If a New York resident owns a Delaware LLC that only trades securities for its own account, and the LLC's other member is a trust with an out-of-state trustee, does New York tax the LLC or the trust?

Plain-English summary

Petitioner, Laura J. Silver, is domiciled in New York State and is a resident of New York City. She is the managing member (1 percent interest) of a Delaware LLC that elects to be treated as a partnership for federal tax purposes. The LLC's only other member, holding a 99 percent interest, is an irrevocable trust that Petitioner created while she was a New York domiciliary. The LLC's sole activities are managing its own working capital (bank deposits held outside New York) and trading stocks, bonds, debt obligations, and other securities and financial instruments for its own account. The LLC's only office is its statutory office in Delaware; its only New York connection is a mailing P.O. Box in Rockland County. The trust likewise has no New York office, only a Rockland County P.O. Box; its trustee is an individual domiciled outside New York, and its beneficiary is currently located in New York City. Petitioner asked the Department to address four issues, and the Department answered all four:

1. Is the LLC or Petitioner "carrying on a business" in New York? No. Trading securities and managing working capital solely for one's own account does not constitute carrying on a business, trade, profession, or occupation in New York under Tax Law § 631, following the Department's prior opinions in Kenneth S. Davidson Partners (TSB-A-88(11)I), Paul E. Singer (TSB-A-92(2)I), and MSD Capital, L.P. (TSB-A-98(8)I). Because the LLC's activities don't rise to that level, neither the LLC nor Petitioner, as managing member conducting those activities, is carrying on a business in New York.

2. Is the LLC or Petitioner subject to NY State/City tax or filing requirements? The LLC, treated as a partnership, is not itself subject to Article 22 tax (Tax Law § 601(f)); partners are taxed individually. But because the LLC has a resident partner (Petitioner), it must still file a partnership return, Form IT-204, under Tax Law § 658(c)(1). Because the LLC's own-account trading and asset management don't produce New York-source income under § 631, the LLC owes no annual filing fee under Tax Law § 658(c)(3). Petitioner, as a New York State and New York City resident, must file a resident income tax return, Form IT-201, computing her New York taxable income under § 611(a) and reporting her distributive share of all the LLC's income, gain, loss, and deduction items, and she is also liable for New York City resident tax on the same return.

3. Is the trust or its trustee subject to NY State/City tax or filing requirements? The trust is technically a "resident trust" of New York under Tax Law § 605(b)(3)(C), because Petitioner (the grantor) was domiciled in New York when she transferred the property and when the trust became irrevocable. But resident-trust status alone does not mean the trust owes New York tax. Under 20 NYCRR § 105.23(c), a resident trust owes no New York State (or, correspondingly, New York City) personal income tax for any year in which all three conditions are met: (1) all trustees are domiciled outside New York; (2) the entire trust corpus is located outside New York (the situs of intangible assets follows the trustee's domicile, citing Charles B. Moss Trust, TSB-A-94(7)I, and the cases it relies on); and (3) all trust income and gains are from non-New York sources, determined as if the trust were a nonresident. Here, the trustee is domiciled outside New York, the corpus (the 99 percent LLC interest, an intangible) is therefore situated outside New York, and none of the trust's income or gains are New York-source. All three conditions are met, so the trust — while formally a New York resident trust — owes no New York State or City tax for the years those conditions hold.

4. Does the trustee's or beneficiary's domicile affect the trust's tax status? Yes for the trustee, no for the beneficiary. If the trustee were domiciled in New York (or in New York City), the § 105.23(c) conditions would fail and the trust would become subject to New York State (and possibly City) personal income tax. The beneficiary's location or domicile, however, plays no role in this analysis — the beneficiary being in New York City does not affect the trust's tax status.

