New York Advisory Opinion TSB-A-89 (10)I: Issue raised is whether, under several sets of circumstances, a nonresident individual is subject to tax under Article 22 of the Tax Law when the individual has commodity trading profits or receives dividends from a corporation.

Plain-English summary

Bryan R. Sullivan asked the Department, on behalf of a nonresident commodities trader called "Client A" (a New Jersey resident), whether five different fact patterns would expose Client A to New York Article 22 tax. Client A trades commodities solely for his own account - he is not a dealer or broker - but he is frequently, sometimes daily, on the floor of a New York City exchange executing his own trades. To cut down on high clearing costs, Client A formed Corporation X, a New York corporation he wholly owns (he holds every officer position except vice-president, which is held by another employee). Corporation X leases a Manhattan office and holds four exchange memberships - two titled to Client A personally and two to the vice-president, since a membership can't be registered directly to a corporation - which Client A lets Corporation X use, without charge, to obtain corporate trading privileges. Corporation X's sole business is clearing trades (it doesn't trade for its own account and isn't a futures commission merchant); under CFTC rules it can only clear trades for its own officers and shareholders, and so far it has cleared only Client A's trades, for which he pays it fees. Corporation X elected federal S-corp status but never made a matching New York S-corp election, so it files New York franchise tax returns as an ordinary C corporation.

The Department worked through each scenario. First, even though Client A is on the exchange floor executing his own trades almost every day, and even though he could plausibly argue (citing Commissioner v. Groetzinger, 480 US 23 (1987), where a full-time gambler trading only for himself was still held to be in a federal "trade or business") that his trading is a trade or business for federal purposes and report it on Schedule C, none of that matters for New York. Tax Law § 631(d) provides a safe harbor: a nonresident who is not a dealer is not deemed to carry on a New York business solely by buying and selling property (or stock options) for his own account. Because Client A's profits come solely from trading for himself, his New York tax exposure doesn't depend on how his trading is characterized or reported federally - his trading profits are not NY-source income and are not subject to Article 22 tax.

Second, on dividends: Tax Law § 631(b)(2) makes intangible income like dividends NY-source only when it comes from property employed in a New York business - and a corporation's business is legally separate from its shareholder's, as the Court of Appeals held long ago in People v. American Bell Telephone Co., 117 NY 241 (1889) ("in no legal sense can the business of a corporation be said to be that of its individual stockholders"). Personal Income Tax Regulations § 131.5(a) illustrates the same point: a nonresident who wholly owns a New York corporation pays NY tax on his salary from it, but not on its dividends. Because Corporation X never elected New York S status, it's taxed as its own separate C corporation - so it makes no difference that its office and clearing business are physically in Manhattan, or that its business might later expand to clear trades for Client A's own profit-sharing plan or for unrelated individuals with no ownership stake in the company. Any of those activities remain Corporation X's business, not Client A's personally, so dividends Client A receives from Corporation X are never NY-source income. The one exception the opinion flags: if Client A is ever personally paid for services he performs for Corporation X (as opposed to receiving dividends as a shareholder), that compensation would be NY-source income to the extent the services were performed in New York, under § 631(b)(1)(B) and Regulations § 131.4.

A companion opinion issued to the same petitioner the following year, TSB-A-90(7)I, addressed a related question about leasing extra New York exchange memberships to other clearing corporations.

What this means for you

Nonresident commodities and futures traders active on a New York exchange floor

If your only activity in New York is buying and selling for your own account - even if you're physically present on an exchange floor executing trades nearly every day - the § 631(d) safe harbor keeps that activity from being treated as a New York business, as long as you're not a dealer holding property for sale to customers in the ordinary course of business. That holds true no matter how you characterize the activity for federal tax purposes.

