MURPHY & O'CONNELL, PATRICK J. MURPHY AND KATHLEEN …archive.citylaw.org/tat/2000/931768det0500.pdf · 4 3. Murphy & O’Connell, Patrick J. Murphy, and Kathleen M. O’Connell each

MURPHY & O'CONNELL, PATRICK J. MURPHY AND KATHLEEN M. O'CONNELL – DETERMINATION – 05/04/00 In the Matter of MURPHY & O'CONNELL, PATRICK J. MURPHY AND KATHLEEN M. O'CONNELL TAT(H) 93-1768(UB) - DETERMINATION TAT(H) 93-4100(UB), TAT(H) 93-4101(UB) NEW YORK CITY TAX APPEALS TRIBUNAL ADMINISTRATIVE LAW JUDGE DIVISION UNINCORPORATED BUSINESS TAX – DURING THE PERIODS AT ISSUE, THE LAW PRACTICE KNOWN AS MURPHY & O'CONNELL WAS A PARTNERSHIP WHOSE MEMBERS CONSISTED OF PATRICK J. MURPHY AND KATHLEEN M. O'CONNELL/THE PARTNERSHIP COULD NOT OFFSET ITS UNINCORPORATED BUSINESS INCOME BY LOSSES PASSED THROUGH TO MR. MURPHY IN HIS INDIVIDUAL CAPACITY FROM OTHER PARTNERSHIPS IN WHICH HE HAD AN INTEREST. MAY 4, 2000

NEW YORK CITY TAX APPEALS TRIBUNAL ADMINISTRATIVE LAW JUDGE DIVISION__ : : In the Matter of the Petitions : DETERMINATION : of : TAT(H) 93-1768(UB) : TAT(H) 93-4100(UB) MURPHY & O’CONNELL, PATRICK J. : TAT(H) 93-4101(UB) MURPHY AND KATHLEEN M. O’CONNELL : ___________________________________:

Picucci, A.L.J.:

Petitioners, Murphy & O’Connell, 300 East 42nd Street, New

York, New York 10017, Patrick J. Murphy, 300 East 42nd Street,

New York, New York 10017, and Kathleen M. O’Connell, 8901 Shore

Road, Brooklyn, New York 11209, each filed a petition with the

New York City (“City”) Commissioner of Finance (“Commissioner”

or “Respondent”) requesting a redetermination of deficiencies 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 years ended

December 31, 1981, December 31, 1982, December 31, 1983,

December 31, 1984, December 31, 1985, and December 31, 1986 (the

“Tax Years”).

A hearing was held before Conferee Melissa S. Siegel of the

former Hearings Bureau of the Department of Finance (the

“Department”) on July 16, 1992, at which time testimony was

taken and various documents, including a stipulation of facts,

were entered into the record. Those facts have been

incorporated in the Findings of Fact below. Petitioners were

represented at that hearing session by Patrick J. Murphy, Esq.

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The Commissioner was represented at that hearing session by

Nelson Aviles, Esq. of the Department’s Office of Legal Affairs.

Pursuant to the provisions of sections 168 through 172 of

the City Charter as amended by act of the New York State

(“State”) Legislature on June 28, 1992, Ch. 808, Laws 1992,

section 140, this case was transferred on October 1, 1992 to the

City Tax Appeals Tribunal (“Tribunal”) for determination.

Following conferences with the parties, the hearing was

continued before the undersigned on June 11, 1997, November 18,

1997, and June 23, 1998. At those hearing sessions, Patrick J.

Murphy, Esq. and Kathleen M. O’Connell, Esq. appeared pro se,

and Patrick Murphy, Esq. continued to represent Murphy &

O’Connell. The Commissioner was represented at those hearing

sessions by Andrea Grant-Gross, Esq. and Amy F. Nogid, Esq.,

Assistant Corporation Counsels.

Initial briefs were filed by the Petitioners on May 10,

1999 and by the Respondent on September 13, 1999. Petitioners

filed their reply brief on September 28, 1999 and Respondent

filed his reply brief on October 26, 1999. The Petitioners

filed a sur-reply brief on November 4, 1999. Andrea Grant-

Gross, Esq. and Karen Griffin, Esqs., Assistant Corporation

Counsels, participated on the City’s briefs.

ISSUES

I. Whether, during the Tax Years, the law practice known

as “Murphy & O’Connell” was a sole proprietorship conducted by

Patrick J. Murphy or a partnership whose partners were Patrick

J. Murphy and Kathleen M. O’Connell.

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II. Whether Patrick J. Murphy’s distributive share of

losses in Kips Bay Associates (“Kips Bay”), Irak Associates

(“Irak”) and Lone Star Associates (“Lone Star”)(collectively

known as the “Three Partnerships”) can be taken into account in

computing the net unincorporated business income of the law

practice of Murphy & O’Connell.