What this means for you

Out-of-state trading LLCs with a New York-resident managing member

If your LLC (or partnership) is organized and based outside New York and its only activities are managing its own working capital and trading securities or similar financial instruments for its own account — with no market-making or other active trading-business activities — those activities alone do not make the entity "carrying on a business" in New York, even if its managing member is a New York resident and even if the entity's only New York contact is a mailing address. That said, a resident partner or member still triggers a partnership-return filing obligation (Form IT-204) under § 658(c)(1), even though no annual filing fee is owed under § 658(c)(3) if the entity has no New York-source income. The resident partner or member must still report their full distributive share of the entity's income on their personal resident return (Form IT-201).

NY-resident grantors of trusts with non-NY trustees and assets

Creating an irrevocable trust while domiciled in New York makes that trust a New York "resident trust" under § 605(b)(3)(C) permanently based on the grantor's domicile at the time of the transfer — that status doesn't change later. But resident-trust status by itself doesn't create New York tax liability. If you keep the trustee domiciled outside New York, keep the trust's corpus (intangibles follow the trustee's domicile) outside New York, and ensure all trust income and gains are from non-New York sources, the trust owes no New York State or City tax under 20 NYCRR § 105.23(c) for those years. Swapping in a New York-domiciled trustee, even temporarily, breaks the exemption for that period.

Common questions

Q: If the LLC has no New York-source income and owes no filing fee, does it still have to file anything with New York?
A: Yes. Because the LLC has a resident partner (Petitioner), Tax Law § 658(c)(1) requires it to file a partnership return, Form IT-204, each year regardless of whether it has any New York-source income or owes the § 658(c)(3) annual filing fee.

Q: Why doesn't trading securities for the LLC's own account count as "carrying on a business" in New York?
A: Under Tax Law § 631 and the Department's prior opinions in Davidson, Singer, and MSD Capital, activities limited to managing one's own working capital and trading stocks, bonds, and other securities and financial instruments solely for one's own account do not rise to the level of carrying on a business, trade, profession, or occupation in New York, even when some securities trade on public exchanges.

Q: The trust is a "New York resident trust" - so why doesn't it owe any New York tax?
A: Resident-trust status under § 605(b)(3)(C) turns solely on the grantor's domicile when the property was transferred and became irrevocable; it does not depend on the trustee's location, the corpus's location, or the source of income. Separately, 20 NYCRR § 105.23(c) exempts a resident trust from New York tax for any year in which the trustee is domiciled outside New York, the corpus is situated outside New York, and all income and gains are non-New York source. This trust met all three conditions, so despite being a "resident trust" on paper, it owes no tax.

Q: What would cause this trust to become taxable in New York?
A: If the trustee became domiciled in New York, the first § 105.23(c) condition would fail, and the trust would then be subject to New York State personal income tax (and New York City tax if the trustee were a City resident), because the corpus's situs would then also be considered inside New York.

Q: Does it matter that the trust's beneficiary lives in New York City?
A: No. The advisory opinion specifically states that the beneficiary's domicile does not affect the trust's taxable status — only the trustee's domicile (along with corpus situs and income source) matters under 20 NYCRR § 105.23(c).

Q: Does Petitioner, as the LLC's New York-resident managing member, owe New York tax on the LLC's trading income even though the LLC itself isn't "carrying on a business" in New York?
A: Yes. As a New York State domiciliary and New York City resident, Petitioner must file a resident return (Form IT-201) reporting her full distributive share of all the LLC's income, gain, loss, and deduction items under Tax Law § 611(a) and § 612(a), and she is also liable for New York City resident tax on that same return, regardless of where the LLC's underlying activities occur.

