Sobel v. Commissioner of Revenue Services ( 2019 )

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JONATHAN A. SOBEL v. COMMISSIONER
OF REVENUE SERVICES
(SC 20215)
Robinson, C. J., and Palmer, Mullins, Kahn, Ecker,
Vertefeuille and DiPentima, Js.
Syllabus
The plaintiff taxpayer appealed to the trial court from the decision of the
defendant, the Commissioner of Revenue Services, denying the plaintiff’s
protest in connection with the defendant’s denial of state income tax
credits that the plaintiff sought for nonresident income taxes paid to
the state of New York on the distributive share of profits that he received
for managing two limited partnerships. The plaintiff, who resided in
Connecticut but worked in New York, was a member of a limited liability
company, L Co., which served as the general manager for the limited
partnerships. The limited partnerships, which operated as hedge funds
and primarily traded their own stock index options, paid L Co. a share
of their profits for L Co.’s services, and L Co., in turn, allocated to the
plaintiff his distributive share of those profits. In 1997 and 1998, the
plaintiff reported the income he received from L Co. as capital gains
on his New York state income tax returns, paid taxes on that income
to New York, and sought a credit against his Connecticut resident income
taxes for the taxes he paid to New York during those years pursuant
to the statute (§ 12-704 [a] [1]) allowing a resident of this state to receive
a credit against nonresident income tax paid to another state when the
nonresident income being taxed would otherwise be subject to taxation
in Connecticut. The defendant disallowed the credit under § 12-704 (a)
(1), reasoning that the plaintiff’s income must be treated as if it derived
from trading intangible property for his own account because the limited
partnerships were trading their own intangible property and the charac-
ter of the partnerships’ income passed through to the income of their
general partner, and that Connecticut does not tax nonresidents on
income from the trading of intangible property for the nonresident’s
own account pursuant to statute (§ 12-711 [f]). In sustaining the plaintiff’s
appeal, the trial court first determined that, for purposes of § 12-711 (f),
the plaintiff was not trading intangible property for his own account
but was engaging in the trade or business of trading intangible property
owned by others, namely, the limited partnerships. The trial court also
determined that, even if the plaintiff was trading intangible property for
his own account, he nonetheless must be deemed to have been engaged
in a trade or business, pursuant to Moller v. United States (721 F.2d
801), on the basis of the frequency and volume of his trading activity,
which involved millions of transactions and approximately $250 million.
The trial court concluded, on the basis of either of those two grounds,
that the plaintiff would be taxed in Connecticut on such income and,
therefore, that he was entitled to the credits that he sought for the
nonresident income taxes he paid to New York. The defendant appealed,
claiming that the trial court incorrectly concluded that the plaintiff was
not trading intangible property for his own account but, rather, was
engaged in the trade or business of trading intangible property owned by
others. Held that the defendant’s appeal was moot because the defendant
challenged only one of the trial court’s two independent bases for its
determination that the plaintiff was entitled to the income tax credits
he sought, and, accordingly, his appeal was dismissed: the defendant
conceded that he challenged the trial court’s judgment only on the issue
of whether the plaintiff was trading intangible property for his own
account, and, because he did not challenge the alternative ground on
which the trial court based its decision, namely, that, even if the plaintiff
was trading intangible property for his own account, the plaintiff none-
theless was deemed to have been engaged in a trade or business under
Moller on the basis of the frequency and volume of his trading activity,
there existed an unchallenged, independent basis for the trial court’s
decision, and, therefore, there was no relief that this court could afford
the defendant; moreover, this court rejected the defendant’s claim that
the trial court’s determination under Moller did not constitute an alterna-
tive, independent basis for its decision, especially in view of the defen-
dant’s concession in his posttrial brief to the trial court that the plaintiff
could be treated as if he were engaged in a trade or business under
Moller if he was engaged in substantial, daily trading activity.
Argued April 30—officially released November 19, 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).
