If a nonresident leases out a membership (seat) in a New York stock or commodity exchange, or later sells it, is that rental income or sale gain New York source income?

Plain-English summary

James Rhein, then a New York resident, was considering buying one or more memberships ("seats") in a New York stock or commodity exchange and leasing the seat or seats out for income. He expected that at some point after acquiring the seat or seats he would move out of New York while continuing to own them, with the seats not connected to any other New York activity of his. He asked two questions: (1) is rental income from leasing the seat or seats New York source income to him once he becomes a nonresident, and (2) is any gain on a later sale of the seat or seats New York source income?

This document is captioned a "Modified Advisory Opinion." An earlier Advisory Opinion answering the same petition had been issued on September 27, 2005; upon further review, the Department modified that earlier opinion into the analysis set out here. The text does not describe what specifically changed between the two versions - it simply presents the modified analysis as the Department's current answer to Rhein's petition.

Tax Law § 601(e) taxes a nonresident's income derived from New York sources, and § 631(a)-(b) define New York source income to include items attributable to a business, trade, profession, or occupation carried on in New York, plus income from intangible property (which includes an exchange seat) to the extent that property is employed in such a New York business. Under 20 NYCRR 132.4(a)(2), a business is "carried on" in New York when activities here are conducted with a fair measure of permanency and continuity - an occasional or isolated transaction is not enough. Citing the U.S. Supreme Court's decision in New York ex rel Whitney v Graves, 299 US 366 (1937), the Department noted that a stock exchange seat has its "business situs" in New York, meaning any business activity connected with the seat is treated as carried on at the Exchange.

Applying that continuity test, the Department concluded that rental income from a single lease of one or more seats generally is not income from a business carried on in New York, because one lease usually lacks the requisite continuity and regularity. But entering into several leases during the tax year - whether of several seats or repeatedly of just one seat - usually does constitute a trade or business, since that activity would not be merely casual or incidental. The same distinction applies to a sale: gain from selling one or more seats under a single contract of sale is generally not New York source income unless the seat was used in a New York business at the time of sale, but selling seats under several contracts of sale usually does constitute a New York trade or business. The Department declined to decide how Rhein's own eventual activity would be classified, explaining that the continuity-and-regularity determination is a factual question resolved through an audit, not through an Advisory Opinion.

What this means for you

Leasing an exchange seat as a nonresident

If you own a New York stock or commodity exchange seat and become a nonresident, a single lease of the seat generally won't be treated as New York source income because it lacks the continuity of a business carried on in New York. But if you enter into multiple leases over the course of a year - even repeated leases of the same single seat - that pattern usually will be treated as a New York trade or business, making the rental income New York source income taxable to you as a nonresident.

Selling an exchange seat as a nonresident

The same continuity principle governs a sale. Gain from selling one or more seats under one contract of sale is generally not New York source income unless the seat was being used in a New York trade or business at the time of sale. Selling seats under several separate contracts, however, usually will be treated as carrying on a business in New York, which would make the gain New York source income. Because this line-drawing depends on your actual pattern of activity, expect it to be examined on audit rather than resolved in advance.

Common questions

Q: Does a nonresident owe New York tax on rental income from leasing out a single exchange seat?
A: Generally no. A single lease usually lacks the continuity and regularity needed to be a "business carried on" in New York under 20 NYCRR 132.4(a)(2), so the rental income generally is not New York source income under Tax Law § 631(b).

Q: What if the nonresident enters into several leases during the year?
A: That usually is treated differently. Several leases during the tax year - whether of several seats or repeated leases of one seat - usually constitute a trade or business carried on in New York, since the activity would not be casual or incidental, making the rental income New York source income.

Q: Is gain on selling an exchange seat treated the same way?
A: Yes, the same continuity test applies. Gain from one contract of sale is generally not New York source income unless the seat was used in a New York business at the time of sale, while selling under several contracts of sale usually constitutes a New York trade or business.

Q: Why didn't the Department just decide whether Rhein's specific plans would count as a business?
A: Because that determination depends on the frequency, continuity, and regularity of the actual facts, which the Department said must be reviewed on a case-by-case basis in the context of an audit - something outside the scope of an Advisory Opinion under Tax Law § 171(24) and 20 NYCRR 2376.1(a).

Q: What is this opinion's relationship to any earlier ruling on the same petition?
A: The opinion states it is a "Modified Advisory Opinion" that modifies an earlier Advisory Opinion issued September 27, 2005 in response to the same petition, upon the Department's further review. The text does not describe what changed between the two versions.

