendered, Petitioner and B will be entitled to a distributive share of profits
or losses of P based on their respective equity interests in P.
Section 632(a)(1) of the Tax Law provides that the portion of a nonresident
partner's items derived from or connected with New York sources shall be
determined under regulations of the Commissioner consistent with the applicable
rules of section 631 of the Tax Law. The New York source of partnership income
under section 631 is, under the applicable regulations, determined at the
partnership level. Therefore, as to a nonresident partner, the New York source
of partnership income is determined by the activity of the partnership.
Section 631(d) of the Tax Law provides, in pertinent part, that "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

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TSB-A-92(2)I
Income Tax
June 4, 1992

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."
Based on the facts presented herein stating that P is not a dealer in
securities, etc., and is engaged in trading solely for its own account, P, as to
nonresident partners, will not be deemed to be carrying on a business in New York
State pursuant to section 631(d) of the Tax Law.
Accordingly, any income
attributable to P would not constitute income derived from or connected with New
York State sources pursuant to section 631 of the Tax Law and the regulations
thereunder.
This characterization of P's income as non-New York source will remain
intact despite the existence of a tiered partnership arrangement, i.e., even
though P's income is funnelled through B before its ultimate distribution (or
deemed distribution) to Petitioner. In this regard, it is immaterial that these
distributions are from B in the form of a guaranteed payment (within the meaning
of section 707(c) of the Internal Revenue Code), since section 632(b)(1) of the
Tax Law provides, in pertinent part, that "In determining the source of a
nonresident partner's income, no effect shall be given to a provision in the
partnership agreement which ­
1.

characterizes payments to the partner as being for services or for
the use of capital ..."

Therefore, the income attributable to P will remain non-New York source
income, regardless of whether the distributions (or deemed distributions) to
Petitioner or to B and subsequently to Petitioner are in the form of a guaranteed
payment (within the meaning of section 707(c) of the Internal Revenue Code), or
proportionate interest in profits and losses since, pursuant to section 632(b)(1)
of the Tax Law, such designations are to be ignored for New York purposes in
determining the source of a nonresident partner's income.
Since the income of P does not constitute New York source income to a
nonresident, and since Petitioner is a nonresident of New York, the distributive
shares of P income would not constitute New York source income to Petitioner.

DATED:

June 4, 1992

NOTE:

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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