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 consti-
tutes 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 Con-
necticut 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 Commis-
sioner of Revenue Services (commissioner), disallowed
the credit after conducting an audit. Specifically, the
commissioner concluded that the plaintiff was not enti-
tled to a credit because (1) the plaintiff’s income must
be treated as if it derived from trading intangible prop-
erty for his own account2 because the limited partner-
ships 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) Connecti-
cut does not tax the income of nonresidents from trad-
ing intangible property for their own accounts; see Gen-
eral 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 commis-
sioner 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. Accord-
ingly, 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, there-
fore, appeal is moot [internal quotation marks omit-
ted]). 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 chal-
lenged on appeal. The plaintiff contended in his supple-
mental brief that the appeal is moot. We agree with the
plaintiff that the appeal is moot because the commis-
sioner 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 Liv-
ingston 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 partner-
ships made profits primarily from the trading of United
States treasury bills and stock index options that were
owned by the partnerships. LAM, LLC, received approx-
imately 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 Con-
necticut 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 trad-
ing intangible property for their own accounts, that
income characterization must be passed through to the
plaintiff. See General Statutes § 12-712 (c) (1) (charac-
ter 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) (part-
ner’s income from distributive share has same character
as if income were realized directly from source from
which partnership realized income). Because Connecti-
cut does not tax the income of nonresidents derived
from trading intangible property for their own accounts;
see General Statutes § 12-711 (f); the commissioner con-
cluded 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 deci-
sion 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 omit-
ted]). 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 partner-
ships was derived from the trading of intangible prop-
erty 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 transac-
tions’’); see also Stoller v. Commissioner of Internal
Revenue, T. C. Memo 1990-659, 60 T.C.M. 1554,
1562, T.C.M. (P-H) P90,659 (T.C. 1990) (‘‘[w]hen a tax-
payer, 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 evi-
dence 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 trad-
ers.’’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 plain-
tiff 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 man-
aged approximately $250 million of their money. The
daily frequency and enormous volume of the plaintiff’s
trading activity clearly satisfy the day trading stan-
dards.’’ (Emphasis added.) The trial court thus con-
cluded 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 com-
missioner 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 whether the commissioner had challenged
that independent basis for the trial court’s ruling and,
if not, whether the appeal therefore was moot under
State v. Lester, supra, 324 Conn. 526–27.
The commissioner concedes in his supplemental brief
that he did not challenge the trial court’s conclusion
that the plaintiff was engaged in a trade or business
under Moller in his initial appellate brief. The commis-
sioner contends, however, that the appeal is not moot
because the trial court’s conclusion does not provide
an independent basis for its ruling that the plaintiff was
engaged in a trade or business so as to make his income
taxable in New York. Specifically, the commissioner
contends that the trial court ‘‘could not and did not
conclude that the plaintiff could receive income from
trading for his own account and have that same income
be considered income from property employed in a
trade or business.’’ (Emphasis in original.) As we
explained, however, the commissioner conceded in his
posttrial brief that, even if the trial court concluded that
the plaintiff’s conduct in trading the intangible property
belonging to the limited partnerships ordinarily would
be deemed to be trading for his own account, that same
conduct could be treated as a trade or business if the
court found that the plaintiff had satisfied the Moller
standard, in which case the plaintiff would be entitled
to a credit for the income taxes that he paid in New
York.12 Accordingly, it is entirely unclear to us why the
commissioner now claims that the trial court ‘‘could
not and did not’’ conclude that the plaintiff’s trading
of intangible property should be treated as a trade or
business, even if the conduct ordinarily would be
deemed to be trading for his own account.
