## Facts

- Petitioners were nonresident partners in a multi-office law firm with offices in Washington, D.C., and New York City.
- Petitioners resided and worked in Washington, D.C., but received distributive shares of firm income generated in part by New York operations.
- New York tax authorities issued notices of deficiency for New York State personal income tax and New York City nonresident earnings tax for tax years 1976–1979, attributing part of petitioners’ partnership income to New York sources.
- Petitioners asserted they had relied on prior favorable advice or treatment by a tax official for earlier years indicating nonliability under their reporting approach.
- After administrative proceedings, the State Tax Commission sustained the deficiencies and rejected petitioners’ proposed alternative allocation method.
- Petitioners sought judicial review in an article 78 proceeding challenging the Commission’s determination.

## Issues

1. Whether New York may tax nonresident partners on the portion of their partnership distributive shares attributable to the partnership’s business carried on in New York.
2. Whether the State Tax Commission’s allocation method (and rejection of petitioners’ alternative method) was arbitrary, capricious, or unsupported by substantial evidence.
3. Whether prior advice or prior-year treatment by tax officials estopped the State from asserting deficiencies for later years.
4. Whether the tax assessments, as applied, violated the United States Constitution.

## Decision

- The Appellate Division confirmed the State Tax Commission’s determination and dismissed the article 78 petition.
- The court upheld taxation of the New York-attributable portion of petitioners’ distributive shares as New York-source income.
- The court held the Commission’s allocation approach was not arbitrary or capricious and was supported by substantial evidence.
- The court rejected petitioners’ reliance/estoppel arguments based on earlier communications or determinations for prior tax years.
- The court rejected petitioners’ constitutional challenges.

## Legal Principles

- Nonresidents are taxable on income derived from or connected with New York sources, including the New York-allocable portion of partnership income from a partnership conducting business in New York.
- In review of a tax agency determination, if the decision is supported by substantial evidence and is not arbitrary or capricious, it must be confirmed.
- Estoppel generally does not lie against the State in tax collection based on prior informal advice or prior-year administrative treatment.
- A state may tax a nonresident’s income when there is a sufficient connection between the taxed income and in-state business activity and the allocation method is reasonably related to that in-state activity.

## Conclusion

The court sustained New York State and New York City nonresident tax deficiencies against nonresident law-firm partners for the New York-source portion of their partnership income, deferring to the Tax Commission’s allocation methodology as supported by substantial evidence and rejecting estoppel and constitutional objections.


Matter of Weil v. Chu, 120 A.D.2d 781, 501 N.Y.S.2d 515 (N.Y. App. Div. 3d Dep’t 1986)