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Legal Memorandum: Unincorporated Business Deductions in NY

Issue: Under New York law, must there be a showing of more than participation in business activities for a court to find that a defendant has ‘engaged’ in a particular business and is subject to taxation?

Area of Law: Tax Law
Keywords: Unincorporated business tax; Substantial evidence; Ownership right to the assets of the business
Jurisdiction: New York
Cited Cases: 406 N.E.2d 1335; 453 N.Y.S.2d 802; 67 A.D.2d 1074; 414 N.Y.S.2d 49
Cited Statutes: Code § 11-507(3)
Date: 03/01/2006

Mere participation in business-related activities, without more, does not signify that one is “engaged in” a particular unincorporated business and subject to the tax.  See Welch v. State Tax Comm’n, 89 A.D.2d 683, 453 N.Y.S.2d 802, 803 (3d Dep’t 1982).  To be subject to an unincorporated business tax, there must be substantial evidence that the taxpayer has an ownership right to the assets of the business and to the income from the sale of its assets.  See Gaines v. Tully, 66 A.D.2d 106, 412 N.Y.S.2d 678, 679 (3d Dep’t 1979), aff’d, 49 N.Y.2d 1008, 406 N.E.2d 1335 (1980).  Thus, proprietorship, partnership or some other legal status conferring a right to the assets and income of the business is required.  See id.  The conclusion that only proprietors or partners may be held liable for the tax is buttressed by Code § 11-507(3) which provides that payments to “a proprietor or partner” are not deductible.  Limiting the non-deductibility of payments only to proprietors and partners makes no sense if all participants in the business’s activity are liable for the tax.  Certainly, merely being the wife of a proprietor is not enough.  See Costa v. State Tax Comm’n, 67 A.D.2d 1074, 414 N.Y.S.2d 49, 52 (3d Dep’t 1979). 

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