FINDINGS OF FACT

1. The law practice known as Murphy & O’Connell maintained

an office in the City throughout the Tax Years consecutively at:

870 U.N. Plaza; 100 Park Avenue; 220 East 42nd Street; and at 300

East 42nd Street.

2. Murphy & O’Connell initially did not file UBT Returns

for the Tax Years and, as a result, became the subject of an

audit in July of 1988. After the conclusion of the audit, the

Department issued a Notice of Determination, dated April 12,

1990, against “MURPHY & O’CONNELL, A PARTNERSHIP, AND PATRICK J.

MURPHY AND KATHLEEN O’CONNELL, CO-PARTNERS,” which asserted the

following UBT deficiencies:

Tax Years Principal Interest1 Penalty Total

2/1/81-12/31/81 $ 106.00 $ 112.13 $ 31.80 $ 249.93 1/1/82-12/31/82 7,292.48 6,300.84 2,187.30 15,780.62 1/1/83-12/31/83 11,877.56 7,955.28 3,563.26 23,396.10 1/1/84-12/31/84 3,016.92 1,541.28 905.07 5,463.27 1/1/85-12/31/85 3,011.36 1,116.45 903.40 5,031.21 1/1/86-12/31/86 6,484.76 1,748.79 2,828.96 11,062.51

Total: $31,789.08 $18,774.77 $10,419.79 $60,983.64

1 Computed to 4/22/90.

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3. Murphy & O’Connell, Patrick J. Murphy, and Kathleen M.

O’Connell each filed a petition dated July 10, 1990 with the

Respondent. The Petition filed by Murphy & O’Connell asserted,

in part, that “[f]or the years 1981 through 1986, this business

was operated as a sole proprietorship in that all income and

expenses were that of one person, PATRICK J. MURPHY.”

4. During the initial hearing session before the

Department’s former Hearings Bureau, the parties entered into

the record a Stipulation of Facts in which the “[g]ross receipts

increase adjustment” and the “disallowance of expense adjust-

ment” made by the Commissioner were withdrawn for the year 1986.

As a result of that withdrawal the asserted deficiencies were

reduced as follows:

Tax Years Principal Interest2 Penalty Total

2/1/81-12/31/81 $ 0 $ 0 $ 0 $ 0 1/1/82-12/31/82 1,847.24 2,471.15 2,353.16 6,671.55 1/1/83-12/31/83 4,452.80 4,872.83 5,072.48 14,398.11 1/1/84-12/31/84 950.56 851.10 988.29 2,789.95 1/1/85-12/31/85 1,198.16 862.17 1,140.41 3,200.74 1/1/86-12/31/86 1,944.28 1,152.57 1,707.85 4,804.70

Total: $10,393.04 $10,209.82 $11,262.19 $31,865.05

UBT Returns

5. Subsequent to the audit but prior to the issuance of

the Notice of Determination, undated City UBT Returns (Forms NYC

202) for the tax years 1985 and 1986 were filed by “Patrick J.

Murphy.”

2 Computed to 7/16/92.

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6. For 1985, Patrick J. Murphy filed two undated UBT

Returns. The first return listed the name of the business as

“d/b/a Murphy & O’Connell;” the second return listed the name of

the business as “d/b/a Patrick J. Murphy.” Both returns listed

the principal business activity as “general partner.” The first

return only listed a loss of $24,180 on line 1 entitled “total

income from business before NYC Modification.” That loss

equaled the total amount in a handwritten schedule entitled

“Patrick J. Murphy 1985” which, under the heading “general

partner,” listed income of $39,954 from Murphy & O’Connell,

income of $39,141 from Kips Bay, a loss of $58,235 from Lone

Star, and a loss of $45,040 from Irak Associates (the “1985

Schedule”). The second return also lists a loss of $24,180 on

line 1, which apparently came from the same schedule, and also

includes a deduction of $4,836 on line 11 entitled “Less:

Allowance for taxpayer’s services: Limitations: 20% of Line 10a

or 10b, or $5,000, whichever is less.” Although the first

return does not indicate when Murphy & O’Connell started doing

business, the second return indicates that “Patrick J. Murphy”

started doing business on “1/1/85.”

