The New York State Tax Appeals Tribunal ("Tribunal") held that a New York resident was not entitled to a resident tax credit for tax she paid to Connecticut on her carried interest. Matter of Greenberg, DTA No. 829737 (N.Y.S. Tax App. Trib., Nov. 22, 2023).

Facts: Taxpayer was domiciled in New York State and City and filed a New York State resident income tax return for 2014. Taxpayer was a partner in Hildene Holding Company, LLC ("Hildene"), a holding company that had an interest in two hedge funds. The taxpayer received a K-1 from Hildene reporting ordinary income and carried interest, consisting of interest income, dividends, and capital gain received by Hildene from its investments in the funds.

The taxpayer filed a Connecticut nonresident income tax return reporting and paying tax on the ordinary income and carried interest sourced to Connecticut under Connecticut law. For New York income tax purposes, the taxpayer claimed a resident tax credit for the tax she paid to Connecticut on both the ordinary income and the carried interest. The New York Division of Taxation ("Division") agreed that the taxpayer was entitled to a resident tax credit for the ordinary income but denied her the resident tax credit for the carried interest income. The Administrative Law Judge ("ALJ") upheld the denial of the resident tax credit with respect to the carried interest income.

Decision: The Tribunal affirmed the determination of the ALJ. The Tribunal found that amounts distributed to the taxpayer as carried interest retained their character as income from intangible personal property pursuant to the well‑established rule that partnership income retains its character when passed through to partners. The Tribunal noted that a resident tax credit is only allowed for income tax imposed by another state where the income in question is subject to tax in both states and is “derived from” the other state. Under New York Tax Law, intangible personal property constitutes income derived from New York sources for nonresidents only to the extent that such income is from property employed in a business, trade, profession, or occupation carried on in New York. Citing to the Division’s regulation, the Tribunal found that the resident tax credit is generally only allowable to the extent similar income to a nonresident is found to be derived from New York sources and would be subject to tax in New York. The Tribunal noted that in this case, New York would not tax this type of income if received by a nonresident because it would not be determined to have a New York source.

Ultimately, the Tribunal found that the taxpayer failed to show that the intangible assets of the Hildene funds that generated the carried interest income were employed in the conduct of Hildene’s business at all. In fact, the Tribunal noted that the taxpayer had failed to even argue that the intangible assets were employed in a business. Accordingly, the Tribunal determined taxpayer did not meet its burden to establish entitlement to the resident credit.

While the taxpayer did not prevail in this case, the question remains as to whether a similarly situated taxpayer could prevail if it could affirmatively establish that the intangible assets generating the carried interest income were employed in a business in another state.