Citations and references

• Tax Law § 2(5) and (6) - defines "limited liability company" and extends "partnership"/"partner" to LLCs and their members
• Tax Law § 601(f) - a partnership as such is not subject to Article 22 tax; partners are taxed individually
• Tax Law § 605(b) - definition of a resident individual
• Tax Law § 605(b)(3)(C) - a trust is a New York resident trust if the grantor was domiciled in New York when the property became irrevocable
• Tax Law § 611(a) and § 612(a) - computation of a resident individual's New York taxable income and adjusted gross income
• Tax Law § 631(b)(1) and (2) - New York source income includes income from a business carried on in New York and intangible income employed in such a business
• Tax Law § 631(d) - trading or writing stock options for one's own account does not, by itself, constitute carrying on a business in New York
• Tax Law § 658(c)(1) - a partnership with a resident partner must file a partnership return (Form IT-204)
• Tax Law § 658(c)(3) - annual filing fee applies only to an LLC/partnership with New York-source income
• 20 NYCRR § 105.23(c) - a resident trust owes no New York tax for a year in which the trustee is domiciled outside New York, the corpus is situated outside New York, and all income and gains are non-New York source
• TSB-M-94(6)I and TSB-M-94(8)C - an LLC treated as a partnership for federal purposes is treated as a partnership for New York tax purposes
• TSB-A-88(11)I, Kenneth S. Davidson Partners - trading options solely for a partnership's own account is not carrying on a New York business
• TSB-A-92(2)I, Paul E. Singer - a partnership trading securities solely for its own account is not carrying on a New York business, even with a New York office and a tiered partnership structure
• TSB-A-98(8)I, MSD Capital, L.P. - an LP's and its LLCs' trading activities solely for their own account do not produce New York-source income
• TSB-A-94(7)I, Charles B. Moss Trust - the situs of a trust's intangible corpus follows the trustee's domicile; a resident trust owes no New York tax when the three 20 NYCRR § 105.23(c) conditions are met

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a00_2i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(2)I
Income Tax
March 29, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z990803B

On August 3, 1999, a Petition for Advisory Opinion was received from Laura J. Silver, P.O.
Box 2241, Fort Lee, New Jersey 07024.
The issues raised by Petitioner, Laura J. Silver, are:

1. Whether the limited liability company ("LLC"), as described below, or Petitioner,
   as the managing member of the LLC, is carrying on a business, trade, profession or
   occupation in New York State.
2. Whether the LLC, as described below, or Petitioner, as the managing member, is
   subject to any New York State or New York City tax law or filing requirements or
   fees (i.e. Partnership Return and Tax, Self-Employment Tax).
3. Whether the Trust, as described below, or Trustee(s), as described below, is
   subject to any New York State or New York City tax law or filing requirements or
   fees (i.e. Fiduciary Income Tax Return).
4. Whether the domicile of the Trustee(s) or Beneficiary affects the tax status of the
   Trust.
   Petitioner submits the following facts as the basis for this Advisory Opinion.
   The LLC has two members and is organized pursuant to the laws of the State of Delaware.
   The LLC was organized by Petitioner who is the managing member with one percent interest in the
   LLC, and the other member is the Trust with 99 percent interest in the LLC. Petitioner will
   contribute 100 percent of the capital. Petitioner is domiciled in New York State and is a resident of
   the City of New York.
   The LLC elects to be classified and treated as a partnership for federal income tax purposes.
   The LLC's only office is the statutory office in Delaware. The activities of the LLC will be dedicated
   exclusively for its own account to:
   (a) manage its own assets which consist of working capital, and is currently
   comprised of monies on deposit in bank accounts outside New York State; and

