New York Advisory Opinion TSB-A-88 (15)I: Issue raised is whether income from trading activities is exempt from personal income tax pursuant to section 631(d) of the Tax Law, where a nonresident individual trades a security account under an arrangement with a partnership that does nothing but trade securities for its own account.

Plain-English summary

A nonresident individual made a deal with a partnership whose sole business was trading securities for its own account: the individual would get complete trading authority over a securities account titled in both his own name and the partnership's name, and in exchange he would receive a growing share of the account's net trading profits - starting at 50% and increasing as total profits increased, reported to him annually on Form 1099. The individual (through counsel, Gompers & Blau) argued this arrangement was really a joint venture or joint account: each side contributed something (the partnership its capital, the individual his time and skill), profits were shared in a determinable way, and unwithdrawn profits stayed at risk in the account. On that theory, the individual claimed an ownership interest in the account and asked the Department to treat his share of the profits as his own trading for his own account, exempt from New York personal income tax under Tax Law § 631(d)'s safe harbor for nonresidents.

The Department disagreed and ruled the income taxable. Section 631(d) keeps a nonresident from being treated as carrying on a New York business solely because he buys and sells property (or writes stock options) "for his own account." A nearly identical rule existed under former Tax Law § 703(d), part of the now-repealed Unincorporated Business Income Tax (Article 23, repealed effective December 31, 1982). Interpreting that predecessor provision, the courts in Matter of Swid-Pearlman Management v. Tully and Matter of Wohlreich v. Tully held that a general partnership formed to manage two limited partnerships' pooled investment capital - trading securities and earning a percentage of the resulting capital gains, with no separate commissions, fees, or salary - was not trading for its own account. It was managing investments belonging to others, which the courts treated as the conduct of a taxable business rather than exempt own-account trading, because the general partnership's income was really compensation for investment-management services rendered to the limited partnerships.

The Department found this case "substantially similar" to Swid-Pearlman: the nonresident individual here traded an account funded with the partnership's capital, not his own, and his income was a percentage share of that account's profits - functionally the same as a management fee. Because § 631(d) and former § 703(d) are "almost identical," the Swid-Pearlman/Wohlreich precedent controlled. Regardless of how the parties labeled the arrangement (joint venture, joint account, Form 1099 reporting, the account carrying both names, or unwithdrawn profits being "at risk"), the substance was that the individual was compensated with a profit share for managing capital that belonged to the partnership, not for trading his own capital for himself. That makes the income taxable New York-source compensation for services, not exempt own-account trading gains.

This is a useful contrast to opinions holding that individuals trading their own capital solely for themselves stay outside New York's tax net under section 631(d) - the safe harbor turns on whose capital is being traded and for whose benefit, not merely on how much control or risk the trader personally has. Here, the individual had complete trading authority and bore some risk on unwithdrawn profits, but because the underlying capital belonged to the partnership and he was paid a profit share for managing it, the own-account safe harbor did not apply.

What this means for you

Traders managing someone else's capital for a profit share

If you trade an account that is funded by another person's or entity's capital - even if you have complete trading discretion, the account is titled partly in your name, and your unwithdrawn share of profits is genuinely at risk - your profit share is compensation for investment-management services, not gains from trading your own account. Labeling the deal a "joint venture" or "joint account," or having profits reported to you on Form 1099, does not change that substance-over-form result. As a nonresident, that income is New York-source income if the underlying trading activity is conducted through a New York-based business, and it is not shielded by Tax Law § 631(d).

Partnerships or firms that hire outside traders to run an account

If your firm funds an account and brings in an individual trader to run it in exchange for a percentage of profits, understand that this arrangement does not create own-account trading exemptions for either side just because the trader has full discretion. The relevant question is whose capital is at risk and who is receiving a percentage-of-profits payment for managing someone else's money - the same analysis applied to the general partnership in Swid-Pearlman when it traded pooled limited-partner capital.

