333 Conn. 712
Conn.2019Background
- Jonathan Sobel, a Connecticut resident, was a member of an LLC (LAM, LLC) that served as general partner/manager of two New York hedge fund limited partnerships (LAM, LP and LIF, LP).
- The partnerships earned profits trading intangible property (treasury bills and stock index options); LAM, LLC received ~30% of partnership profits, half of which were allocated to Sobel.
- Sobel paid New York income tax on his distributive share for 1997–1998 and sought a credit on his Connecticut return under §12-704(a)(1).
- The Connecticut Commissioner denied the credit, reasoning the partnerships traded intangibles for their own account, that character passed through to Sobel, and Connecticut does not tax nonresidents on income from trading intangibles for their own account (§12-711(f)).
- The Superior Court (trial court) ruled Sobel was entitled to the Connecticut credit on two independent grounds: (1) he was engaged in the trade or business of trading intangible property owned by the partnerships (so income sourced to NY), and (2) alternatively, even if deemed to be trading for his own account, his frequency and volume of trading met the Moller standard (substantial daily trading), so he must be treated as engaged in a trade or business.
- The Commissioner appealed but challenged only the trial court’s first ground; the Connecticut Supreme Court held the appeal moot because the Commissioner failed to challenge the independent Moller-based ground and dismissed the appeal.
Issues
| Issue | Sobel (Plaintiff) Argument | Commissioner (Defendant) Argument | Held |
|---|---|---|---|
| Characterization: Is Sobel’s distributive share income treated as trading intangibles for his own account or as income from trading property owned by others? | Sobel: Income derives from managing/trading partnership property (trade/business) so taxable in NY and CT credit allowed. | Commissioner: Partnership income was trading intangibles for the partnership’s own account; that character passes through to Sobel, and CT does not tax nonresidents on such income. | Trial court: found income was from trading partnership-owned intangibles (trade/business); Supreme Court did not reach correctness, dismissed appeal as moot. |
| Alternative Moller theory: If trading were "for his own account," can intensive trading nonetheless be treated as a trade/business? | Sobel: His daily, high-volume trading (millions of trades; ≈$250M) meets Moller standard so he’s engaged in a trade/business. | Commissioner (posttrial concession): If plaintiff showed substantial daily trading, Moller could treat trading-for-own-account as a trade/business; on appeal Commissioner did not contest this ground. | Trial court held Moller standard satisfied; Supreme Court treated this as an independent basis and, because unchallenged on appeal, dismissed appeal as moot. |
| Mootness: Does failure to challenge all independent grounds render the appeal moot? | Sobel: Yes — Commissioner failed to challenge the Moller-based independent ground. | Commissioner: Argued Moller ruling was not an independent basis and thus appeal not moot. | Supreme Court: Appeal is moot under State v. Lester because an unchallenged independent basis remains for the trial court’s judgment; appeal dismissed. |
| Relevance of Connecticut regulations limiting taxation of trading-for-own-account | Sobel: Trade/business finding means intangibles not treated as owned by him, so CT would not tax the income as domiciliary intangible income. | Commissioner: Regulations and §12-711(f) show trading-for-own-account cannot be treated as business income; even if business, options might not be "property employed in a business." | Court: Rejected Commissioner’s arguments as inconsistent with his posttrial positions and trial court’s alternative reasoning; did not resolve broader regulatory scope. |
Key Cases Cited
- Moller v. United States, 721 F.2d 810 (Fed. Cir. 1983) (standard for treating intensive, frequent trading as a trade or business rather than investment activity)
- State v. Lester, 324 Conn. 519 (Conn. 2017) (appeal moot where appellant fails to challenge all independent bases for trial court’s adverse ruling)
- Greenough v. Tax Assessors, 331 U.S. 486 (U.S. 1947) (intangible property has no situs; owner’s domicile governs sourcing)
- Michaelson v. Tax Comm'n, 67 N.Y.2d 579 (N.Y. 1986) (increase in stock value tied to investment, not "property employed in a business")