Nonresident partners taxed on 100% of gains derived from sale of New York hotels – three-factor business allocation percentage method disallowed

In the recent decision Ronald K. and Maxine H. Linde, DTA 823300 (May 24, 2012), the Tax Appeals Tribunal (TAT) affirmed an administrative law judge’s (ALJ) decision holding that the New York State Department of Taxation and Finance had properly allocated to New York State the taxpayers’ entire share of partnership income derived from the sale of hotels located in New York.

The taxpayers, who were Arizona residents, were partners in a partnership that owned hotels in several states, including New York. The partnership sold two of its New York hotels and apportioned the gains to New York using the three-factor business allocation percentage – based on percentages of partnership property, partnership payroll and partnership gross income – set forth in 20 NYCRR 132.15 [d], [e], [f]).  The Division determined,  however, that the entire gain should be allocated to New York because the hotels constituted real property located in New York, and therefore the gains were subject to 20 NYCRR 132.16.  That regulation provides that income and deductions connected with the rental of real property and gain and loss from the sale or exchange of real property are not subject to allocation, but are considered as entirely derived from the situs of the real property. The TAT held that the Division’s determination, previously upheld at the ALJ level, was correct.


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