To the extent that the commissioner claims that the
trial court had no need to address the Moller issue
because it already had concluded that the plaintiff was
engaged in a trade or business of trading intangible
property belonging to others, it is clear that the court’s
ruling pursuant to Moller was a ruling in the alternative,
which is entirely proper.13 To the extent that the com-
missioner contends that the Moller line of cases is rele-
vant only to the issue of whether the stock index options
were ‘‘property employed in a business, trade or profes-
sion’’ within the meaning of § 12-704(a)-4 (a) (3) of the
Regulations of Connecticut State Agencies;14 (emphasis
added); which the court would not have needed to
address if it had concluded that the plaintiff was trading
intangible property for his own account, that claim is
both illogical and inconsistent with the commissioner’s
position in his posttrial brief to the trial court. Moller,
by its plain terms, provides a standard for determining
whether an individual who is trading intangible property
for his own account nevertheless may be treated as if
he were engaged in a trade or business. Indeed,
although the trial court discussed Moller in the portion
of its memorandum of decision addressing the opera-
tion of § 12-704(a)-4 (a) (3), the court expressly stated
that the Moller line of cases went to the issue of whether
the plaintiff was engaged in a trade or business. It is
also clear that the trial court found that the ‘‘trade
or business’’ in which the plaintiff was engaged under
Moller was trading the intangible property owned by
the limited partnerships. Indeed, the commissioner
does not suggest that the court found that the plaintiff
was engaged in some other trade or business.
The commissioner also contends that, even if the
plaintiff was engaged in a trade or business when he
traded the intangible property owned by the limited
partnerships for purposes of Moller, he still would not
be entitled to a credit because the stock index options
that he traded were not ‘‘property employed in a busi-
ness, trade or profession . . . .’’ Regs., Conn. State
Agencies § 12-704(a)-4 (a) (3). In his posttrial brief to
the trial court, however, the commissioner contended
only that the stock index options were not property
employed in a trade or business because the plaintiff
was not engaged in a trade or business but was trading
intangible property for his own account. On appeal,
the commissioner for the first time cites Michaelson v.
Tax Commission, 67 N.Y.2d 579, 496 N.E.2d 674, 505
N.Y.S.2d 585 (1986), to support his claim that, even if
the plaintiff was engaged in a trade or business, the
plaintiff’s income did not derive from property
employed in the trade or business. In Michaelson, the
New York Court of Appeals concluded that income
derived from an increase in the market value of stock
owned by the nonresident taxpayer between the time
he exercised his option to purchase the stock and the
time the stock was sold was not taxable ‘‘income . . .
from property employed in a business, trade, profes-
sion, or occupation’’; (internal quotation marks omit-
ted) id., 583; but was nontaxable investment income.
Id., 585. There was no claim in Michaelson, however,
that the taxpayer should be deemed to be engaged in
the trade or business of trading stock options, notwith-
standing the fact that he owned the stock options at
issue. Accordingly, we conclude that Michaelson has
no bearing on the present case.
The commissioner also relies on § 12-711(b)-5 (b) of
the Regulations of Connecticut State Agencies, which
provides in relevant part: ‘‘Intangible personal property
is employed in a business, trade, profession or occupa-
tion carried on in this state if such property’s possession
and control have been localized in connection with a
business, trade, profession or occupation in Connecti-
cut, so that the property’s substantial use and value
attach to and become an asset of such business, trade,
profession or occupation. . . .’’ Section 12-711(b)-5 (b)
then provides the following two examples of intangible
property owned by a nonresident being employed by a
business in this state: (1) ‘‘a nonresident pledges stocks,
bonds or other intangible personal property in Connect-
icut as security for the payment of indebtedness
incurred in connection with a business being carried
on in Connecticut by the nonresident’’; and (2) ‘‘a non-
resident maintains a branch office in Connecticut and
an interest-bearing checking account on which the
agent in charge of the branch office may draw checks
for the payment of expenses in connection with the
activities in this state.’’ The commissioner points out
that the circumstances of the present case do not con-
form to either example and, therefore, contends that
Connecticut would not tax a nonresident’s income that
had the same character as the plaintiff’s.