Accountants distinguishing genuine own-account trading from compensated account management

When advising a nonresident client who trades securities, look past how the parties structured or documented the deal (joint venture language, dual account titling, 1099 reporting, at-risk unwithdrawn equity) and focus on two facts: whose capital funds the account, and whether the client is being paid a percentage share for managing it. If the capital belongs to someone else and the client is compensated with a profit share, Swid-Pearlman and this opinion indicate the income is taxable service income, not exempt § 631(d) own-account trading gains.

Common questions

Q: If I have complete trading authority and my own money is at risk in the account, doesn't that count as trading for my own account?
A: Not necessarily. This opinion holds that having full trading discretion and bearing some risk on unwithdrawn profits is not enough, if the underlying capital in the account belongs to someone else and you are being compensated with a percentage-of-profits share for managing it. The safe harbor in Tax Law § 631(d) exists for trading your own capital for yourself - not for being paid to manage another party's capital, however much control or risk you personally take on.

Q: Does calling the arrangement a "joint venture" or "joint account" change the tax result?
A: No. The Department looked past the labels the parties used and focused on the substance: the partnership's capital funded the account, and the individual received a percentage share of the account's profits, just like the general partnership in Swid-Pearlman received a percentage of the limited partnerships' capital gains for managing their pooled funds. Calling it a joint venture, titling the account in both names, or reporting the profit share on Form 1099 does not convert compensation for managing someone else's money into exempt own-account trading.

Q: Why does the repealed Unincorporated Business Income Tax matter to a personal income tax question?
A: Former Tax Law § 703(d), part of Article 23 (the Unincorporated Business Income Tax, repealed effective December 31, 1982), contained an own-account trading safe harbor that the Department found "almost identical" to the personal income tax safe harbor in current Tax Law § 631(d). Because the two provisions are nearly the same, the Department applied the courts' interpretation of the older provision in Matter of Swid-Pearlman Management v. Tully and Matter of Wohlreich v. Tully directly to this personal income tax question.

Q: What made the general partnership's trading in Swid-Pearlman a taxable business rather than own-account trading?
A: The general partnership in Swid-Pearlman was formed to serve as general partner for two limited partnerships that pooled their limited partners' capital for investment. The general partnership traded that pooled capital - not its own funds - and earned a percentage of the resulting capital gains, with no separate commissions, fees, or salary. The court held that managing investments or property belonging to others is the conduct of a taxable business: the general partnership's trading was part of its regular investment-management business, and its income was really compensation for services rendered to the limited partnerships, not gains from trading for its own account.

Q: Would the result be different if the nonresident individual had funded the account with his own money instead of the partnership's?
A: Yes, potentially. The Department's analysis turned specifically on the fact that the account was funded by the partnership's capital and that the individual's income was a percentage share of profits generated by managing that capital. Trading genuinely with one's own capital, purely for one's own benefit, is the fact pattern § 631(d)'s safe harbor is designed to protect; trading someone else's capital for a profit share is not.

Citations and references

• Tax Law § 631(d) - a nonresident (other than a dealer) is not deemed to carry on a New York business solely by reason of purchasing or selling property, or stock options, for his own account
• former Tax Law § 703(d) (Article 23, Unincorporated Business Income Tax, repealed effective December 31, 1982) - a near-identical own-account trading safe harbor under the now-repealed unincorporated business tax
• Matter of Swid-Pearlman Management v. Tully, 67 A.D.2d 1022 - a general partnership trading pooled limited-partner capital for a percentage of profits was managing investments of others, a taxable business, not own-account trading
• Matter of Wohlreich v. Tully, 72 A.D.2d 825 - to the same effect as Swid-Pearlman

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_15i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (15) I
Income Tax
September 16, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I880617B

June 17, 1988, a Petition for Advisory Opinion was received from Gompers & Blau, 160
Broadway, New York, New York 10038.
The issue raised is whether income from trading activities is exempt from personal income
tax pursuant to section 631(d) of the Tax Law, where a nonresident individual trades a security
account under an arrangement with a partnership that does nothing but trade securities for its own
account.
A partnership that does nothing but trade securities for its own account entered into an
agreement with an individual who is a nonresident of New York State. The agreement allows the
individual to trade securities in an account over which the individual has complete authority. The
title of the account bears both the name of the partnership and the name of the responsible individual.
The agreement states that the individual's share of net trading profits generated by the trading in the
account is initially 50%, and increases as the total earned increases. The individual's share of the
profits is reported to him at the end of each year on a Form 1099.
Petitioner feels that the arrangement between the partnership and the individual is a joint
venture for the following reasons:
(a)

Each party contributes something to the venture; the partnership, capital, and the
individual, time and skill.