Nonresidents who route trades through a wholly-owned New York clearing corporation

Setting up a corporation to clear your own trades and reduce costs doesn't, by itself, create New York tax exposure on the dividends that corporation pays you - provided the corporation doesn't make a New York S-corp election and is instead taxed as its own separate C corporation. This stays true even if the corporation's clearing business later expands to include your profit-sharing plan or unrelated customers, since that's still the corporation's business rather than yours. But watch the line between a dividend (as shareholder) and compensation for services you personally perform for the corporation - the latter is New York-source income to the extent performed in New York.

Tax preparers advising active traders on Schedule C treatment

A client's decision to report trading activity on Schedule C as a "trader" (rather than as investment expenses on Schedule A) may matter for federal purposes, but it has no bearing on New York nonresident sourcing once the § 631(d) safe harbor applies. Don't assume a federal trade-or-business characterization carries over to New York exposure for a nonresident trading solely for his own account.

Common questions

Q: If I'm on a New York exchange floor every day trading for myself, do I owe New York tax on my profits?
A: Not under this opinion's facts. Tax Law § 631(d) provides that a nonresident (other than a dealer) isn't deemed to carry on a New York business solely by purchasing and selling property, or stock options, for his own account - regardless of how frequently he's physically present in New York doing it.

Q: Does owning a New York corporation that clears my trades make its dividends taxable to me in New York?
A: No, as long as the corporation hasn't elected New York S-corp status and is instead taxed as its own separate C corporation. Under Tax Law § 631(b)(2) and Personal Income Tax Regulations § 131.5(a), a corporation's business is legally distinct from its shareholder's, so dividends paid to a nonresident shareholder are not NY-source income even though the corporation's own business is conducted in New York.

Q: Does it matter whether I report my trading on Schedule C or claim expenses as investment expenses on Schedule A?
A: Not for New York purposes here. Because § 631(d)'s safe harbor already takes the trading activity out of "New York business" status, it's irrelevant whether the activity would be considered a federal trade or business (per Commissioner v. Groetzinger, 480 US 23 (1987)) or how it's reported on the federal return.

Q: What if my New York clearing corporation later starts clearing trades for other people, or for my own retirement plan?
A: That expansion doesn't change the dividend analysis. Whether Corporation X clears only your trades, your profit-sharing plan's trades, or trades for unrelated individuals, that remains the corporation's own business - not yours - so dividends you receive as a shareholder still aren't NY-source income under § 631(b)(2).

Q: Is there any way payments from my New York corporation could become taxable to me in New York?
A: Yes - if you personally perform services for the corporation and receive compensation for them (as distinct from a dividend paid to you as a shareholder), that compensation is NY-source income to the extent the services were performed in New York, under Tax Law § 631(b)(1)(B) and Personal Income Tax Regulations § 131.4.

Citations and references

• Tax Law § 601(e) - computes a nonresident's tax as the as-if-resident tax multiplied by the ratio of New York-source income to federal adjusted gross income
• Tax Law § 631(a) - defines New York-source income for a nonresident
• Tax Law § 631(b)(1) - sources income to New York when attributable to New York real/tangible property or a business, trade, profession, or occupation carried on in New York
• Tax Law § 631(b)(2) - sources intangible income (dividends, interest, gains) to New York only when derived from property employed in a New York business
• Tax Law § 631(d) - safe harbor: a nonresident non-dealer isn't deemed to carry on a New York business solely by trading property or stock options for his own account
• Tax Law § 631(b)(1)(B) - sources compensation for services performed in New York to New York
• Commissioner v. Groetzinger, 480 US 23 (1987) (94 L Ed 2d 25, 107 S Ct 980) - a full-time gambler trading solely for his own account was engaged in a federal trade or business
• IRC § 162 - allows deductions for trade or business expenses
• Personal Income Tax Regulations § 131.5(a) - example holding a wholly-owned New York corporation's dividend, unlike its shareholder's salary, is not NY-source income
• Personal Income Tax Regulations § 131.4 - guidance for sourcing compensation to New York
• People v. American Bell Telephone Co., 117 NY 241, 255 (1889) - a corporation's business is not, in any legal sense, the business of its individual stockholders