The commissioner fails to recognize, however, that
it follows from the trial court’s conclusion that the
plaintiff must be treated as if he were engaged in a trade
or business—either because he was trading intangible
property owned by others15 or because he must be
deemed to have been trading intangible property for
his own account but satisfied the Moller standard—that
he also must be treated as if he did not personally own
the intangible property that he traded. This is because,
for state income tax purposes, the concepts of operating
a trade or business and trading intangible property for
one’s own account, which is defined as trading one’s
own property; see footnote 2 of this opinion; are mutu-
ally exclusive. Because the plaintiff was deemed not to
own the intangible property, the property could not
be tied to the plaintiff’s domicile in Connecticut; see
footnote 5 of this opinion; and, therefore, income
derived from the property could not be taxed in this
state. Put another way, it was implicit in the trial court’s
ruling that the plaintiff’s trading activities constituted
a trade or business, and the income from those activities
should be taxed in the locale where they took place.
See Regs., Conn. State Agencies § 12-711(b)-4 (a) (1)
(income attributable to business, trade, profession or
occupation carried on in Connecticut is taxable in Con-
necticut).
To the extent that the commissioner contends that
the trial court ‘‘could not and did not’’ conclude that
the plaintiff’s trading activities on behalf of the limited
partnerships constituted a trade or business under
Moller because, under § 12-711(f)-1 (a) of the Regula-
tions of Connecticut State Agencies,16 income from trad-
ing intangible property for one’s own account can never
be treated as income from a trade or business, that
position is also inconsistent with the position that the
commissioner took in his posttrial brief. Specifically,
the commissioner conceded that, if the plaintiff satis-
fied the Moller standard, he could be deemed not to be
trading for his own account, in which case § 12-711(f)-
1 (a) simply would not apply. Although § 12-711(f)-1 (a)
expressly provides that a nonresident’s income from
trading for his own account shall not be included in
his Connecticut adjusted gross income derived from
engaging in a trade or business, it does not expressly
prohibit the commissioner from ever treating income
from trading intangible property for one’s own account
as if it were income derived from a trade or business. In
any event, the argument that this court should conclude
that the trial court’s ruling that the plaintiff was engaged
in a trade or business under the Moller standard was
not an independent basis for its decision because any
such ruling would have been self-evidently incorrect
amounts to a back door attempt to challenge the ruling,
which the commissioner contends he had no reason to
do because the ruling was not an independent ground
for the trial court’s decision in the first instance. Thus,
this argument is circular and constitutes an attempt to
end-run the principle that the failure to challenge an
independent basis for the trial court’s ruling on appeal
renders the appeal moot.17 See State v. Lester, supra,
324 Conn. 526–27.
The commissioner finally contends that the notion
that the trial court’s ruling pursuant to Moller provides
an independent basis for its decision is belied by the
fact that the plaintiff made no claim in his initial appel-
lee’s brief that he could be deemed to be engaged in a
trade or business pursuant to the Moller line of cases,
even if this court concluded that a general partner who
trades intangible property owned by the limited partner-
ships is ordinarily deemed to be trading property on
his own account. We disagree. For the reasons that we
already explained, it is clear to us that the trial court’s
ruling pursuant to Moller provided an independent basis
for its conclusion that the plaintiff was engaged in a
trade or business. Indeed, although the commissioner
expounds at length as to the reasons that he believes
the trial court’s ruling pursuant to Moller did not consti-
tute an independent basis for its decision that the plain-
tiff was not trading intangible property for his own
account but, instead, was engaged in a trade or busi-
ness, he provides no convincing reasons why the trial
court would have had any reason to address Moller if
it did not provide an independent basis for its decision.
Having reached this conclusion, we decline to speculate
as to why the plaintiff did not alert this court to this
alternative ground for the trial court’s ruling in his main
brief. The commissioner has provided no authority for
the proposition that, if an appellee fails to claim on
appeal that the appellant has not challenged an indepen-
dent basis for the trial court’s decision, the reviewing
court may presume either that the appellee believes
that there was no valid independent basis or, if there
was one, that the appellee has waived any reliance on
it. Indeed, we also note that, because mootness impli-
cates the court’s subject matter jurisdiction, it cannot
be waived. See, e.g., Wilcox v. Webster Ins., Inc., 294
Conn. 206, 222, 982 A.2d 1053 (2009).
