New York Advisory Opinion TSB-A-88 (11)I: Issues raised are (1) whether the purchase and sale by the Petitioner, for its own account, of futures contracts on commodities, foreign currencies, debt obligations, indexes and eurodollars will cause the Petitioner to be engaged in a business, trade, profession or occupation in New York State within the meaning of Section 631 of the Tax Law and (2) whether the writing, by Petitioner, of options on indexes, foreign currencies, debt obligations and futures contracts and the exercise, closing out or expiration of such options will cause the Petitioner to be engaged in a business, trade, profession or occupation in New York State within the meaning of Section 631 of the Tax Law.

Plain-English summary

Kenneth S. Davidson Partners, a partnership, asked the Department two related questions. First, does the partnership's own-account purchase and sale of futures contracts - on commodities, foreign currencies, debt obligations, indexes, and eurodollars - cause it to be "carrying on a business" in New York under Tax Law section 631? Second, does the partnership's writing of options on indexes, foreign currencies, debt obligations, and futures contracts, and the exercise, closing out, or expiration of those options, do the same? The partnership was not a dealer; it traded these instruments solely for its own account and benefit, not on behalf of customers.

Tax Law section 631 taxes a nonresident partner on the portion of his distributive share of partnership income derived from or connected with New York sources, and New York-source income is attributable to a business, trade, profession, or occupation carried on in New York. But section 631(d) carves out a safe harbor: a nonresident (other than a dealer holding property for sale to customers in the ordinary course of business) is not deemed to carry on a New York business solely by purchasing, selling, or writing stock option contracts for his own account. The legislative history behind section 631 - the 1976 Legislative Annual - explains that the provision was enacted to encourage active trading on New York's exchanges without exposing traders to New York business tax exposure, which is why the original statute (covering stocks and securities) was expanded to also cover stock options.

The Department reasoned that futures contracts and options on indexes, foreign currencies, debt obligations, and eurodollars are traded on New York exchanges in essentially the same manner as the stock options the statute already names. Extending the same safe-harbor treatment to these functionally similar instruments was consistent with the Legislature's goal of encouraging active New York exchange trading, even though futures and index/currency instruments are not literally listed in the statutory text. The Department therefore held that all of the described activities - done solely for the partnership's own account - qualify for the section 631(d) exception, so none of it makes the partnership "carrying on a business" in New York.

The opinion carries one important limitation: the partnership will not be considered to be trading "solely for its own account" if it also engages in other activities such as market-making. If it does, it would be deemed to be carrying on a New York trade or business after all. A later opinion, TSB-A-90(7)I, cited this ruling as the counterpoint illustrating when the safe harbor breaks down if a trading entity also engages in market-making activity.

What this means for you

Investment partnerships trading futures and options for their own account

If your partnership buys and sells futures contracts or writes options on financial instruments purely for its own account - not as a dealer holding these positions for sale to customers - Tax Law section 631(d) shields that activity from being treated as "carrying on a business" in New York, even though futures and index/currency options aren't literally named in the statute. The Department extended the safe harbor to these instruments because they trade the same way, on the same kinds of exchanges, as the stock options Section 631(d) explicitly covers.

Nonresident partners in New York-based trading partnerships

If you're a nonresident partner in a partnership that limits itself to own-account futures trading and options writing of this kind, your distributive share from those activities is not New York-source income under section 631, so it should not be subject to New York personal income tax merely because the partnership trades through a New York exchange or has a New York office.

Accountants distinguishing own-account trading from market-making

The safe harbor in section 631(d) depends entirely on the partnership trading "solely for its own account." The moment a partnership also engages in market-making activities - quoting prices and standing ready to buy or sell to accommodate customer order flow, rather than simply managing its own book - it loses the exception entirely and is deemed to be carrying on a trade or business in New York. When reviewing a trading partnership's activities, confirm there is no market-making component before relying on this safe harbor.

Common questions

Q: Does trading futures contracts and writing options in New York automatically make a partnership subject to New York business tax?
A: No. If the partnership is not a dealer and trades futures contracts and writes options on indexes, foreign currencies, debt obligations, and futures contracts solely for its own account, Tax Law section 631(d) exempts that activity from being treated as carrying on a business in New York, so a nonresident partner's distributive share is not New York-source income on that basis.

Q: What happens if the partnership also does market-making?
A: It loses the safe harbor. The opinion specifically warns that a partnership will not be considered to be trading "solely for its own account" if it also engages in other activities such as market making. If it does, the partnership would be deemed to be carrying on a trade or business in New York, exposing nonresident partners' distributive shares to New York tax.

