New York Budget Bill Impact on Nonresident Individual and Corporate Partners Providing Investment Management Services


New York, like many other states, is facing a budget crisis of epic proportions. New York Governor David Patterson's budget bill has sparked much debate, especially with respect to the revenue proposals intended to fill a portion of the budget gap. After much deliberation and three revisions, the New York State Assembly passed a budget bill based on Governor Patterson's proposal (Assembly Bill A9710D) and delivered the budget bill to the Senate July 1, 2010. In hopes of making a dent in the $9.2 billion budget deficit, lawmakers made a particularly aggressive play to tax income of certain investment managers who are not New York residents. Much of this income would not normally be treated as New Yorksource income under current law, and would be taxable, if at all, only in the investment manager's state of residence.

Currently, the investment manager for many hedge or private equity funds participates in the fund through a carried interest. Rather than receiving an explicit management/service fee, the carried interest allows the nonresident member to receive a distributive share of income, gain, loss and deduction from the fund. At the federal level, this distributive share is generally classified as capital gain under current law. For New York income tax purposes, an investment manager's distributive share of fund income, gain, loss and deduction derived from the manager's carried interest is also generally classified as capital gain (passed through from the fund). For a non-New York resident, this gain would not normally be characterized as New York source income. Instead, such gain would typically be sourced to the manager's state of residence.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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