Court Opinion

ID: 5845068
Source: CourtListenerOpinion
Date Created: 2022-01-12 23:43:11.962506+00
Date Added: 2024-06-11T08:43:54.126084
License: Public Domain

Kane, J. P. (dissenting).
In determining the income tax liability of a nonresident partner under Part 3 of article 22 of the Tax Law, only the portion of such partner’s distributive share of partnership income, gain, loss and deduction which is derived from or connected with a New York source may be considered (Tax Law, § 637, subd [a], par [1]; § 632, subd [a], par [1], cl [A]). The requisite source encompasses items *760attributable to a business carried on within or partly within this jurisdiction (Tax Law, § 632, subd [b], par [1], cl [B]; §632, subd [c]), but the term “business” is not defined in the subject article. Since Endeavor’s operations were wholly directed from points in New York, the primary question developed before respondent was whether those activities constituted a business. Respondent’s negative answer seems to be based, at least in part, on statutes and regulations pertaining to the taxation of unincorporated entities under article 23 of the Tax Law. Assuming those provisions offer relevant guidance, the determination finally made does not possess a rational foundation. There is no evidentiary support for respondent’s conclusion that Endeavor’s activities lacked frequency, continuity or regularity. Organized in 1968, its purchase of railroad cars extended throughout the tax year in question and the financing and leases it arranged covered lengthy time periods. Whatever its nature, Endeavor was plainly involved in something more than a haphazard or isolated series of commercial transactions. Annulment is not warranted on that ground alone, however, for respondent’s determination also mentions the passive character of Endeavor’s investment in rolling stock as yet another reason for declining to consider it a business. While the substance of its operations merited attention, respondent’s conclusion is legally flawed. Subdivision (d) of section 703 of the Tax Law provides, in part, that “An * * * unincorporated entity * * * shall not be deemed engaged in an unincorporated business solely by reason of the purchase and sale of property for his own account”. The applicable regulations expand on this concept as follows: “(a) Except as otherwise specifically provided in this Subchapter, an unincorporated business means any trade, business or occupation conducted, engaged in or being liquidated by an individual or by an unincorporated entity including a partnership or fiduciary or a corporation in liquidation but not including any entity subject to the tax imposed by articles 9, 9-A, 9-B, 9-C or 32 of the Tax Law. In general, the trades, businesses or occupations which constitute an unincorporated business when conducted or engaged in (or when they are being liquidated) by an individual or an unincorporated entity include, without limitation, all phases of such activities as mining, farming, manufacturing and processing, merchandising, banking and financing, trucking and other transportation services, brokerage services of all types and any other activity which involves the leasing of or trading or dealing in real or personal property or the performing of services of any kind. Where a doubt as to the status of an activity exists, all the relevant facts and circumstances must be considered in determining whether the activity or the transactions involved constitute a trade, business or occupation for the purposes of this section. Generally the continuity, frequency and regularity of activities, as distinguished from casual or isolated transactions, and the amount of time, thought and energy devoted to the activities or transactions are the factors which are to be taken into consideration, (b) Ordinarily, the engaging in activities relating to the investment and re-investment of a taxpayer’s own funds and the receipt or collection of income therefrom or the consummation of isolated or incidental transactions connected with such investment activities will not be considered to be the carrying on of a trade, business or occupation. However, a taxpayer who or which invests funds in the purchase of an operating unincorporated business such as a manufac*761turing plant, mercantile organization, hotel or other unincorporated activity of the type where the carrying on of business is necessary to realizing on the investment will be deemed to be engaged in the conduct of a taxable trade, business or occupation, even though only a limited amount of time, thought and energy may be devoted to the activity by an individual taxpayer or by the members of a partnership or other unincorporated entity ” (20 NYCRR 203.1 [1] [b]; emphasis added.) Since Endeavor was active in financing the purchase and subsequent lease of personal property, and since petitioner depended on that activity to obtain a return on his investment, the only rational view of the matter —consistent with prior rulings and judicial authority—is that Endeavor was engaged in a business (cf. Matter of Wohlreich v Tully, 72 AD2d 825; Matter of Swid-Pearlman Mgt. v Tully, 67 AD2d 1022). The declaration by one of its partners may have been intended to limit New York income, but it cannot serve to mask the reality of Endeavor’s operations in this jurisdiction. Lastly, the evidence does not support respondent’s alternative finding under a treasury regulation because the adjusted basis of petitioner’s interest in Endeavor was never fixed. Accordingly, the determination should be annulled and the matter remitted for further proceedings.