7. For 1986, Patrick J. Murphy also filed two undated UBT

Returns. The first return listed the name of the business as

“d/b/a Murphy & O’Connell;” the second return listed the name of

the business as “d/b/a Patrick J. Murphy.” Both returns listed

the principal business activity as “general partner.” The first

return for “d/b/a Murphy & O’Connell” shows income of $72,209 on

line 1 entitled “total income from business;” whereas the second

return for “d/b/a Patrick J. Murphy” shows a loss of $72,209 on

line 1. The first return also claimed on line 8 a City net

operating loss deduction of an identical amount ($72,209), thus

reporting taxable business income of $0. The income listed of

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$72,209 on the first return equals the total amount of a hand-

written schedule entitled “1986 Patrick J. Murphy” (the “1986

Schedule”) which, under the heading “General Partner,” indicates

income of $49,207 from Kips Bay, income of $58,607 from “M&O”

[Murphy & O’Connell], and a loss of $35,605 from Lone Star. The

net operating loss listed on the first return also comes from

the 1986 Schedule which shows a net operating loss carryforward

of $60,369 for 1984 and $11,849 for 1985 and indicates a total

of $72,209, even though the total of those two sums of $72,218.

The only other entry on the second return for “d/b/a Patrick J.

Murphy” is an entry of $0 in line 16 entitled “TOTAL TAX.”

Unlike the 1985 tax year, no amount was listed, on either return

filed for 1986, on line 11 entitled “Less: Allowance for

taxpayer’s services: Limitations: 20% of Line 10a or 10b, or

$5,000, whichever is less.”

U.S. Individual Tax Returns

8. Patrick J. Murphy filed U.S. Individual Income Tax

Returns (Forms 1040) for each of the Tax Years using the filing

status of married filing separate returns. Petitioner Kathleen

O’Connell, Mr. Murphy’s spouse during the Tax Years, did not

file Forms 1040 during the Tax Years.

9. In his 1981 Form 1040, dated October 15, 1982, Mr.

Murphy listed his occupation as “general partner” and the

occupation of his spouse “Kathleen Murphy” as “housewife

lawyer.” The only listing under income was a loss of $31,596 on

line 17 entitled: “Rents, royalties, partnerships, estates,

trusts, etc. (attach Schedule E).” Mr. Murphy did not attach a

Schedule E to the return but the number appears to be derived

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from a handwritten schedule entitled “partnerships 1981” which

indicates a loss of $19,832 from Murphy & O’Connell and a loss

of $11,764 from Kips Bay.

10. In his 1982 Form 1040 dated October 15, 1983, Mr.


occupation of his spouse “Kathleen Murphy” as “house-

wife/lawyer.” The only listing under income was a loss of

$24,956 on line 17 entitled: “Rents, royalties, partnerships,

estates, trusts, etc. (attach Schedule E).” Mr. Murphy did not

attach a Schedule E to the return but the number appears to be

derived from a handwritten schedule entitled “1982 Partnerships”

which indicates income of $76,013 from Murphy & O’Connell, a

loss of $12,969 from Kips Bay, and a loss of $88,000 from Irak.








derived from a handwritten schedule. The area on top where the

other schedules were labeled was not photocopied. The schedule

indicates income of $121,320 from Murphy & O’Connell, income of

$23,810 from Kips Bay, a loss of $232,518 from Lone Star, and a

loss of $55,000 from Irak.





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attach a schedule E to the return but the number appears to be

derived from a typewritten schedule entitled “1984 partnerships,

etc” which indicates income of $33,764 from Murphy & O’Connell,

income of $21,179 from Kips Bay, a loss of $76,672 from Lone

Star, and a loss of $38,640 from Irak.








derived from the 1985 Schedule (see, Finding of Fact 6, supra).


Murphy listed his occupation as “general partner.” Although he

listed his spouse as “Kathleen Murphy” for this year, he did not

list her occupation. The only listing for income was income of




derived from the 1986 Schedule (see, Finding of Fact 7, supra).

Mr. Murphy also claimed an identical net operating loss

deduction of $72,209, comprised of a net operating loss

carryforward of $60,369 from 1984 and a net operating loss

carryforward of $72,209 from 1985 (although the total of those

two sums is $72,218). As a result of the net operating loss

claimed, Mr. Murphy reported total income of $0 for 1986.

9

U.S. Partnership Returns

15. The record does not contain a copy of a U.S.

Partnership Return of Income (Form 1065) filed by Murphy &

O’Connell for 1981.

16. A U.S. Partnership Return of Income (Form 1065), dated

June 15, 1983, was filed by Murphy & O’Connell for 1982. The

return used an Internal Revenue Service label which had the name

“MURPHY OCONNELL” and, on the second line, “P Murphy GENERAL

PTR.” The return, which was signed by Mr. Murphy, does not

indicate the number of partners in the partnership. The return

lists gross receipts of $179,910 and total deductions of

$103,897 (comprised of salaries and wages of $10,013, rent of

$30,000, depreciation of $1,281, and a deduction for employee

benefit programs of $62,603), resulting in ordinary income of

$76,013 – the same amount reported by Mr. Murphy on his Form

1040.