We conclude that, contrary to the commissioner’s
contention, the trial court’s ruling pursuant to Moller
was an independent basis for its conclusion that the
plaintiff was engaged in a trade or business when he
traded intangible property owned by the limited part-
nerships, and, therefore, the plaintiff was entitled to a
credit for the income tax that he paid in New York.
The commissioner makes no claim that, if this court
concludes that the trial court’s ruling pursuant to Moller
provides an independent basis for the trial court’s deci-
sion, the appeal would not be moot as the result of the
commissioner’s failure to challenge the ruling on appeal
pursuant to State v. Lester, supra, 324 Conn. 526–27.
We conclude, therefore, that the appeal must be dis-
missed as moot.
The appeal is dismissed.
In this opinion the other justices concurred.
1
General Statutes § 12-704 (a) (1) provides: ‘‘Any resident or part-year
resident of this state shall be allowed a credit against the tax otherwise due
under this chapter in the amount of any income tax imposed on such resident
or part-year resident for the taxable year by another state of the United
States or a political subdivision thereof or the District of Columbia on
income derived from sources therein and which is also subject to tax under
this chapter.’’
2
The parties agree that trading for one’s own account means trading
property that one owns.
3
General Statutes § 12-712 (c) (1) provides: ‘‘The character of partnership
or corporation items for a nonresident partner or S corporation shareholder
shall be determined in accordance with section 12-715.’’
4
General Statutes § 12-715 (b) provides in relevant part: ‘‘Each item of
partnership . . . income, gain, loss or deduction shall have the same charac-
ter for a partner . . . as for federal income tax purposes. . . .’’
For federal income tax purposes, ‘‘[t]he character of any item of income,
gain, loss, deduction, or credit included in a partner’s distributive share
. . . shall be determined as if such item were realized directly from the
source from which realized by the partnership, or incurred in the same
manner as incurred by the partnership.’’ 26 U.S.C. § 702 (b) (2012).
5
General Statutes § 12-711 (f) provides: ‘‘Any nonresident, other than a
dealer holding property primarily for sale to customers in the ordinary
course of his trade or business, shall not be deemed to carry on a trade,
business, profession or occupation in this state solely by reason of the
purchase or sale of intangible property or the purchase, sale or writing of
stock option contracts, or both, for his own account.’’ See also Regs., Conn.
State Agencies § 12-711(f)-1 (a) (‘‘[w]here a nonresident individual who is
not a dealer buys and sells property, or buys, sells or writes stock option
contracts, or both, for his or her own account, such nonresident individual
is not deemed to be carrying on a business, trade, profession or occupation
within Connecticut’’).
Income derived from the purchase and sale of intangible property owned
by the taxpayer is sourced to the state of the taxpayer’s domicile because
intangible property has ‘‘no real situs . . . .’’ Greenough v. Tax Assessors,
331 U.S. 486, 493, 67 S. Ct. 1400, 91 L. Ed. 1621 (1947); see id. (‘‘[s]ince the
intangibles themselves have no real situs, the domicile of the owner is the
nearest approximation’’).
6
The commissioner appealed to the Appellate Court, and we subsequently
granted his motion to transfer the appeal to this court pursuant to General
Statutes § 51-199 (c) and Practice Book § 65-2.
7
The plaintiff claims that he became a resident of New York in July, 1998.
See footnote 11 of this opinion. Because this claim has no bearing on the
issue before us, we assume for purposes of this opinion that he was a
resident of Connecticut during the relevant time period.
8
As far as we have been able to determine, the plaintiff did not cite to
the Moller line of cases in the proceedings before the trial court.
