Sobel v. Commissioner of Revenue Services

          Argued April 30, 2019

         Procedural History

         Appeal from the defendant's assessment of certain personal income tax deficiencies against the plaintiff, brought to the Superior Court in the judicial district of New Britain, Tax Session, and tried to the court, Schuman, J.; judgment sustaining the plaintiff's appeal, from which the defendant appealed. Appeal dismissed.

          Philip Miller, assistant attorney general, with whom were Louis P. Bucari, Jr., and, on the brief, George Jepsen, former attorney general, for the appellant (defendant).

          Jonathan A. Sobel, self-represented, with whom was Jonathan M. Shapiro, for the appellee (plaintiff).

          Robinson, C.J., and Palmer, Mullins, Kahn, Ecker, Vertefeuille and DiPentima, Js.

          OPINION

          VERTEFEUILLE, J.

         This appeal arises from a dispute as to whether the income of a general partner who lives in Connecticut and manages intangible property owned by limited partnerships operating in New York constitutes income derived from trading intangible property for the general partner's own account, in which case it would be taxable in this state or, instead, constitutes income from a trade or business, in which case it would be taxable in New York. The plaintiff, Jonathan A. Sobel, who resided in Connecticut and worked in New York, was a member of a limited liability company that was the managing partner of two limited partnerships that operated as hedge funds. The plaintiff reported his income derived from the two partnerships on his Connecticut tax returns in 1997 and 1998, and sought a credit pursuant to General Statutes § 12-704 (a) (1)^[1] for income taxes that he had paid on the income as a nonresident in New York. The defendant, the Commissioner of Revenue Services (commissioner), disallowed the credit after conducting an audit. Specifically, the commissioner concluded that the plaintiff was not entitled to a credit because (1) the plaintiff's income must be treated as if it derived from trading intangible property for his own account^[2] because the limited partnerships were trading their own intangible property and the character of the partnerships' income passed through to the income of their general partner; see General Statutes §§ 12-712 (c) (1)^[3] and 12-715 (b);^[4] (2) Connecticut does not tax the income of nonresidents from trading intangible property for their own accounts; see General Statutes § 12-711 (f);^[5] and (3) residents of this state are not entitled to a credit for income taxes paid in other states unless Connecticut would tax nonresident income of the same character. See General Statutes § 12-704 (a) (1). The plaintiff then filed a protest against the proposed income tax assessment. The commissioner denied the protest in relevant part. The plaintiff appealed from that denial to the trial court, which, after conducting a trial de novo, concluded on two independent grounds that the plaintiff was not trading intangible property for his own account but was engaged in the trade or business of trading intangible property owned by the limited partnerships. Accordingly, the court concluded that the plaintiff was entitled to a credit for the income tax that he paid in New York. The commissioner then filed this appeal, ^[6] in which he challenged only one of the two independent bases for the trial court's decision. After oral argument, this court, sua sponte, ordered the parties to submit supplemental briefs on the issue of whether the appeal was moot as a consequence of the commissioner's failure to challenge both grounds for the trial court's decision. See, e.g., State v. Lester, 324 Conn. 519, 526-27, 153 A.3d 647 (2017) (‘‘[w]here an appellant fails to challenge all bases for a trial court's adverse ruling on his claim, even if this court were to agree with the appellant on the issues that he does raise, we still would not be able to provide [him] any relief in light of the binding adverse finding[s] [not raised] with respect to those claims, '' and, therefore, appeal is moot [internal quotation marks omitted]). The commissioner contended in his supplemental brief that the appeal is not moot because there was only one basis for the trial court's ruling that the plaintiff was engaged in a trade or business, which he had challenged on appeal. The plaintiff contended in his supplemental brief that the appeal is moot. We agree with the plaintiff that the appeal is moot because the commissioner failed to challenge an independent basis for the trial court's ruling and that the appeal must therefore be dismissed.

         The record reveals the following relevant facts, which were found by the trial court or are undisputed, and procedural history. The plaintiff and his brother, Peter Sobel, were the sole members of a limited partnership, Livingston Asset Management, LLC (LAM, LLC), which acted as the general partner of two limited partnerships, Livingston Asset Management, LP (LAM, LP), and Livingston International Fund, LP (LIF, LP). LAM, LP, and LIF, LP, were hedge funds, and the function of LAM, LLC, was to manage their assets. The limited partnerships made profits primarily from the trading of United States treasury bills and stock index options that were owned by the partnerships. LAM, LLC, received approximately 30 percent of the partnerships' profits, one half of which, in turn, was allocated to the plaintiff.

         In 1997 and 1998, the plaintiff, who resided in Connecticut and worked in New York, ^[7] reported the income that he received from LAM, LLC, as capital gains on his federal and New York income tax returns, and he paid taxes on the income in those jurisdictions. The plaintiff also reported the income on his Connecticut tax return, and he sought a credit pursuant to § 12-704 (a) (1) for the income taxes that he had paid as a nonresident in New York. The commissioner concluded that, because the limited partnerships' profits were derived from trading intangible property for their own accounts, that income characterization must be passed through to the plaintiff. See General Statutes § 12-712 (c) (1) (character of partner's income is determined in accordance with § 12-715); General Statutes § 12-715 (b) (‘‘[e]ach item of partnership . . . income . . . shall have the same character for a partner . . . as for federal income tax purposes''); see also 26 U.S.C. § 702 (b) (2012) (partner's income from distributive share has same character as if income were realized directly from source from which partnership realized income). Because Connecticut does not tax the income of nonresidents derived from trading intangible property for their own accounts; see General Statutes § 12-711 (f); the commissioner concluded that the plaintiff was not entitled to a credit for the income tax that he paid in New York. See General Statutes § 12-704 (a) (1) (Connecticut resident may be allowed credit for income tax paid in another state only if same form of nonresident income would be taxable in Connecticut). The plaintiff then filed a protest against the proposed assessment, which the commissioner denied in relevant part.

