The New York State Tax Appeals Tribunal upheld an income tax assessment and disallowed taxpayers’ claim of resident tax credits (RTCs) to the extent such RTCs were claimed for taxes paid to Connecticut on the taxpayers’ carried interest income. The taxpayers, both of whom were residents of New York, were employed by an affiliate of two investment hedge funds. Both taxpayers received flow-through investment income in the form of carried interest, consisting of interest income, dividends, capital gains and ordinary business income or loss generated by such hedge funds. During the periods at issue in the case, the taxpayers paid income tax in both Connecticut and New York on all of their carried interest income and each taxpayer claimed an RTC in New York for income taxes paid in Connecticut. The Division of Taxation disallowed the RTCs and issued assessments. The taxpayers’ argued that they were entitled to the RTC because the carried interest constituted income derived from property employed in a business, trade, profession or occupation within another jurisdiction. The Tribunal disagreed, finding that, as an initial matter, the taxpayers had not met their burden in demonstrating that the operations of the hedge funds were solely based in Connecticut rather than New York. In addition, the Tribunal held that the carried interest income was intangible income derived from the trading of intangible property. As a result, the income could not be generated from a business in any jurisdiction and that New York taxed such income based on the taxpayers’ residency in New York. The Tribunal determined that the resulting double taxation in both Connecticut and New York was not a violation of the U.S. Constitution’s Commerce Clause because New York did not tax the intangible income of nonresidents.
