Court Opinion

ID: 5828143
Source: CourtListenerOpinion
Date Created: 2022-01-12 21:31:25.131622+00
Date Added: 2024-06-11T08:43:20.454179
License: Public Domain

Mahoney, P. J. (dissenting).
Pursuant to subdivision (a) of section 705 of the Tax Law, unincorporated business gross income is limited to that sum which is includible as gross income for Federal tax purposes (United States Stationery Co. v State Tax Comm., 57 AD2d 187, 189). Although under Federal law partnerships are merely conduits through which the taxpaying obligation passes to the individual partners in accord with their distributive shares (US Code, tit 26, § 701), partnerships are entities for purposes of filing information returns and determining the nature of an item (see United States v Basye, 410 US 441). Accordingly, the question presented here is whether the gain recognized on the sale of *109petitioner Gaines’ stock exchange seat would be considered as partnership income under Federal principles.
There appear to be no Federal cases or rulings on point, and hence the commission sought to determine whether the stock exchange seat, though nominally the asset of Mr. Gaines, should be treated as an asset of the partnership under the "debt-equity concept” developed by Federal case law to determine whether a stockholder’s advances to a corporation should be characterized as a contribution to capital rather than merely as an indebtedness. This concept has also been applied to advances to a partnership by one of its partners (see Stanchfield v Commissioner, 1965 USTC Memo 65, 305), In my view, since the essence of petitioner’s position is that the use of his seat was merely on loan to the partnership, the commission’s use of this "debt-equity concept” was appropriate.
Under this concept, whether advances are contributions to capital or loans is a question of fact (Matthiessen v Commissioner of Internal Revenue, 194 F2d 659, 661), and it is not the form but rather the substance of the transaction that is controlling (Gregory v Helvering, 293 US 465; Gilbert v Commissioner of Internal Revenue, 262 F2d 512). One significant factor is whether the funds were advanced with the reasonable expectation of repayment regardless of the success of the venture or were placed at the risk of the business (see Gilbert v Commissioner of Internal Revenue, supra), and here whether petitioner Gaines retained the proceeds of the sale of his seat, which were available as protection for the partnership’s creditors, was clearly dependent upon the financial soundess of the partnership. Moreover, it is equally clear from the nature of the partnership’s business that the partners’ Stock Exchange seats were the essential elements of that business and, accordingly, there was no reasonable expectation that petitioner’s "loan” would be repaid at any time prior to his withdrawal from the venture. Whether the alleged loans are subordinate to those held by outsiders is also an important factor to be considered (Nassau Lens Co. v Commissioner of Internal Revenue, 308 F2d 39, 47), and here the proceeds of petitioner’s seat were expressly made an asset of the partnership for the protection of its creditors. Based upon these factors, it cannot be said that the commission’s determination is not supported by substantial evidence.
It should be noted that the majority has based its decision *110upon findings that the partnership had no control over petitioner Gaines’ seat, either to sell it or pledge it, and that the seat did not appear as an asset on the partnership’s books or balance sheets. In my view, the majority’s reliance upon these factual matters reinforces the conclusion that the determination as to whether the gain from the sale of petitioner’s Stock Exchange seat constitutes partnership income is a question of fact, and such questions of fact are to be determined by the commission subject to very limited judicial review. (See, e.g., Matter of Koner v Procaccino, 39 NY2d 258, 263; Matter of Tripp v State Tax Comm., 53 AD2d 763, 764.) The courts may not substitute their judgment for that of the commission "where reasonable minds may differ as to the probative force of the evidence” (Matter of Great Lakes Dredge & Dock Co. v Department of Taxation & Fin. of State of N. Y., 39 NY2d 75, 79, cert den 429 US 832). Here, as noted above, the commission’s determination is supported by rationality and by substantial evidence in the record and should, therefore, be confirmed (cf. Matter of Pell v Board of Educ., 34 NY2d 222).
Kane, Staley, Jr., and Main, JJ., concur with Herlihy, J.; Mahoney, P. J., dissents and votes to confirm in an opinion.
Petition granted, and determination annulled, with costs.