Gaines v. Tully , 412 N.Y.S.2d 678 ( 1979 )

OPINION OF THE COURT

Herlihy, J.

The petitioner, Gaines, owned a New York Stock Exchange (NYSE) seat which, pursuant to the rules of the NYSE and his partnership agreement with the other individual petitioners, he was required to own and make available to the partnership in order to remain a partner. In 1967 he sold the seat and reported the income thereof as his personal income, but the partnership did not report such income for the purpose of the unincorporated business tax.

The record established that the seat was available for partnership purposes as long as Gaines was a member of the partnership and he allowed the partnership to use his seat. In particular, the seat was subject to the claims of creditors and pursuant to the rules of the NYSE, the partnership agreement provided, in part: "[T]he proceeds of his membership shall be deemed an asset of the partnership so far as may be necessary for the protection of the creditors of the partnership.” However, it was also expressly stated in the partnership agreement that the seats “shall nevertheless remain the sole and individual personal properly of the partners to whom they respectively belong.”

The Tax Commission has taken the position that since the seat is subject to use by the partnership, any income (gain) derived from its sale by a partner is income of the partnership subject to the unincorporated business tax. The theory utilized for imposing the tax is that the Federal authorities presently include such income as gross income upon the ground that the loan of the property (seat) to the partnership is a contribution to equity and not simply a loan and that the seat was partnership property (cf. Michtom v United States, 573 F2d 58). Assumming that the seat could properly be considered the property of the partnership for the purpose of allocating the gain on its sale to the partnership, there nevertheless must be substantial evidence to support the finding that it is an asset of the partnership (Matter of Shearson, Hammill & Co. v State Tax Comm. of State of N. Y., 19 AD2d 245, affd without opn 15 NY2d 608).

Analysis shows that the seat, while certainly used in the business of the partnership, was never subject to any ownership control and in particular could not have been sold by the partnership. While the seat was collateral for the protection of all of the partnership’s creditors, the seat was not ever made an asset which the partnership could specifically pledge as a part of its business, nor did it appear on the partnership’s books or balance sheet. While the Federal position may have changed as to the recognition of partnership income and the income from "loaned” assets since the decision in the Shear-son case, there remains no reasonable basis for considering asset gain transactions which do not and cannot inure to the benefit of the partnership as gains attributable to such partnership as its income, where such gains are not in any way attributable to the partnership activity or business.

Finally, the application of the loaned assets doctrine to this case is superfluous as the sale of the asset terminated the partnership interest of the owner. While the proceeds of the sale would inure to the benefit of creditors of the partnership, the proceeds would not in any way belong to the partnership or be subject to its control. Since the proceeds could not in any way be used by the partnership and the contingent liability would run from the former owner of the asset to creditors of the partnership, the gain or loss is not the equivalent of debt-equity assets conversion by any reasonable interpretation. The "loan” of the seat which is relied upon in the dissent is a characterization of the transaction herein, which, to some extent, has a basis in the license to "use” the seat. However, that license or loan was clearly revoked by the sale of the seat as there is nothing to establish an interest of the partnership in the proceeds thereof. To rely upon the power of the Tax Commission to make factual determinations is no substitute for the primary role of finding a reasonable basis for invoking the fact-finding power. Such a basis is lacking in this case.

The petition should be granted, and the determination annulled, with costs.