Case Name: In the Matter of Marion G. Vogt, Individually and as Executrix of the Estate of George R. Vogt, Deceased, Petitioner, v. James H. Tully, Jr., et al., Constituting the Tax Commission of the State of New York, Respondents
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1980-12-11
Citations: 79 A.D.2d 758
Docket Number: 
Parties: In the Matter of Marion G. Vogt, Individually and as Executrix of the Estate of George R. Vogt, Deceased, Petitioner, v James H. Tully, Jr., et al., Constituting the Tax Commission of the State of New York, Respondents.
Judges: 
Reporter: Appellate Division Reports
Volume: 79
Pages: 758–761

Head Matter:
In the Matter of Marion G. Vogt, Individually and as Executrix of the Estate of George R. Vogt, Deceased, Petitioner, v James H. Tully, Jr., et al., Constituting the Tax Commission of the State of New York, Respondents.

Opinion:
Proceeding pursuant to CPLR article 78 (transferred to this court by order of the Supreme Court at Special Term, entered in Albany County) to review a determination of the State Tax Commission which sustained a notice of deficiency against petitioner in the amount of $4,917.72. In this proceeding, the petitioner contends that the determination of the respondents, assessing a deficiency of $4,917.72, lacks a substantial evidentiary basis. In his lifetime the decedent, a resident of New Jersey, acquired a 3.4977 % interest, by a capital contribution of $50,000, in Endeavor Car Company (Endeavor), a partnership established under the laws of New York. This partnership consisted of two general partners and 18 limited ones, one of whom was the decedent. It was formed to facilitate the acquisition and financing of railroad cars for leasing to an out-of-State corporation called PPG Industries (PPG). Endeavor purchased new cars directly from manufacturers at invoice and used cars from PPG itself at appraised values. Through such sales and leasebacks, PPG sought to obtain cash for capital expansion. Under the terms of its lease with Endeavor, PPG assumed liability and agreed to indemnify Endeavor against all obligations and claims relating to or arising out of the operation of the equipment and to maintain and repair the rolling stock at its own expense. The in-State activities of Endeavor were handled by one of the general partners, who was also a vice-president of the First Boston Corporation, and the business of Endeavor was conducted by him at 20 Exchange Place, New York, New York, the headquarters of First Boston. This partner devoted between 30% to 50% of his time to the business of Endeavor, arranging temporary and long-term financing, negotiating lease agreements, and generally supervising the partnership activities. Otherwise, Endeavor had no employees, and it paid no salaries, even to this general partner. In 1970, Endeavor incurred an operating loss of which the decedent's share was $22,152. Losses in this amount were deducted by the decedent from his New York State income tax nonresident return. The respondent dismissed the petition for redetermination of deficiency or for refund, and sustained the deficiency for the following reasons: "A. That the activities of the partnership, Endeavor Car Company, were passive in nature and did not have the frequency, continuity, and regularity of activities so as to constitute a regular business activity, within the meaning and intent of section 703 of the Tax Law and 20 NYCRR 203.1 (a). As a result, the partnership was not engaged in a business, trade, or profession in New York State, but rather had an investment in railroad cars located outside New York State; therefore, the distributive share of loss received by petitioner George R. Vogt from Endeavor Car Company did not constitute a loss derived from or connected with New York State sources, within the meaning and intent of sections 632 (b) (1) (A), 632 (b) (1) (B) and 637 (a) (1) of the Tax Law, and 20 NYCRR 131.4(a). B. That Treasury Regulation § 1.704-1 (d) limits the amount of partnership loss which may be allowed to a partner, to the amount of the adjusted basis of his interest in the partnership at the end of the partnership's taxable year, wherein the loss occurred; moreover, petitioner George R. Vogt would not have been allowed to claim a loss had said loss been derived from, and/or connected with New York sources." The record supports the determination made. On its New York State partnership tax return, Endeavor indicated that the partnership had "no New York State source income" and that the losses that the petitioner seeks to deduct were not "derived from or connected with New York sources" pursuant to section 637 (subd [a], par [1]) of the Tax Law. These declarations by one partner concernng the partnership business are competent against other partners (Hutchison v Brown, 277 App Div 130). Furthermore, the activities of Endeavor in this State did not constitute a business under 20 NYCRR 131.4 (a) where it maintained no business office separate and distinct from that of the First Boston Corporation and the general partner, who managed the affairs of Endeavor, was not affected in the salary he received from First Boston for conducting the affairs of Endeavor. The activity carried on in New York by Endeavor fell squarely within the definition of a "net lease" whereby the lessee pays, in addition to rent, the taxes, insurance and maintenance charges. Net leases are recognized as financing or investment arrangements rather than business activities (McCoach v Minehill Ry. Co., 228 US 295). Accordingly, the determination of the respondent should be confirmed. Determination confirmed, and petition dismissed, without costs. Main, Mikoll, Casey and Herlihy, JJ., concur.
Kane, J. P., dissents and votes to annul in the following memorandum.