53 N.Y.2d 580 (1981)

A non-resident partner can deduct their distributive share of partnership losses on their New York State income tax return if the partnership is actively carrying on a business within New York State.

Summary

George Vogt, a New Jersey resident, deducted losses from a limited partnership, Endeavor Car Company, on his New York State non-resident income tax return. The New York State Tax Commission disallowed the deduction, arguing Endeavor’s activities were passive and didn’t constitute a regular business in New York. The court reversed the Commission’s decision, holding that Endeavor’s activities, including arranging financing, acquiring, and leasing railroad tank cars, constituted an active business conducted within New York, thus entitling Vogt to the deduction. The court also rejected the Commission’s reliance on a statement on the partnership’s tax return disclaiming New York sources of loss, finding it a non-binding legal conclusion.

Facts

Endeavor Car Company, a limited partnership, was established in New York in 1968 to purchase and lease railroad tank cars. Endeavor purchased used tank cars from PPG Industries and new tank cars from manufacturers and leased them to PPG. To finance this, Endeavor raised capital and secured long-term debt. Charles A. Lee, Jr., a general partner, directed and supervised the partnership’s activities from his office in New York City. Endeavor kept its books and records at this New York office. The partnership utilized employees of First Boston Corporation on a contractual basis.

Procedural History

The Department of Taxation and Finance issued a notice of deficiency disallowing George Vogt’s deduction of partnership losses. Vogt filed a petition for review, which the State Tax Commission denied. Vogt then initiated a proceeding under CPLR Article 78 to review the Commission’s determination. The Appellate Division confirmed the Tax Commission’s determination. Vogt appealed to the New York Court of Appeals.

Issue(s)

1. Whether there was substantial evidence to support the Tax Commission’s determination that the activities of Endeavor Car Company were passive and did not constitute a regular business activity carried on in New York State.
2. Whether a statement on the partnership’s tax return, disclaiming any connection to New York sources, constituted an admission binding on an individual limited partner regarding their personal income tax liability.

Holding

1. No, because the Tax Commission’s own findings demonstrated that Endeavor’s business activities were actively managed and conducted within New York State, including arranging financing, acquiring assets, and leasing them.
2. No, because the statement was a conclusion of law, not a factual admission, and there was no proof that the general partner was authorized to make such an admission on behalf of the limited partner for purposes of his personal income tax liability.

Court’s Reasoning

The court reasoned that under Section 632 of the Tax Law and related regulations, a nonresident partner’s distributive share of partnership losses is deductible if the partnership carries on a business in New York State. The court found that Endeavor’s activities, directed by Mr. Lee from its New York office, constituted an active business. The court emphasized that the partnership systematically and regularly engaged in arranging financing, acquiring, and leasing tank cars, utilizing personnel and services within New York. The court stated, “Business is carried on within the State if activities within the State in connection with the business are conducted in this State with a fair measure of permanency and continuity.”

Regarding the statement on the partnership’s tax return, the court deemed it a legal conclusion rather than a factual admission. The court emphasized that the statement was made by the partnership, not directly by Mr. Vogt, and there was no evidence that Mr. Vogt authorized the partnership to make such a statement on his behalf for his personal income tax purposes. The court stated, “The conclusory declaration on the partnership returns as to characterization for tax purposes of the net operating loss of the partnership, for whatever purpose or possible advantage there sought, was in no way binding on Mr. Vogt in the computation of his individual personal income taxes.”