9
As we have explained, the commissioner did not rely on the Moller line
of cases to support his position that the plaintiff was trading intangible
property for his own account. Rather, because the application of this line
of cases could only be unfavorable to the commissioner in that it provided
an alternative route to the conclusion that the plaintiff was engaged in a
trade or business, it is reasonable to presume that the commissioner cited
Moller in furtherance of his duty to bring adverse authority to the attention
of the trial court. See Rules of Professional Conduct 3.3 (a) (2) (‘‘[a] lawyer
shall not knowingly . . . [f]ail to disclose to the tribunal legal authority in
the controlling jurisdiction known to the lawyer to be directly adverse to
the position of the client and not disclosed by opposing counsel’’).
10
Thus, the trial court effectively concluded that, even if the commissioner
were correct that the partnerships’ income ordinarily would be considered
to derive from trading intangible property on their own accounts, and even
if the commissioner were correct that that character would pass through
to the plaintiff pursuant to § 12-715 (b) so that the plaintiff ordinarily would
be deemed to be trading on his own account, the volume of trading was
sufficiently regular and substantial to compel the conclusion that both the
partnerships and the plaintiff must be deemed to be engaged in a trade or
business under Moller.
11
The commissioner also challenged the trial court’s ruling that, even if
the plaintiff was not entitled to a credit for the income taxes that he paid
in New York because he was trading intangible property for his own account,
he was entitled to a reduction in his income tax assessment for 1998 because
he became a resident of New York in July of that year. The trial court
apparently believed that it was not required to reach this issue in light of
its conclusion that the plaintiff was entitled to a credit, and it addressed
the issue only in the event that the reviewing court found it necessary to
reach the issue on appeal. In his brief, the plaintiff also characterizes this
claim in his main appellate brief as an ‘‘alternative argument.’’ Accordingly,
because we conclude that the commissioner’s appeal from the trial court’s
ruling that the plaintiff was entitled to a credit must be dismissed as moot,
we need not address the domicile issue.
12
The commissioner stated in his posttrial brief that the fact that the
plaintiff must be deemed under state income tax law to be trading intangible
property for his own account was ‘‘not the end of the analysis, as there are
certain situations in which a general partner may be deemed to be engaged
in a trade or business separate and apart from that of the partnership.’’ The
commissioner then quoted the standard set forth in § 12-711(c)-2 of the
Regulations of Connecticut State Agencies for determining whether an activ-
ity constitutes a trade or business, and noted that, under § 12-711(f)-1 (a)
of the regulations, a nonresident who sells stock option contracts for his
own account is deemed not to be carrying on a business. See Regs., Conn.
State Agencies § 12-711(f)-1 (a) (‘‘[w]here a nonresident individual who is
not a dealer buys and sells property, or buys, sells or writes stock option
contracts, or both, for his or her own account, such nonresident individual
is not deemed to be carrying on a business, trade, profession or occupation
within Connecticut’’). The commissioner stated that, ‘‘[a]ccordingly, other
than trading for one’s own account, a taxpayer will be entitled to a credit
for tax paid to another jurisdiction if the taxpayer maintains an office in
said jurisdiction and systematically and regularly conducts its affairs in said
jurisdiction or conducts its business with a fair measure of permanency and
continuity.’’ (Emphasis added.) The commissioner then observed that, under
the Moller line of cases, a taxpayer who trades intangible property for his
own account and who would, therefore, ordinarily be deemed not to be
engaged in a trade or business, may nevertheless be deemed to be engaged
in a trade or business if the taxpayer engages in ‘‘substantial, daily trad-
ing activity.’’