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(b) use the working capital to trade for its own account in stocks, bonds, debt
obligations, interest investments such as certificate of deposits, money market
accounts and various other securities and financial instruments some of which will
be traded on public exchanges.
Petitioner, as the managing member, will conduct the business of the LLC by telephone, mail
or fax from wherever Petitioner happens to be situated at the time (in or out of New York State).
The mailing address for the LLC will be a Post Office Box in Rockland County, New York
Acknowledgments, statements, tax documents etc. will, when needed, be sent to the P.O. Box. The
P.O. Box will be the only thing the LLC will have in New York State. Petitioner states that all
income and gains of the LLC will be derived from sources outside of New York State.
The Trust does not have an office in New York State, but does have a Post Office Box in
Rockland County, New York. Petitioner is the trust grantor. The Trust is irrevocable and Petitioner
transferred property to it while Petitioner was a domiciliary of New York State and a resident of New
York City. The Trust is for the benefit of a third party or parties. The Beneficiary(s) is currently
located in New York City. The Trustee of the Trust is an individual who is domiciled outside of
New York. The entire corpus of the Trust consists of the 99 percent interest in the LLC. The
Trustee will be a non managing member of the LLC, but will determine the payment, if any, of the
annual floating rate, zero percent to 100 percent, of return on investments or profits to Petitioner.
Discussion
Section 2 of the Tax Law provides the definition of certain terms used in the Tax Law, and
was amended by Chapter 576 of the Laws of 1994 which added the following:

5. The term “limited liability company” means a domestic limited liability company
   or a foreign limited liability company, as defined in section one hundred two of the
   limited liability company law.
6. “Partnership and partner,” unless the context requires otherwise, shall include, but
   shall not be limited to, a limited liability company and a member thereof,
   respectively.
   An LLC that is treated as a partnership for federal income tax purposes, is treated as a
   partnership for New York State tax purposes. (See, Department of Taxation and Finance
   Memorandum, TSB-M-94(6)I and (8)C, October 25, 1994.) Accordingly, for New York State
   personal income tax purposes, the LLC will be treated as a partnership.

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Section 601(f) of Article 22 of the Tax Law provides that a partnership, as such, shall not be
subject to tax under Article 22. Persons carrying on business as partners shall be liable for tax under
Article 22 only in their separate or individual capacities.
Section 658(c)(1) of the Tax Law provides that every partnership having a resident partner
shall make a return for the taxable year setting forth all items of income, gain, loss and deduction
and such other pertinent information as the Commissioner of Taxation and Finance may, by
regulations and instructions, prescribe.
Section 658(c)(3) of the Tax Law provides that every LLC that is treated as a partnership
which has any income derived from New York sources, determined in accordance with the
applicable rules of section 631 of the Tax Law is subject to an annual filing fee.
Section 631(b)(1) of the Tax Law provides that items of income, gain, loss and deduction
derived from or connected with New York sources include those items attributable to (a) the
ownership of any interest in real or tangible personal property located in New York State, or (b) a
business, trade, profession or occupation carried on in New York State. Section 631(b)(2) of the Tax
Law provides that income from intangible personal property, including annuities, dividends, interest,
and gains from the disposition of intangible personal property constitutes 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 New York State.
Section 631(d) of the Tax Law provides that a nonresident, other than a dealer holding
property primarily for sale to customers in the ordinary course of the individual’s trade or business,
shall not be deemed to carry on a business, trade, profession or occupation in New York State solely
by reason of the purchase and sale of property or the purchase, sale or writing of stock option
contracts, or both, for the individual’s own account.
In Kenneth S. Davidson Partners, Adv Op Comm T&F, June 28, 1988, TSB-A-88(11)I, it
was held that the purchase and sale by the partnership of options on indexes, foreign currencies, debt
obligations and futures contracts and the exercise, closing out or expiration of such options solely
for its own account did not constitute the carrying on of a business, trade, profession or occupation
in New York State under section 631 of the Tax Law. However, the opinion noted that the
partnership would not be considered to be solely trading for its own account if it engaged in certain
other activities such as market making activities.
In Paul E. Singer, Adv Op Comm T&F, June 4, 1992, TSB-A-92(2)I, a partnership with its
principal office in New York engaged in trading securities for its own account. It had two general
partners, one was a nonresident individual and the other was a limited partnership. The opinion held
that the partnership was not carrying on a trade or business in New York because it was engaged