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a89_10i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (10) I
Income Tax
February 1, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z880923A

On September 23, 1988, a Petition for Advisory Opinion was received from Bryan R.
Sullivan, 200 E. Randolph Drive, Suite 7750, Chicago, Illinois 60601.
The issue raised is whether, under several sets of circumstances, a nonresident individual is
subject to tax under Article 22 of the Tax Law when the individual has commodity trading profits
or receives dividends from a corporation. Specifically:
(1)

when the individual appears frequently, if not daily, on the floor on a New York City
exchange to execute his own trades;

(2)

when the individual reports his trading activities on Schedule C of his federal income
tax return and reports his business address as either the out-of-state residence or the
address of the New York exchange on which he trades.

(3)

when the individual owns the corporation;

(4)

when the business of the corporation is expanded to clear the trades of the
individual's profit sharing plan; or

(5)

when the business of the corporation is expanded to clear the trades of other
individuals.

Facts
Client A, who is a resident of New Jersey, is a commodities trader. Client A trades solely for
his own account. He does not perform any services as a dealer or broker.
Client A enters into numerous trades for his own account. At one time, he cleared his trades
through various clearing members of commodities exchanges, but the clearing costs were
prohibitively high. In order to reduce those costs, Client A formed Corporation X. The corporation
was incorporated in New York. Client A has always owned 100 percent of the corporation's stock,
and has always held all officer positions except vice-president. Another employee of Corporation
X has always held the vice-president's office. Corporation X leases an office in Manhattan.
Corporation X lists four exchange memberships among its assets. Two of the memberships
are titled in Client A's name, and two of the memberships are titled in the name of Corporation X's
vice-president. Client A actually owns the memberships, and grants Corporation X permission to
use the seats to obtain corporate privileges on the exchanges. Client A receives no payments from

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Corporation X for its use of the memberships. This format is followed because a corporation cannot
register a membership in its own name. A membership must be registered in an individual's name.
The sole business of Corporation X is clearing or processing trades. Corporation X does not
trade for its own account. Furthermore, Corporation X is not a futures commission merchant.
Pursuant to requirements of the Commodity Futures Trading Commission, Corporation X is thus
permitted to clear trades only for its officers and shareholders. To date, Corporation X has cleared
only Client A's trades. Client A materially participates in the trade or business activities of
Corporation X. Client A pays fees to Corporation X for clearing his trades.
Corporation X has elected subchapter S status for federal income tax purposes and has filed
federal subchapter S returns each year. A similar election has not been filed for New York purposes.
Accordingly, Corporation X files New York franchise tax reports as a regular "C" corporation.
Corporation X might in the future distribute dividends to Client A. In addition, Corporation
X might begin to clear trades in addition to Client A's personal trades. Specifically, Corporation X
might begin clearing the trades of Client A's profit sharing plan, as well as the trades of individuals
who have no ownership interest in Corporation X.
Client A is also considering whether to report his individual trading on Schedule C of his
federal return. No income would be reported on Schedule C. Instead, the "other income" line would
refer to a statement which would read as follows:"Taxpayer is a trader and all income is properly
reported on Schedule D and Form6781." Trading expenses would be reported as ordinary and
necessary business expenses on Schedule C, rather than as investment expenses on Schedule A.
Discussion
Petitioner states that Client A is a nonresident individual who has income from intangible
personal property, namely, trading profits from trading commodities for his own account and
dividends from wholly owned Corporation X.
Section 601(e) of the Tax Law imposes a personal income tax for each taxable year on a
nonresident individual's taxable income which is derived from sources in New York State. The tax
is equal to the tax computed as if the individual were a resident, reduced by certain credits and
multiplied by a fraction, the numerator of which is the individual's New York source income and the
denominator of which is the individual's federal adjusted gross income.
Section 631 of the Tax Law provides that:
(a) General. The New York source income of a nonresident individual shall
be the sum of 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 ....