In his supplemental brief to this court, the commissioner appears to
contend that a conclusion that the plaintiff must be deemed to have been
trading intangible property for his own account is the end of the analysis,
because there are no circumstances under which that activity can be deemed
to be a trade or business under Connecticut law. Although this position is
consistent with the commissioner’s statement in his posttrial brief that the
activity of trading for one’s own account is excepted from the regulatory
standard for determining whether an activity is a trade or business, there
would have been no reason for the commissioner to discuss the Moller line
of cases in this context unless he believed that the cases provided an
exception to that exception. Moreover, that position would be consistent
with the commissioner’s statement in his posttrial brief that a determination
that the plaintiff was trading intangible property for his own account was
not the end of the analysis. Accordingly, although the commissioner’s post-
trial brief is not a model of clarity, the most reasonable reading is that the
commissioner conceded that, even if the plaintiff ordinarily would be deemed
to be trading for his own account when he traded intangible property belong-
ing to the partnerships, if the plaintiff could satisfy the Moller standard, he
could be deemed to be engaged in a trade or business and, therefore, would
be entitled to a credit.
13
In other words, contrary to the commissioner’s suggestion, the trial
court did not conclude that the plaintiff was both trading for his own account
and engaged in a trade or business. Rather, the court concluded that, even
if the commissioner were correct that the plaintiff would ordinarily be
deemed to be trading intangible property for his own account, the income
from which would be taxable in Connecticut, the plaintiff should be deemed
not to be trading on his own account because his trading activities met the
Moller standard for engaging in a trade or business, the income from which
was taxable in New York.
14
Section 12-704(a)-4 (a) (3) of the Regulations of Connecticut State Agen-
cies provides in relevant part: ‘‘[T]he credit is not allowed for tax imposed
by another jurisdiction upon income from intangibles, except where such
income is from property employed in a business, trade or profession carried
on in the other jurisdiction. . . .’’
15
To the extent that the commissioner suggests that the trial court’s
conclusion that the plaintiff’s income did not derive from trading intangible
property for his own account because he was trading intangible property
owned by the limited partnerships did not imply that the plaintiff’s income
derived from a trade or business, he has not explained how, if the plaintiff’s
income derived neither from trading intangible property for his own account
nor from a trade or business, the source of the income should be charac-
terized.
16
Section 12-711(f)-1 (a) of the Regulations of Connecticut State Agencies
provides in relevant part: ‘‘If the nonresident individual is otherwise carrying
on a business, trade, profession or occupation within Connecticut, his or
her income from buying and selling property, or buying, selling or writing
stock option contracts, or both, for his or her own account, shall not be
included in Connecticut adjusted gross income derived from or connected
with sources within this state.’’
17
We note that, because the commissioner conceded in his posttrial brief
that the trial court could conclude that the plaintiff’s trading of intangible
property owned by the limited partnerships constituted a trade or business
if the plaintiff presented sufficient evidence to satisfy the Moller standard,
it would appear that any error by the trial court in applying the Moller
standard was induced by the commissioner, and, therefore, any challenge
to the ruling on grounds other than evidentiary insufficiency likely would
have been unreviewable, even if the commissioner had raised the challenge
in his main appellate brief. See State v. Cruz, 269 Conn. 97, 105, 848 A.2d
445 (2004).
We emphasize that we express no opinion as to whether the trial court
correctly applied the Moller standard to determine the geographical source
of the plaintiff’s income for state income tax purposes. We note that Moller
involved a federal income tax statute that allowed a deduction for business
expenses attributable to the maintenance of an office in the taxpayer’s
personal residence when the office is the ‘‘principal place of business for
any trade or business of the taxpayer.’’ (Internal quotation marks omitted.)
Moller v. United States, supra, 721 F.2d 812. It is far from self-evident that
a standard designed to determine whether a taxpayer who is trading for his
own account is entitled to certain federal income tax deductions that are
available only to a trade or a business may also be used to determine the
source of a taxpayer’s income for state income tax purposes. Regardless
of whether the trial court’s ruling pursuant to Moller was correct, however,
we conclude that the ruling was an independent basis for the trial court’s
decision, and the commissioner did not, and likely could not, challenge the
ruling on appeal.