(b)

The fruits of the venture are to be shared in a determinable manner with the
individual receiving at least 50% of the profits initially, and more as his success
continues.

(c)

According to the agreement, as profits are generated, neither the partnership nor the
individual may withdraw all of the profits allocable to it/him; but, rather, the profits
accumulate in the account. This unwithdrawn equity is at risk, and can be lost at any
time.

Petitioner also feels that since the arrangement is in the nature of a joint account, it follows
that the individual has an ownership interest in the account:
(a)

He shares directly in his trading success.

(b)

He receives his share of earnings directly from the account.

(c)

He is at risk to the extent that profits earned and not withdrawn can be lost at any time.
Petitioner contends that all of the foregoing indicates that the nonresident individual is

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Income Tax
September 16, 1988
trading for his own account, and is therefore not subject to New York State personal income tax per
section 631(d) of the Tax Law.
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 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.
A similar provision was contained in section 703(d) of Article 23 (Unincorporated Business
Income Tax) of the Tax Law, prior to the repeal of Article 23 effective December 31, 1982. In an
interpretation of former section 703(d), Matter of Swid-Pearlman Management v. Tully (67 A.D.2d
1022), it was determined that when the petitioner, a general partnership, traded the securities of
limited partnerships such trading did not constitute the purchase and sale of property for its own
account and the general partnership was not exempt from the unincorporated business tax. Therein,
the general partnership was formed to serve as the general partner for two limited partnerships. The
two limited partnerships were private investment partnerships in which the limited partners pooled
their capital to be invested for their benefit by the general partner. The general partnership's
activities consisted solely of investing and trading in securities for the benefit of the respective
partners. The general partnership did not buy and sell securities for third parties. It did not earn any
commission or fee income nor did it receive any salary for services. It did receive a percentage of
the net capital gains. The court determined that managing investments or property of others is
considered the conduct of a business and taxable. Further, the general partnership was not investing
its own funds in securities, but rather the capital funds of the limited partners. Since the general
partnership was created to "engage in general investment activities" and serve as general partner of
the two limited partnerships, it is evident that the trading of securities was part and parcel of the
regular conduct of the partnership's "investment management" business. Therefore, the general
partnership's income was derived principally from services rendered for the limited partnerships, and
such trading did not constitute the purchase and sale of property for its own account. (See also
Matter of Wohlreich v. Tully (72 A.D.2d 825))
Clearly, the instant case is substantially similar to Swid-Pearlman. Herein, the nonresident
individual has an agreement with a partnership that the individual will trade a security account
funded by the partnership and the net profits of the account. The general partnership in SwidPearlman was a general partner for two limited partnerships whereby the general partnership traded
an account funded by the limited partnership. The income of the individual, like the general
partnership in Swid-Pearlman is derived from the managing of the trading account. Like the general
partnership in Swid-Pearlman, the individual's income is a percentage of the profits of the account.
Since the circumstances of the instant case are substantially similar to SwidPearlman, and the provisions of section 631(d) and section 703(d) are almost identical,

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Income Tax
September 16, 1988
the precedent set in Swid-Pearlman and Wohlreich should control for purposes of the determination
made herein as well. Therefore, the income the nonresident individual receives from the trading
account is income from the managing of investments on property of others and constitutes income
from services rendered for the benefit of the partnership.
Accordingly, it is determined that the income the nonresident individual receives from the
trading account is not income from trading for the individual's own account and therefore such
income is not exempt from personal income tax under section 631(d) of the Tax Law.

DATED: September 16, 1988

FRANK J. PUCCIA
Director
Technical Services Bureau

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