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(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.
....
(d) Purchase and sale for own account. 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.
For federal income tax purposes, it must be determined whether Client A's activities
constitute the conduct of a trade or business. Section 162 of the Internal Revenue Code provides a
deduction for "trade or business expenses". However, the term "trade or business" is not defined in
either the Internal Revenue Code or the Treasury Regulations promulgated thereunder. Historically,
a facts, and circumstances approach has been used in determining when an activity is considered a
trade or business. In 1987, the U.S. Supreme Court found that the offering of goods and services is
not an absolute prerequisite to be considered in a trade or business. In Commissioner v. Groetzinger,
a full-time gambler, who had no other profession or employment and who did not place bets for
others or give tips, but did gamble solely for his own account, was considered to be the equivalent
to a securities speculator by the Tax Court. The Appeals Court affirmed and the Supreme Court
agreed.(94 L. Ed. 2d 25; 107 S. Ct. 980). In Groetzinger, the Supreme Court stated that "[t]o be
engaged in a trade or business, the taxpayer must be involved in the activity with continuity and
regularity and the taxpayer's primary purpose for engaging in the activity must be for income or
profit." Therefore, an individual investor who devotes time to actively trading his own portfolio
could argue that he is engaged in a trade or business, for federal income tax purposes, if he can show
a profit motive.
Generally, when an activity constitutes a trade or business for federal income tax purposes,
such activity would be treated as a trade or business for New York State personal income tax
purposes. However, under section 631(d) of the Tax Law, a nonresident individual who executes
trades for the individual's own account on the floor of a stock exchange in New York City, is not

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deemed to be carrying on a business, trade, profession or occupation in New York State, unless the
individual is a dealer holding property primarily for sale to customers in the ordinary course of the
individual's trade or business.
Herein, Client A is frequently on the floor of a New York City stock exchange executing his
own trades. However, Client A is not a dealer or trader of securities and Client A's trading profits
are derived solely from trading commodities for his own account. Therefore, pursuant to section
631(d) of the Tax Law, it is irrelevant whether or not Client A's activities of trading commodities
for his own account are deemed to be a trade or business for federal income tax purposes and
reported on Schedule C of Client A's federal income tax return. Such activities would not be deemed
to be a trade or business for New York State income tax purposes and such trading profits would not
be subject to tax under Article 22 of the Tax Law.
Section 631(b) of the Tax Law provides that income from intangible property, including
dividends, is income from New York State sources when such income is from property employed
in a business, trade, profession or occupation carried on in New York State. Section 131.5(a) of the
Personal Income Tax Regulations provides the following example:
A, a resident of New Jersey, owns 100 percent of the stock of X
Corporation, which operates a store in New York State. In 1980, the
corporation pays A a salary of $20,000, all of which was earned in
New York State, and a dividend of $2,000. A's income from New
York State sources is his salary of $20,000, since the dividend is not
income derived from New York State sources and thus not taxable for
New York State personal income tax purposes.
Herein, Corporation X is a non-electing S corporation that is subject to tax under Article 9-A of the
Tax Law. The New York State Court of Appeals, in People v. American Bell Telephone Co., 117
N.Y. 241, 255, has stated "[i]n no legal sense can the business of a corporation be said to be that of
its individual stockholders." Therefore, it is immaterial where the business of Corporation X is
conducted or the nature of its activities. The activities of Corporation X do not constitute the
conduct of a business, trade, profession, or occupation of Client A, the sole stockholder. It is
immaterial where the business of Corporation X is conducted or the nature of its activities.
Accordingly, the dividends Client A receives from Corporation X are not subject to tax under
Article 22 of the Tax Law, pursuant to section 631(b)(2) of the Tax Law. It should be noted, that,
pursuant to section 631(b)(1)(B) of the Tax Law, if Client A performs services for Corporation X

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and receives compensation, such compensation would be subject to tax if such services were
performed in New York State. See section 131.4 of the Personal Income Tax Regulations for
guidance in determining the portion of such compensation that is derived from New York State
sources.

DATED: February 1, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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