         The plaintiff appealed from the commissioner's decision to the trial court pursuant to General Statutes § 12-730, and the trial court conducted a trial de novo. Cf. Leonard v. Commissioner of Revenue Services, 264 Conn. 286, 294, 823 A.2d 1184 (2003) (‘‘[a] sales and use tax appeal taken pursuant to [General Statutes] § 12-422 is a trial de novo'' [internal quotation marks omitted]). In his posttrial brief, the plaintiff contended that he was entitled to a credit for the income taxes that he paid in New York because his income was derived from the trade or business of trading intangible property owned by others, namely, the limited partnerships. The commissioner contended in his posttrial brief that, to the contrary, because the income of the limited partnerships was derived from the trading of intangible property for their own accounts, that character must be passed through to the income of their general partner, LAM, LLC, and, in turn, to the plaintiff's income.

         The commissioner conceded, however, in his post-trial brief that, even if the trial court agreed with him that the plaintiff ordinarily would be deemed to have been trading intangible property for his own account, the plaintiff still could be treated as if he were engaged in a trade or business for state income tax purposes if he was engaged in ‘‘substantial, daily trading activity.'' The commissioner cited Moller v. United States, 721 F.2d 810 (Fed. Cir. 1983), cert. denied, 467 U.S. 1251, 104 S.Ct. 3534, 82 L.Ed.2d 839 (1984), among other cases, in support of this proposition. See id., 813 (‘‘[i]n determining whether a taxpayer who manages his own investments is a trader, and thus engaged in a trade or business, relevant considerations are the taxpayer's investment intent, the nature of the income to be derived from the activity, and the frequency, extent, and regularity of the taxpayer's securities transactions''); see also Stoller v. Commissioner of Internal Revenue, T. C. Memo 1990-659, 60 T.C.M. (CCH) 1554, 1562, T.C.M. (P-H) P90, 659 (T.C. 1990) (‘‘[w]hen a taxpayer, in this case a partnership, is trading solely for its own account, the volume of trading must be very regular and substantial in order to rise to the level of a trade or business''), rev'd in part on other grounds, 994 F.2d 855 (D.C. Cir. 1993), amended, 3 F.3d 1576 (D.C. Cir. 1994).^[8] The commissioner argued that the plaintiff's income could not be treated as if it derived from conducting a trade or business under the Moller line of cases because he had ‘‘not presented any evidence of any trading activity, other [than] his own vague testimony in which he claims he made a lot of trades.''

         The trial court agreed with the plaintiff that he was not trading for his own account but was in the trade or business of trading intangible property owned by others, namely, the limited partnerships. The trial court then observed that, ‘‘[i]n arguing that the plaintiff did not engage in a trade or business, the commissioner relies on a line of federal cases that distinguish[es] between persons trading securities who are investors and persons who engage in that activity as a trade or business, sometimes referred to as traders or day traders.''^[9] (Internal quotation marks omitted.) The court concluded that these cases were ‘‘inapplicable because they all involve persons who were investing their own money or their family's money, '' and the court already had concluded that the plaintiff was in the trade or business of managing property owned by others. The court also concluded, however, that, ‘‘even under the standards urged by the commissioner''-that is, even if the commissioner were correct that the plaintiff had to satisfy the Moller standard to be treated as if he were engaged in a trade or business because a general partner who trades intangible property belonging to the limited partnership ordinarily is deemed to be trading for his own account for state income tax purposes-the plaintiff still must be treated as if he were engaged in a trade or business because he ‘‘commuted every workday to an office where he worked long hours, met with clients and investors, engaged in millions of trades, and managed approximately $250 million of their money. The daily frequency and enormous volume of the plaintiff's trading activity clearly satisfy the day trading standards.'' (Emphasis added.) The trial court thus concluded both that (1) the plaintiff was engaged in the business of trading intangible property belonging to others, and (2) even if he ordinarily would be deemed to have been trading intangible property for his own account because the character of the partnerships' income producing activity passed through to him, he still must be treated as if he were conducting a trade or business under the Moller line of cases. For these reasons, the trial court concluded that the plaintiff was entitled to a credit for the income taxes that he paid in New York.^[10]

         This appeal followed. The commissioner contended in his main appellate brief that the trial court incorrectly determined that the plaintiff was not trading intangible property for his own account but was engaged in the trade or business of trading intangible property owned by others, namely, the limited partnerships.^[11] The commissioner did not, however, challenge the trial court's ruling that, even if the plaintiff ordinarily would be deemed to be trading intangible property for his own account, he still could be deemed to have been engaged in a trade or business under the Moller standard. Accordingly, after oral argument, this court, sua sponte, ordered the parties to submit supplemental briefs on the issues of ...