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solely in trading for its own account, thus the income attributable to the partnership was not New
York source income under section 631 of the Tax Law, and this did not change despite the existence
of a tiered partnership arrangement, where the partnership's income is funneled through the limited
partnership before its ultimate distribution, or deemed distribution to the individual.
In MSD Capital, L.P., Adv Op Comm T&F, September 4, 1998, TSB-A-98(8)I, it was held
that the activities of the petitioner, Portfolio LP, the Series G LLCs and Series J LLCs constituted
trading for their own accounts pursuant to section 631 and 632 of the Tax Law. Accordingly, the
distributive share of income that M or any of the other M Interests receive as partners of petitioner,
or are deemed to receive, from Portfolio LP (whether directly or indirectly through the petitioner),
from the Series G LLCs and Series J LLCs (indirectly through the petitioner), and/or from petitioner
was not deemed to be attributable to a trade or business carried on in New York State. Therefore,
M and the other M Interests did not have New York source income from these activities under
section 631 of the Tax Law.
Section 605(b) of the Tax Law provides, in pertinent part, that a resident individual means
an individual who is domiciled in New York State, unless the individual maintains no permanent
place of abode in New York State, maintains a permanent place of abode elsewhere and spends in
the aggregate not more than 30 days of the taxable year in New York State.
Section 611(a) of the Tax Law provides that the New York taxable income of a resident
individual is the individual's New York adjusted gross income less the individual's New York
deduction and New York exemptions. Section 612(a) of the Tax Law provides that the New York
adjusted gross income of a resident individual means the individual's federal adjusted gross income
as defined in the laws of the United States for the taxable year, with the modifications specified in
that section.
Section 605(b)(3)(C) of the Tax Law defines a resident trust as follows:
a trust, or portion of a trust, consisting of the property of:
(i) a person domiciled in this state at the time such property was transferred
to the trust, if such trust or portion of a trust was then irrevocable, or if it was then
revocable and has not subsequently become irrevocable ....
Section 105.23(c) of the Personal Income Tax Regulations provides as follows:
[t]he determination of whether a trust is a resident trust is not dependent on
the location of the trustee or the corpus of the trust or the source of income; provided,

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however, no New York State personal income tax may be imposed on such trust if
all of the following conditions are met:
(1) all the trustees are domiciled in a state other than New York State;
(2) the entire corpus of the trust, including real and tangible property is
located outside of New York State; and
(3) all income and gains of the trust are derived or connected from sources
outside of New York State, determined as if the trust were a nonresident.
Issue 1
Petitioner is the managing member of the LLC which is treated as a partnership for New
York State personal income tax purposes. The LLC's activities will be dedicated exclusively for its
own account (1) to manage its assets comprised of monies on deposit in bank accounts outside New
York State which is its working capital, and (2) to use the working capital to trade, for its own
account, stocks, bonds, debt obligations, interest investments such as certificate of deposits, money
market accounts and various other securities and financial instruments some of which will be traded
on public exchanges.
As in Davidson, supra, Singer, supra, and MSD Capital, supra, the LLC's activities of
managing its bank deposits and trading securities for its own account does not constitute the carrying
on of a business, trade, profession or occupation in New York State for purposes of Article 22 of the
Tax Law. Further, as the managing member of the LLC, Petitioner's conduct of such activities
would not be considered to be carrying on a business, trade, profession or occupation in New York
State.
Issue 2
The LLC, which is treated as a partnership for New York State personal income tax purposes,
is not subject to tax under Article 22 of the Tax Law pursuant to section 601(f) of the Tax Law.
Petitioner is a domiciliary of New York State and is a resident of New York City. Therefore,
pursuant to section 605(b) of the Tax Law Petitioner is a resident of New York State.
Accordingly, pursuant to section 601(f) of the Tax Law, the LLC which is treated as a
partnership, is not subject to tax under Article 22 of the Tax Law. However, the LLC has a resident
member, and, pursuant to section 658(C)(1) of the Tax Law, the LLC must file a partnership return
– form IT- 204, for each taxable year setting forth all items of income, gain, loss and deduction and