Citations and references

• Tax Law § 601(e) - imposes personal income tax on the New York source income of nonresidents and part-year residents
• Tax Law § 631(a) - defines New York source income of a nonresident as items of income, gain, loss, and deduction derived from or connected with New York sources
• Tax Law § 631(b)(1) - New York source income includes items attributable to a business, trade, profession, or occupation carried on in New York
• Tax Law § 631(b)(2) - income from intangible personal property is New York source income only to the extent employed in a business carried on in New York
• 20 NYCRR 132.4(a)(2) - a business is carried on within New York when conducted here with a fair measure of permanency and continuity
• New York ex rel Whitney v Graves, 299 US 366 (1937) - a stock exchange seat has its business situs at the Exchange
• Tax Law § 171(24); 20 NYCRR 2376.1(a) - an Advisory Opinion addresses only a specific set of facts, not case-by-case factual determinations reserved for audit

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2005.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a05_5_1i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-05(5.1)I
Income Tax
August 8, 2006

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
MODIFIED ADVISORY OPINION

PETITION NO. I050225B

On February 25, 2005, a Petition for an Advisory Opinion was received from James
Rhein, 52-07 Overbrook Street, Douglaston, New York 11362.
The issues raised by Petitioner, James Rhein, are:

1. Whether the receipt by a nonresident individual of rental income from leasing a
   membership or memberships in a New York stock or commodity exchange constitutes
   New York source income for New York state income tax purposes.
2. Whether any gain on a subsequent sale of such membership or memberships would
   constitute New York source income.
   On September 27, 2005, an Advisory Opinion in response to the Petition was issued.
   Upon further review of the matter, the aforementioned Advisory Opinion is modified as
   hereinafter set forth.
   Petitioner submitted the following facts as the basis for this Advisory Opinion.
   Petitioner is currently a resident of New York State and considering purchasing one or
   more memberships (seats) in a New York stock or commodity exchange and leasing the seat or
   seats to produce a stream of income. It is anticipated that at some point in time after acquiring
   one or more seats, Petitioner will move out of New York State while retaining ownership of the
   seat or seats. The seat or seats will not be connected to any other activity of Petitioner in
   New York.
   Applicable law and regulations
   Section 601(e) of the Tax Law imposes a personal income tax on nonresidents of
   New York State who have New York source income and provides, in part:
   Nonresidents and part-year residents. (1) General. There is hereby imposed for
   each taxable year on the taxable income which is derived from sources in this state of
   every nonresident and part-year resident individual . . . a tax which shall be equal to the
   tax base multiplied by the New York source fraction.
   (2) Tax base. The tax base is the tax computed under subsections (a) through (d)
   of this section, as the case may be, reduced by the credits permitted under subsections (b),

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(c), (d) and (m) of section six hundred six, as if such nonresident or part-year resident
individual . . . were a resident subject to the provisions of part II of this article.
(3) New York source fraction. The New York source fraction is a fraction the
numerator of which is such individual's . . . New York source income determined in
accordance with part III of this article and the denominator of which is such individual's
New York adjusted gross income determined in accordance with part II of this article. . . .
Section 631 of the Tax Law provides, in part:
(a) General. The New York source income of a nonresident individual shall be
the sum of the following: (1) The net amount of items of income, gain, loss and deduction
entering into his federal adjusted gross income, as defined in the laws of the United States
for the taxable year, derived from or connected with New York sources, . . . and
(2) The portion of the modifications described in subsections (b) and (c) of
section six hundred twelve which relate to income derived from New York sources. . . .
(b) Income and deductions from New York sources.
(1) Items of income, gain, loss and deduction derived from or connected with
New York sources shall be those items attributable to:
(A) the ownership of any interest in real or tangible personal property in this state;
or
(B) a business, trade, profession or occupation carried on in this state; . . .
(2) Income from intangible personal property, including annuities, dividends,
interest, and gains from the disposition of intangible personal property, shall constitute
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 this
state. . .
Section 132.4(a)(2) of the Personal Income Tax Regulations (Regulations) provides, in
part:
A business, trade, profession or occupation (as distinguished from personal
services as an employee) is carried on within New York by a nonresident when such
nonresident occupies, has, maintains or operates desk space, an office, a shop, a store, a
warehouse, a factory, an agency or other place where such nonresident=s affairs are
systematically and regularly carried on, notwithstanding the occasional consummation of
isolated transactions without New York State. This definition is not exclusive. Business