Q: Why does the safe harbor cover futures and index/currency options when the statute only mentions "stock option contracts"?
A: The Department looked to the legislative history behind section 631, which shows the Legislature's intent was to encourage active trading on New York's exchanges generally, not just in stocks and stock options. Because futures contracts and options on indexes, foreign currencies, debt obligations, and eurodollars are traded in the same manner as stock options, the Department extended the same exception to them to stay consistent with that legislative purpose.

Q: Does this ruling apply to dealers as well as own-account traders?
A: No. Section 631(d) expressly excludes "a dealer holding property primarily for sale to customers in the ordinary course of his trade or business." The safe harbor is only available to a nonresident trading for his or its own account; a dealer's trading activity is not covered by this exception.

Q: Is this ruling binding on other taxpayers with similar trading activities?
A: No. Like all New York Advisory Opinions, it is limited to the facts described by this specific petitioner and binds the Department only as to that petitioner. Other partnerships with similar own-account futures and options trading can look to this opinion as informal guidance, but should not treat it as binding precedent for their own facts.

Citations and references

• Tax Law § 631 - taxes a nonresident partner's distributive share of partnership income to the extent derived from or connected with New York sources
• Tax Law § 631(b)(1)(B) - defines New York-source income as attributable to a business, trade, profession, or occupation carried on in New York State
• Tax Law § 631(d) - excepts a nonresident (other than a dealer) from being deemed to carry on a New York business solely by purchasing, selling, or writing property or stock option contracts for his own account
• New York State Legislative Annual, 1976, p. 339 - legislative history showing Section 631 was enacted to encourage active exchange trading in New York without subjecting traders to New York business tax

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a88_11i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (11) I
Income Tax
June 28, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I880309A

On March 9, 1988, a Petition for Advisory Opinion was received from Kenneth S. Davidson
Partners, 767 5th Avenue, New York, New York, 10153.
The issues raised are (1) whether the purchase and sale by the Petitioner, for its own account,
of futures contracts on commodities, foreign currencies, debt obligations, indexes and eurodollars
will cause the Petitioner to be engaged in a business, trade, profession or occupation in New York
State within the meaning of Section 631 of the Tax Law and (2) whether the writing, by Petitioner,
of options on indexes, foreign currencies, debt obligations and futures contracts and the exercise,
closing out or expiration of such options will cause the Petitioner to be engaged in a business, trade,
profession or occupation in New York State within the meaning of Section 631 of the Tax Law.
Petitioner has described a partnership engaged in the purchase and sale of futures contracts
and writing options on financial instruments. This partnership is not a dealer but is purchasing and
selling futures contracts and writing options on financial instruments solely for the benefit of its own
account.
Section 631 of the Tax Law states, in part, that an individual partner of a partnership who is
a nonresident of New York State is subject to the New York State Income tax on the portion of his
distributive share of partnership income which is derived from or connected with New York sources.
For the purposes of Section 631, income derived from New York sources shall be attributable to a
business, trade, profession, or occupation carried on in this state.(Section
631(b) (1) (B)).
Section 631(d) of the Tax Law provides:
A nonresident, other than a dealer holding property primarily for sale to
customers in the ordinary course of his trade or business, shall not be deemed
to carry on a business, trade, profession or occupation in this state solely by
reason of the purchase and sale of property or the purchase, sale or writing of
stock option contracts, or both, for his own account.
The legislative history of Section 631 provides that it was enacted to encourage active trading
on the exchanges in New York "without concern that such activities might constitute engaging in
a business in this State and thus subject to ... taxes." (New York State Legislative Annual, (1976)
p. 339.) For this reason the original Section 631 was expanded from covering stock and other
securities to include stock options.
The type of activities described by the Petitioner are similar to the writing of stock options.
They are traded in the same manner as the stocks and stock options explicitly referred to in Section

-2­
TSB-A-88 (11) I
Income Tax
June 28, 1988

631. In keeping within the Legislature's intent of encouraging active trading on the exchanges in New
     York, trading activities similar in nature to trading in stock options will be afforded similar treatment
     under Section 631. Accordingly, the purchase and sale by the Petitioner, for its own account, of
     futures contracts on commodities, foreign currencies, debt obligations, indexes and euro dollars and
     the writing, by Petitioner, 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 will
     qualify for the exception from trade or business status set forth in Section 631.
     It should be noted, however, that Petitioner will not be considered to be purchasing and
     selling solely for its own account if it engages in other activities such as market making activities.
     Should Petitioner engage in such other activities, it would be deemed to be carrying on a trade or
     business within the state.

DATED: June 28, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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