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such other pertinent information as the Commissioner of Taxation and Finance may by regulations
and instructions prescribe.
Since the LLC's activities of managing its bank deposits and trading securities for its own
account does not constitute the carrying on of a business, trade, profession or occupation in New
York State for purposes of Article 22 of the Tax Law, the LLC does not have income derived from
New York sources, as determined under section 631 of the Tax Law. Therefore, the LLC is not
required to pay the annual filing fee imposed under section 658(c)(3) of the Tax Law.
Petitioner, who is a resident of New York State, must file a resident income tax return – form
IT- 201, for each taxable year, and compute Petitioner's New York taxable income pursuant to
section 611(a) of the Tax Law. Such computation would include the Petitioner's share of all items
of income, gain, loss and deduction derived from the LLC as determined for federal income tax
purposes for the taxable year.
In addition, Petitioner, as a resident of New York City, is also liable for the City of New
York resident tax. The New York City personal income tax is similar to the New York State
personal income tax and is administered by New York State in the same manner as Article 22 of the
Tax Law. Accordingly, it is also computed on form IT- 201.
Issue 3
The Trust is a trust consisting of property of Petitioner who was domiciled in New York State
at the time such property was transferred to the trust, and when the trust became irrevocable.
Accordingly, the Trust is a resident trust of New York pursuant to section 605(b)(3)(C) of the Tax
Law. However, this fact does not, by itself, mean that it is subject to New York State personal
income tax under Article 22 of the Tax Law.
In Charles B Moss Trust, Adv Op Comm T & F, April 8, 1994, TSB-A-94(7)I, it was held
that the situs of intangible assets of a trust are deemed to be at the domicile of the trustee. (See, Safe
Deposit & Trust Co. v Virginia, 280 US 83); Mercantile-Safe Deposit and Trust Company v Murphy,
19 AD2d 765, affd 15 NY2d 579; Taylor v State Tax Commission, 85 AD2d 821, 822.) Further, it
was determined that where the three conditions of section 105.23(c) of the Personal Income Tax
Regulations were met, no New York State personal income tax was imposed on the trust even though
the trust was a New York resident trust pursuant to section 605(b)(3)(C) of the Tax Law. First, the
sole trustee was domiciled in Colorado. Second, the corpus of the trust was located outside of New
York State since it consisted solely of intangibles which are deemed to be located at the domicile of
the trustee. Third, none of the assets of the trust were employed in a business carried on in New
York and all income and gains of the trust were derived from sources outside of New York,
determined as if the trust were a nonresident.

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In this case, the three conditions contained in section 105.23(c) of the Personal Income Tax
Regulations have been met. First, the trustee is domiciled outside of New York State. Second, the
corpus of the Trust consists of intangible assets. The situs of the intangible assets of a trust are
deemed to be at the domicile of the trustee. Therefore, the situs of the corpus of the Trust is deemed
to be outside of New York State. Third, none of the assets of the Trust are employed in a business
carried on in New York State and all income and gains of the Trust were derived from sources
outside of New York State, determined as if the Trust were a nonresident.
Accordingly, the Trust is a New York resident trust. However, for the taxable years that the
three conditions contained in section 105.23(c) of the Personal Income Tax Regulations are met, no
New York State personal income tax is imposed on such Trust for those years. Further, no New
York City personal income tax authorized under Article 30 of the Tax Law is imposed on the Trust
for those taxable years.
Issue 4
The domicile of the Trustee of the Trust does affect the taxable status of the Trust. If the
Trustee is domiciled in New York State, the Trust would not meet the three conditions contained in
section 105.23(c) of the Personal Income Tax Regulations, and the Trust would be subject to New
York State personal income tax. In addition, if the Trustee is a resident of the City of New York,
the Trust would be subject to the New York City personal income tax authorized under Article 30
of the Tax Law. The domicile of the beneficiary does not affect the taxable status of the Trust.

DATED: March 29, 2000

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Division

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