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is carried on within New York State if activities within New York State in connection
with the business are conducted in New York State with a fair measure of permanency
and continuity. A taxpayer may enter into transactions for profit within New York State
and yet not be engaged in a trade or business within New York State. If a taxpayer
pursues an undertaking continuously as one relying on the profit therefrom for such
taxpayer=s income or part thereof, such taxpayer is carrying on a business or occupation.
However, see section 132.10 of this Part with regard to the effect of the purchase and sale
of property by a nonresident for such nonresident=s own account.
Opinion
Section 601(e) of the Tax Law imposes a personal income tax on the taxable income
derived from New York sources of a nonresident individual. The tax is equal to the tax
computed as if the nonresident individual were a New York State resident for the entire year,
reduced by certain credits, and then multiplied by the income percentage (i.e., New York source
fraction). The numerator of the fraction used to compute the income percentage is the
nonresident individual=s New York source income; the denominator of the fraction is the
nonresident individual=s New York adjusted gross income from all sources for the entire year.
Section 631(a) of the Tax Law provides that the New York source income of a
nonresident individual is the sum of the items of income, gain, loss and deduction entering into
federal adjusted gross income derived from or connected with New York sources and any
New York addition and subtraction modifications under section 612(b) and (c) of the Tax Law
that relate to income derived from New York sources.
Section 631(b)(1) of the Tax Law provides that income, gain, loss and deduction derived
from or connected with New York sources include those items attributable to 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 property, including annuities, dividends, interest, and gains
from the disposition of intangible personal property, shall constitute 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 this State.
Section 132.4(a)(2) of the Regulations provides that a business is carried on within
New York State if activities within New York State in connection with the business are
conducted in New York State with a fair measure of permanency and continuity. If a
nonresident individual pursues an undertaking continuously in New York and relies on the profit
from the undertaking for all or part of his or her income, the nonresident individual is carrying on
a business or occupation in New York.
New York Stock Exchange seats have been characterized by the United States Supreme
Court as intangible property with a business situs in New York State. See New York ex rel
Whitney v Graves, 299 US 366(1937). The Court noted that:

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[w]hen we speak of a "business situs" of intangible property in the taxing State we are
indulging in a metaphor. We express the idea of localization by virtue of the attributes of
the intangible right in relation to the conduct of affairs at a particular place... [T]he right
may be identified with a particular place because the exercise of the right is fixed
exclusively or dominantly at that place... [T]he localization for the purpose of transacting
business may constitute a business situs quite as clearly as the conduct of the business
itself. Here, we are dealing with an intangible right of a peculiar nature. It embraces the
privilege of a member to transact business on the Exchange as well as a valuable right of
property which is the subject of transfer with the approval of the Exchange and may
survive resignation, expulsion or death... Its very nature localizes it at the Exchange. It is
a privilege which can be exercised nowhere else. The nature of that right is not altered by
the failure to exercise it. . . .
As determined by the United States Supreme Court in Whitney, supra, a New York Stock
Exchange seat has a business situs in New York and it is at such site that a nonresident individual
maintains a membership and from which his or her business affairs are systematically and
regularly carried on.
New York source income of a nonresident individual includes those items attributable to
(1) a business, trade, profession or occupation carried on in New York; and (2) income from
intangible personal property to the extent that such income is from property employed in a
business, trade, profession, or occupation carried on in New York. A business is carried on
within New York State if activities within New York in connection with the business are
conducted in New York with a fair measure of permanency and continuity. The nature of the
activity must have frequency, continuity, and regularity so as to constitute a regular business
activity carried on in New York.
Rental income received by a nonresident individual from entering into a single lease of
one or more seats is generally not considered income from a business, trade, profession, or
occupation carried on in this State. The activity connected with a single lease will usually lack
the requisite continuity and regularity to constitute a trade or business. However, entering into
several leases during the tax year, whether for several seats or just one seat, usually constitutes a
trade or business for purposes of section 631(b) of the Tax Law since the activity would not be a
casual or incidental activity.
In addition, any gain (or loss) from selling one or more seats pursuant to one contract of
sale is generally not New York source income under section 631(b)(2) of the Tax Law unless the
seat or seats are used in a trade or business in New York State at the time of the sale. However,
selling seats pursuant to several contracts of sale usually constitutes a trade or business in
New York State.
The determination of whether Petitioner's activity connected with entering into one or
more leases of a stock exchange seat, or seats, or selling seats pursuant to one or more contracts

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of sale has the requisite continuity and regularity to constitute a trade or business is a question of
fact that must be answered on a case-by-case basis following a careful review of the relevant
facts and circumstances of each case. Inasmuch as any such review of the relevant facts and
circumstances must be conducted in the context of an audit, such determination is not within the
scope of an Advisory Opinion. An Advisory Opinion merely sets forth the applicability of
pertinent statutory and regulatory provisions to "a specific set of facts." Tax Law, §171. Twenty­
fourth; 20 NYCRR 2376.1(a).

DATED: August 8, 2006

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

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