New York Advisory Opinion TSB-H-80(244)I: Is a partnership that trades stocks, options, financial futures, risk arbitrage, and commodities solely for its own account subject to New York's unincorporated business tax?

Plain-English summary

Albert Kutzin described a partnership engaged in various financial transactions - buying and selling stocks, options, financial futures, risk arbitrage positions, commodities, and similar instruments - all solely for the partnership's own account. The partnership had no customers and earned no commission income. Kutzin asked whether this partnership owed New York's unincorporated business tax (UBT).

Tax Law section 701(a) taxes the unincorporated business income of any unincorporated business carried on in New York, and section 703(a) defines that broadly to include a partnership's trade or business. Section 703(d) excludes an individual or unincorporated entity from that definition solely because it buys and sells property (or stock options) for its own account - unless it's a dealer holding property primarily for sale to customers. The regulations add a narrower carve-back: an investor who puts funds into an operating unincorporated business (or similar activity where actively carrying on that business is necessary to realize on the investment) will still be treated as engaged in a taxable business, even if only limited time and effort go into it (20 NYCRR 203.1(b)).

Because the partnership here made all its investments purely for its own benefit, had no customers, and didn't invest in an operating business of the kind the regulation's carve-back targets, the Department concluded it had no UBT liability.

What this means for you

Trading partnerships dealing in stocks, options, futures, and commodities for their own account

If your partnership's only activity is buying and selling financial instruments for its own account - no customers, no commission income - it generally falls outside New York's unincorporated business tax, consistent with the Department's treatment of similar own-account commodity-trading partnerships in other opinions from the same era.

Investors worried the regulatory carve-back might apply

The carve-back in 20 NYCRR 203.1(b) is narrow - it targets investments in an actual operating unincorporated business where running that business is necessary to realize the investment's value, not passive trading of securities, options, or commodities for one's own account.

Accountants advising trading partnerships

Confirm the partnership genuinely has no customers and isn't functioning as a dealer or an active operator of another unincorporated business before relying on the own-account exclusion - either fact would take the partnership outside this ruling's reasoning.

Common questions

Q: Does trading multiple types of instruments (stocks, options, futures, commodities) in one partnership change the own-account analysis?
A: No under this ruling - the exclusion turns on the fact that all trading is for the partnership's own account with no customers, not on which specific instruments are traded.

Q: What would take a trading partnership outside this exclusion?
A: Acting as a dealer holding property primarily for sale to customers, earning commission income from customers, or investing in an operating unincorporated business where actively running it is necessary to realize on the investment.

Q: Is this consistent with how New York treats other commodity- or futures-trading partnerships?
A: Yes - this ruling reaches the same result, on similar reasoning, as the Department's other opinions on own-account commodity and securities trading partnerships from around the same period.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1980.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/h80_244i.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-H-80-(244)-I
Income Tax
August 26, 1980

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION #I800610B

On June 10, 1980, a Petition for Advisory Opinion was received from Albert
Kutzin, 358 Fifth Avenue, New York, New York 10022.
The issue raised is whether a partnership which makes financial investments
for its own account only and has no customers is subject to the New York State
Unincorporated Business Income Tax imposed under Article 23 of the Tax Law.
Petitioner describes a partnership which engages in various financial
transactions consisting of the buying and selling of "stocks, options, financial
futures; risk arbitrage; commodities, etc." All of such trading by the
partnership is solely for its own account. The partnership has no customers and
thus earns no income in the form of commissions.
Section 701(a) of the Tax Law imposes a tax on "...the unincorporated
business taxable income of every unincorporated business wholly or partly carried
on within this state." Section 703(a) of the Tax Law defines the term
"unincorporated business" as "...any trade, business or occupation conducted,
engaged in or being liquidated by an individual or unincorporated entity,
including a partnership or fiduciary or a corporation in liquidation,..." with
certain exclusions not relevant here.
Section 703(d) of the Tax Law provides that any "...individual or other
unincorporated entity, except a dealer holding property primarily for sale to
customers in the ordinary course of his trade or business, shall not be deemed
engaged in an unincorporated business 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..." However, the Unincorporated Business Income Tax
regulations do provide that where there is an investment "...in the purchase of
an operating unincorporated business...or other unincorporated activity of the
type where the carrying on of business is necessary to realizing on the
investment..., even though only a limited amount of time, thought and energy may
be directed to the activity by an individual taxpayer or by the members of a
partnership or other unincorporated entity..."such active involvement in the
conduct of the business or activity just described would render the investor
subject to tax. 20 NYCRR 203.1(b)
Accordingly, a partnership whose activity consists of the making of
financial investments solely for its own account, which has no customers and
which does not carryon business as described in the above-quoted portion of 20
NYCRR 203.l(b) will not be subject to the Unincorporated Business Income Tax
imposed under Article 23 of the Tax Law.

Dated: July 29, 1980

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR