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In the Matter for DONALD TRUMP

OCTOBER 11, 1996


In the Matter of the Petition

TAT(H) 93-216(UB)

Tillman, A.L.J.:
Petitioner, Donald Trump, 725 Fifth Avenue, New York, New York
10019, filed, with the Commissioner of the New York City ("City")
Department of Finance (the "Commissioner" or "Respondent"), a
Petition for redetermination of a deficiency of Unincorporated
Business Tax ("UBT") under former Title S of Chapter 46 (now
Chapter 5 of Title 11) of the City Administrative Code (the "Code")
for the tax year ended December 31, 1984 (the "Tax Year").
A hearing was held before the Department of Finance's former
Hearings Bureau on April 29, 1992 and May 28, 1992. Each party
filed a post-hearing brief on July 30, 1992.
On October 1, 1992, jurisdiction over all open cases pending
before the Department of Finance's former Hearings Bureau was
transferred to the Administrative Law Judge Division of the Tax
Appeals Tribunal pursuant to the provisions of sections 168 through
172 of the City Charter, as amended by act of the New York State
legislature on June 28, 1992, Ch. 808, Laws 1992, section 140.
Although this case was transferred by the Commissioner as an open
case within this Tribunal's jurisdiction, the date stamp affixed by
the Department of Finance on the Petition (February 26, 1988)
suggested that the Petition may not have been timely filed.

information concerning the mailing of the Petition. See, Matter of

TBY Four Seasons Fruit & Vegetable Market, Inc., TAT 93-12 (GCT),
93-1 N.Y.T.C. CT-51 (NYC Tax Appeals Tribunal, 1993).
Petitioner produced a photocopy of a receipt for certified
mail (United States Postal Service Form 3800) for Article number
P 275 317 906 (the "Receipt"), which is the same Article number
contained on the envelope in which the Petition was mailed. The
United States postmark date on the Receipt indicates that it was
mailed, and thus timely filed, on February 13, 1988 -- thirteen
days earlier than the date stamp affixed by the Department of
Finance on the Petition.
After it was ascertained that the Petition was timely filed,
Petitioner filed a supplemental brief dated May 3, 1995; Respondent
filed a [supplemental] reply brief, received on May 8, 1995; and
Petitioner filed a supplemental reply brief dated May 15, 1995.
Petitioner appeared by Jack Mitnick, CPA, of Spahr, Lacher &
Sperber. Respondent was represented by Peter Rabinowitz, Milette
Shannon, and Tania Tulcin, Esqs., of the Department of Finance's
Office of Legal Affairs.
I. Whether Petitioner, a joint venturer, is subject to UBT on
the gain realized from the sale of a condominium unit acquired
shortly before sale, at "cost," from his joint venture.

Whether the 25% late filing penalty should be imposed.1

Petitioner also asserted in the Petition that the

Commissioner: (a) miscalculated the amount of the net operating
loss deduction to which he is entitled; and (b) inappropriately
imposed a 10% substantial underpayment penalty.
As neither of
those issues were pursued by Petitioner at the hearing or in his
briefs, Petitioner is deemed to have waived them.

Equitable Life Assurance Society of the United States
("Equitable") and Petitioner (collectively referred to as the
"Venturers") entered in a joint venture agreement, dated January
30, 1980 (the "Venture Agreement") to form the Trump-Equitable
Fifth Avenue Company (the "Venture") to develop a luxury mixed-use
building located at 721-725 Fifth Avenue ("Trump Tower").
purpose of the Venture was to: (a) acquire title to certain land
and existing buildings; (b) demolish the existing buildings; (c)
construct a new building -- Trump Tower -- to be owned in
condominium form; (d) sell residential condominium units therein;
and (e) lease office retail and other commercial condominium space
therein. Venture Agreement section 3.
2. The Venture Agreement states that the respective interests
of the Venturers in the assets, liabilities, profits, gains and
losses of the Venture are equal unless otherwise provided therein.
Venture Agreement section 5.5.
The Venture Agreement granted each of the Venturers
options (the "Options") to purchase certain of the condominiums
units (the "Condominiums") at prices which were designed to
represent their cost to the Venture as defined therein ("Cost").
Venture Agreement section 9. Petitioner's option rights under the
Venture Agreement encompassed approximately two floors of Trump
Tower, whereas Equitable's option rights encompassed approximately
one floor.
4. The overall management and control of the business affairs
of the Venture vested collectively in the Venturers.
Agreement section 10.1.
Equitable was responsible for general administration,
record keeping, and filing and payment of taxes for the Venture.

Venture Agreement section 10.2.

6. Petitioner entered into a "Development, Sales and Leasing
Agreement" and a "Commercial Space Management Agreement" (the
"Service Agreements") with the Venture.
Petitioner's services
under the Service Agreements were to be provided as an "Agent."
Venture Agreement section 12.4. Although the Service Agreements
are referenced in the Venture Agreement (see, Venture Agreement
sections 10.3(ii) and 12.4), and Petitioner was asked to introduce
the Service Agreements into evidence, he failed to do so.
The only witness to testify on behalf of Petitioner as to
what his activities were with respect to the Venture was his
representative and accountant, Jack Mitnick.
8. Mr. Mitnick testified that Petitioner was compensated for
the following services that he performed for the Venture: (a) the
demolition of the preexisting buildings; (b) the construction of
Trump Tower; (c) the promotion and sale of condominium units in
Trump Tower; (d) the rental of commercial condominium units; and
(e) the selling of residential condominium units. Tr. pp. 35 and
9. When asked "[w]ere there any services Mr. Trump performed
[for the Venture] that he did not receive compensation for," Mr.
Mitnick testified: "I think these documents [the Service
Agreements] were an attempt to describe all of the services he was
to perform -- but whether he performed additional duties as a
partner over and above what he got paid for -- I have no way of
knowing." Tr. pp. 38-39.
10. Mr. Mitnick also testified that the "Trump Corporation"
performed sales and advertising services under the Development,
Sales and Leasing Agreement and reported the resulting income in a
City General Corporation Tax return.
Tr. pp. 39-40.

according to Mr. Mitnick's testimony, the Venture paid a

"development fee" directly to Petitioner in his individual capacity
which Petitioner reported as "[personal] income" and which was
[also] "reported [on the Venture's UBT return] as compensation of
a partner. . .;" i.e., which was not deducted on the Venture's UBT
return. Tr. at pp. 38-41.
11. The Venture Agreement provides in section 10.4 that
except as otherwise provided in the Service Agreements, "either
Venturer may engage in any other business. . . . "
On March 12, 1984, Petitioner exercised the Options
granted him to purchase ten Condominiums from the Venture -including Condominium Unit 62-L, 721-725 Fifth Avenue, New York,
New York (the "Condominium").
Petitioner retained ownership of
eight of these ten Condominiums for at least seven years.
purchase price paid by Petitioner for the Condominium pursuant to
the exercise of one of the Options granted him (the "Option") was
$634,648 (the "Exercise Price").
13. On March 31, 1984, nineteen days after he exercised the
Option, Petitioner sold the Condominium for $3,000,000.
14. On the Schedule D attached to Petitioner's Federal income
tax return for the Tax Year, Petitioner reported a $2,365,352
capital gain from the sale of the Condominium (the "Gain"). The
sale of the Condominium was the only direct sale of real property
during the Tax Year by Petitioner that was evinced in the record.
The record indicates that much of Petitioner's other real estate
activities were conducted through related entities, particularly
15. Petitioner filed a City UBT return for the Tax Year (the
"Return") in which he reported his principal business activity as
"consulting." The Return reported negative taxable business income

of $619,227. Schedule C of Petitioner's Federal personal income

tax return (Form 1040), upon which the Return was based, indicates
that Petitioner had total deductions of $626,264,2 even though he
had no income or receipts from his business activity.3
16. The face of the Return indicates that Petitioner signed
representative, Mr. Mitnick, signed the Return as its preparer, on
October 11, 1985. Although Mr. Mitnick never disputed that the
preparer's signature on the Return was his, he testified at the May
28, 1992 hearing session that "we did not" prepare Petitioner's
1984 tax returns and that he did not know who had prepared them.
Tr. p. 29.
17. Respondent audited the Return and concluded that the Gain
was from an unincorporated business conducted in the City. The
auditor consequently increased Petitioner's unincorporated business
taxable income for the Tax Year to $1,384,759.
18. Respondent
Petitioner, dated November 18, 1987, asserting a UBT deficiency of
The deficiency is comprised of $55,390.36 of tax,
$12,916.58 of interest,4 and $19,386.63 of penalties consisting of
a 25% late filing penalty and a 10% understatement penalty (which
was imposed under former Code section S46-29.O(j) (now 11-525(j))
because the deficiency determined by the Commissioner exceeded the
greater of $5,000 or 10% of the tax that the Commissioner
determined was required to be shown on the Return.

The amount of these deductions as appearing on the Federal

returns were modified pursuant to City law on the Return.

The record does not explain how Petitioner had significant

expenses without any concomitant income from his consulting

Computed through November 18, 1987.


19. On February 13, 1988, Petitioner timely filed a Petition

for Hearing.
20. Mr. Mitnick asserted that a proper application for an
automatic extension of time to file the Return (an "Extension
Request")5 had been filed with the Return and would be found
attached to it.6 Respondent's representative, however, could not
produce the original Return at the hearing -- as only a photocopy
of the Return was contained in the audit workpapers. Unable to
produce the original Return during the hearing, Respondent's
representative made the following stipulation at the May 28, 1992
hearing session: If, by June 18, 1992, he had located the original
Return and it did not contain an Extension Request, he would
provide Petitioner with a copy of the original Return; but if, by
that date, he could not locate the original Return or if he located
it and it contained an Extension Request, he would "withdraw the
penalty." Tr. pp. 44 and 48-49.7
At the close of the May 28, 1992 hearing session, I stated

Former Regulation section 18-3(b) (now 19 RCNY section 2818(c)(2)) provides for an automatic six month extension of time to
file a UBT return, provided that a Form NYC-62 (Application for
Automatic Extension of Time to File for Individuals, Estates and
Trusts) is filed and a properly estimated tax is paid on or before
the due date of the return for the taxable period for which the
extension is requested.

Mr. Mitnick was unable to produce a photocopy of the

Extension Request.

Respondent did not assert that, even if Petitioner had been

able to demonstrate that he had timely filed an Extension Request,
the request would nonetheless have been invalid under former
Regulation section 18-3(b) (now 19 RCNY section 28-18(c)(2)) since
less than 90% of the tax, as finally determined, would have been
paid with that request.

. . . this case will be closed . . . however we will

leave the record open . . . [until June 18, 1992]8 to
allow the City the time to locate its [the Petitioner's]
original tax return as per [the] stipulation that was
entered into earlier on the record.
Tr. pp. 48-49
[emphasis added].
By transmittal letter dated July 24, 1992 (which
mistakenly lists the year as 1994 instead of 1992), another of the
Commissioner's representatives produced the original Return -which did not have an Extension Request attached to it -- and
requested that it be entered into evidence.
No request was ever
made to extend the June 18, 1992 date set at the hearing for the
production of the original Return and the close of the record.
Respondent asserts that Petitioner received the Option in
exchange for management services rendered by him to the Venture and
that the resultant Gain is therefore subject to the UBT.
Respondent alternatively argues that it is "common knowledge that
Trump [Petitioner] was involved in a large number of real estate
sales during the early 1980's" and that therefore: (1) he was a
real estate dealer, and (2) the Condominium was held by him
primarily for sale to customers in the ordinary course of his trade
or business. Finally, Respondent asserts that both the late filing
and substantial underpayment penalties were properly imposed.
Petitioner admits that he "provided management services to the
Partnership [Venture]." Petitioner's supplemental reply brief
p. 1. However, he asserts that since the Venture was subject to
UBT, "any compensation to Trump [Petitioner] would be subject to
tax at the Partnership level." Petitioner further asserts that he

Originally the date was set at "three weeks," but after Mr.
Mitnick requested a date certain, I chose June 18, 1992, to which
the Commissioner's representative agreed.

cannot be taxed on the Gain as a dealer since: (1) he did not have
an established place of business and regularly engage in the
purchase and resale of condominiums, and (2) the dealer status of
the Venture should not be attributed to him personally as a partner
therein. Finally, Petitioner argues that "Respondent stipulated
that it would withdraw the penalty if Respondent was unable to
produce the original return on or before June 18, 1992 (Tr. 44).
The original [Return] not having been produced by such date, the
penalties were withdrawn." Petitioner's supplemental reply brief.9
An unincorporated business engaged in a trade, business,
profession or occupation wholly or partially carried on in the
City, whether conducted by an individual, partnership, or other
unincorporated entity, is subject to the UBT on its unincorporated
business taxable income. Former sections S46-2.0(a) and S46-3.0(a)
(now sections 11-502(a) and 11-503(a)) of the Code.
Petitioner asserts that he should not be subject to the UBT
because the Venture was subject to UBT and any compensation paid to
him is therefore subject to UBT at the Venture's level. Petitioner
thus appears to be suggesting that because the Venture cannot
deduct payments made to partners under former section S46-6.0(3)
(now section 11-507(3)) of the Code, double taxation would ensue
if he were to be taxed on his compensation from the Venture.
To buttress his argument, Petitioner argues that in all the
cases cited by Respondent (where a separate UBT tax was imposed on
a partner who performed services for a partnership of which he was

Although Petitioner refers to "penalties," the stipulation

concerned only the late filing penalty. As indicated in Footnote
1, supra, Petitioner made no claim at the hearing or in his briefs
that the substantial underpayment penalty should not be imposed
provided the Gain is found to be taxable.

a member) the partnerships were exempt from the UBT and, thus, only
one level of tax was imposed at the partner level.
Operating Company v. State Tax Comm., 79 A.D.2d 780 (3d Dpt. 1980);
Swid-Pearlman Management v. Tully, 67 A.D.2d 1022 (3d Dpt. 1979).
See also, Clement J. Wohlreich et al. v. Tully., 72 A.D.2d 825 (3rd
Dpt. 1979); Aaron Elkind v. State Tax Comm., 63 A.D.2d 789 (3d Dpt.
The Code, though, provides a mechanism to avoid double
taxation under the UBT, at least with respect to a service
partner's distributive share income. That mechanism is the former
additional exemption (allowed by former section 11-510(2) of the
Code) or the current credit (allowed by Code section 11-503(j)(1)).
However, the problem at issue is not one of double taxation,
but of no taxation. Because the Condominium was sold by Petitioner
and not the Venture, the Gain cannot be taxed to the Venture.10
Therefore, if Petitioner is correct that he is not taxable on the
Gain, the income realized from highly appreciated inventory
property extracted from the Venture only days before its sale would
escape all taxation under the UBT.11
The Appellate Level of this Tribunal has held that a partner
that provides management services to its partnership is engaged in
a trade or business for UBT purposes.
Matter of 680 Realty

No assertion has been made that the sale was negotiated by

the Joint Venture prior to Petitioner's exercise of the Option -in which event, an argument might have been made that the Gain
should be imputed to the Venture under the doctrine set forth in
Commissioner v. Court Holding Co., 324 U.S. 331 (1945). Moreover,
even though the sale of the Condominium by Petitioner occurred
nineteen days after Petitioner purchased the Condominium from the
Venture, Petitioner had been granted the Option to purchase the
Condominium several years earlier.

Had the Venture not granted the Option, but instead sold
the Condominium and distributed the gain to Petitioner, the Venture
would have realized income subject to the UBT.

Partners and CRC Realty Capital Corp., TAT(E) 93-256(UB) and TAT(E)
95-33(UB), 96-1 N.Y.T.C. CT-61 (1996).12
Petitioner admits, on
page 1 of his supplemental reply brief, that: "Trump provided
management services to the Partnership [Venture]." Petitioner's
accountant testified that Petitioner received payments for
development services provided to the Venture which he took into
income for personal income tax purposes. By virtue of the provision of such services to the Venture, Petitioner is found to have
been engaged in a taxable trade or business for UBT purposes.13
The next question is whether -- as Respondent asserts -Petitioner received the Option in exchange for services rendered
to the Venture as part of his trade or business. Petitioner
does not dispute this assertion. Nor can a contrary finding
be reached given the paucity of the record14 resulting from
Petitioner's failure: (1) to introduce the Service Agreements into
evidence -- as was specifically requested;15 (2) to testify with

680 Realty (which Petitioner does not address even though

the Administrative Law Judge determination which it affirmed was
referenced several times in Respondent's supplemental reply brief)
also involves a partnership which was exempt from UBT.

Under the UBT, all trade or businesses must be combined and

treated as a single trade or business.
See, former section
S46.2.0(a) (now section 11-502(a)) of the Code.

See, 680 Realty, supra. There, the taxpayer argued that

"interest income" was not income accrued on loans and advances made
to the partnership for its business operations but was its unpaid
distributive share amount; i.e., was related to capital that it
contributed to the partnership. In the absence of any testimony or
documents in the record to support such a conclusion, however, the
Appellate Level of this Tribunal sustained the Administrative Law
Judge's finding that the "interest income" was connected with the
taxpayer's trade or business of providing services to its

Agreements contemporaneously entered into by partners

should be viewed together. Without the Service Agreements in the
record (which are referenced in the Venture Agreement), it cannot
be ascertained what manner and amount of compensation Petitioner
received for the services he personally rendered to the Venture.

respect to the nature of the services that he provided the Venture;

and (3) to have anyone else testify who had actual knowledge of
what services he provided the Venture.16 The Option is therefore
found to have been granted to Petitioner in his trade or business
of providing services to the Venture.17
As the compensation given in exchange for services was not the
Gain but was instead the grant of the Option, the next questions
are: (1) whether the grant of the Option was taxable; and, if not,
(2) whether the Gain realized from the sale of the Condominium
nonetheless constitutes income from Petitioner's trade or business.
Petitioner reported income on the Option only when the underlying property -- the Condominium -- was sold. Thus he treated
the granting of the Option as a non-taxable transaction between a

Mr. Mitnick was Petitioner's only witness. Mr. Mitnick

indicated that he was fully familiar with the relevant tax returns
(Tr. p. 23) and that he had seen the relevant documents relating to
Trump Tower (Tr. p. 19).
Mr. Mitnick's testimony, however,
suggests that -- separate and apart from the information provided
in the tax returns, Venture Agreement, and Service Agreements -- he
lacked personal knowledge as to how the Venture operated, what
services Petitioner performed for the Venture in his individual
capacity, and how Petitioner was compensated for those services.
For example: (a) when asked whether Petitioner performed additional
duties as a partner over and above what he got paid for, Mr.
Mitnick replied: "I have no way of knowing" (Tr. pp. 38-39); and
(2) when asked repeatedly why Petitioner received a greater portion
of the Options than did Equitable, Mr. Mitnick failed to provide an

Respondent asserts that because Petitioner and Equitable

"each owned the same interest in the partnership [the Venture]" and
Petitioner received more Options than Equitable, the Option was
granted in exchange for services. This conclusion is questionable.
The provision in the Venture Agreement which indicates that there
was to be an equal profit split, expressly states that it is
subject to other provisions in that agreement -- such as the
provision granting the Excess Options.
Thus, effectively, the
Venture Agreement grants each Venturer a 50% profits interest in
those Condominiums not subject to the Options and a 100% profits
interest in those Condominiums as to which that Venturer held an

partnership and partner acting in the capacity of a partner.18 Such

treatment is respected for purposes of this determination.
With regard to the question of whether the Gain constitutes
income from Petitioner's trade or business, there is no indication
that Petitioner did not hold or exercise the Option as part of the
unincorporated trade or business pursuant to which they were
granted. The Gain therefore is found to be connected with that
trade or business and is thus subject to the UBT. See, former
Reg. sec 2-7(a) (now 19 RCNY section 28-02(g)):
"Where the
purchase and sale of real or personal property is connected with an
unincorporated business otherwise regularly carried on by the
individual or entity, the profits and income from such purchases
and sales will ordinarily be includible in the unincorporated
business gross income of the individual or other entity."
This result is in keeping with the purpose of the UBT since
Petitioner was, along with Equitable, responsible for the overall
management and control of the Venture: Petitioner performed
significant services for the Venture; Petitioner's services helped
give rise to the significant appreciation that was inherent in the
value of the Venture's inventory; and Petitioner received a direct
economic benefit from that appreciation when he exercised the
Option and sold the Condominium.19


Had Petitioner been granted the Options for services

rendered other than as a partner, he would have been taxable on the
full value of all the Options on their grant or on their exercise,
depending upon whether the Options had a "readily ascertainable
fair market value" when they were granted. See IRC sections 707(a)
and 83(a). Instead, Petitioner apparently treated the grant of the
Option (presumably under IRC section 731(a)) as a nontaxable
transfer of intangible property between a partnership and a partner
acting in his capacity as a partner.

As a result of this holding, there is no need to decide the

issues of: (a) whether Petitioner is by virtue of his own
activities a dealer in real property; and (b) whether Petitioner,
by virtue of his being a Venturer in the Venture which was a dealer

Petitioner next asserts that Respondent has withdrawn the 25%

late filing penalty asserted under former section S46-29.0(a)(1)
(now section 11-525(a)(1)(A)) of the Code because Respondent failed
to timely submit the original Return within the prescribed period
set forth in the stipulation at hearing; i.e., June 18, 1992.
Respondent, however, has not formally withdrawn the penalty. To
the contrary, Respondent continues to assert (in his [supplemental]
reply brief received on May 8, 1995) that he appropriately imposed
that penalty.
Petitioner is correct that Respondent's representative did
enter into a stipulation at hearing that Respondent would withdraw
the late filing penalty unless, by June 18, 1992, Respondent was
able to produce, for the record, the original Return. Respondent
never requested an extension of that June 18, 1992 submission
period and thus the record closed as of that date without the
submission of the required original Return which indicated that no
Extension Request had been timely filed.
Respondent submitted the original Return after the date set in
the stipulation without any explanation why the stipulation -- the
agreement his representative entered into -- should not be
enforced. Parties must be bound by the representations that they
make to this forum absent a compelling reason to the contrary. As
no such compelling reason was provided, the stipulation will be
enforced. Respondent is therefore deemed to have waived the late
filing penalty.

in real property, should be deemed to be a dealer in real property

for the purposes of taxing appreciated inventory property that he
received from the Venture and sold in his individual capacity.


A. Petitioner was engaged in a taxable trade or business by
virtue of having provided management and development services to
the Venture;
B. Petitioner received the Option in exchange for services
rendered to the Venture as part of his trade or business;
C. As Petitioner held and exercised the Option as part of his
unincorporated trade or business, the Gain was connected with that
trade or business and is subject to the UBT;
As the record was closed prior to the submission by
Respondent of the original Return, the Return cannot be marked as
an exhibit and entered into evidence; and
Since Respondent specifically stipulated that he would
withdraw the late filing penalty if he were unable to timely
produce and thus submit into the record the original Return, by
virtue such agreement, Respondent is deemed to have waived the late
filing penalty.
The Petition of Donald Trump is denied except to the extent
that the deficiency asserted in the Notice of Determination,
dated November 18, 1987, is to be modified to eliminate the 25%
late filing penalty.

October 11, 1996

New York, New York

H. Gregory Tillman
Administrative Law Judge and