June 15, 1984, was filed by Murphy & O’Connell for 1983. The

return, which was signed by Mr. Murphy, indicates that Murphy &

O’Connell had “2” partners. The return lists gross receipts of

$268,354 and total deductions of $147,034 (comprised of rent of

$31,819, depreciation of $2,350, and a deduction for employee

benefit programs of $112,865), resulting in ordinary income of

$121,320.

Attached to the Form 1065 for 1983 are two federal

“Partner’s Share of Income, Credits, Deductions, etc.”

(Schedules K-1). The Schedule K-1 for Mr. Murphy indicates that

his “partner’s percentage” of “Profit sharing,” “Loss Sharing,”

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and “Ownership of Capital” all were “99%.” Despite being

listed as having a 99% profit sharing interest, his distributive

share of ordinary income was $121,320, which was 100% of Murphy

& O’Connell’s listed ordinary income. That amount of ordinary

income was reported by Mr. Murphy on his Form 1040 for 1983.

The 1983 Schedule K-1 for Ms. O’Connell indicates that her

“partner’s percentage” of “Profit sharing” and “Loss Sharing”

was “0%” but her “Ownership of Capital” was “1%.” Ms.

O’Connell’s distributive share of ordinary income was listed as

“0.”


October 7, 1985, was filed by Murphy & O’Connell for 1984. The

return, which was signed by Mr. Murphy and is dated October 7,

1985, fails to indicate the number of partners that Murphy &

O’Connell had. The return lists gross receipts of $199,317 and

total deductions of $165,553 (comprised of rent of $42,788 and

other deductions of $122,7653), resulting in ordinary income of

$33,764. The copy of this return in the record does not contain

copies of any Schedule K-1.


April 15, 1986, was filed by Murphy & O’Connell for 1985. The

return, which was signed by Mr. Murphy, fails to indicate the

number of partners that Murphy & O’Connell had. The return

lists gross receipts of $165,615 and total deductions of

$125,664 (comprised of rent of $53,935, depreciation of $6,911,

3 These deductions include $77,024 for legal services-professional, $6,615 for secretaries, $8,322 for office expense, $3,556 for court reporters, $6,396 for telephone, $207 for dues, $12,521 for travel, and $8,124 for professional activities.

11

and other deductions of $64,8184), resulting in ordinary income

of $39,951.

Attached to the Form 1065 for 1985 are two Schedules K-1

(both of which transposed the names of the partners and the

partnership). The Schedule K-1 for Mr. Murphy indicates his

“partner’s percentage” of “Profit sharing,” “Loss Sharing,” and

“Ownership of Capital” as being “99%.” Despite being listed as

having a 99% profit sharing interest, Mr. Murphy’s distributive

share of ordinary income was $121,320, which was 100% of Murphy

& O’Connell’s listed ordinary income. That amount of ordinary

income was reported by Mr. Murphy on his Form 1040 for 1985.


“partner’s percentage” of “Profit sharing” and “Ownership of

capital” were “0%” but does not list her “Loss sharing”

percentage. Ms. O’Connell’s distributive share of ordinary

income was listed as “0.”

20. A U.S. Partnership Return of Income (Form 1065) was

filed by Murphy & O’Connell for 1986. The return was neither

signed nor dated. The 1986 return indicates that Murphy &

O’Connell has “2” partners. The return lists gross receipts of

$298,659 and total deductions of $240,052 (comprised of rent of

$40,000 and other deductions of $200,0525), resulting in ordinary

income of $58,607.

4 These deductions include $6,861 for telephone, $8,674 for secretaries, $11,575 for case expenses, $14,887 for court reporters, $2,524 for transportation, $680 for messengers, $1,211 for postage, $1,410 for photocopying, $817 for professional dues, $6,179 for client expenses, and $10,000 for travel.

12

Attached to the Form 1065 for 1986 are two Schedules K-1.

The Schedule K-1 for Mr. Murphy fails to indicate his “partner’s

percentage” of “Profit sharing,” “Loss Sharing,” and “Ownership

of Capital.” Mr. Murphy’s distributive share of ordinary income

was $58,607, which was 100% of Murphy & O’Connell’s listed

ordinary income. That amount of ordinary income was reported by

Mr. Murphy on his Form 1040 for 1986.


“partner’s percentage” of “Profit sharing” and “Loss Sharing”

were “1%” but does not list her “Ownership of capital”

percentage. Despite being listed as having a 1% profit sharing

interest, Ms. O’Connell’s distributive share of ordinary income

was listed as “0.”

Petitioners’ Testimony

21. Mr. Murphy testified that Murphy & O’Connell was the

business name used for his law practice during the Tax Years.

Mr. Murphy further testified that Murphy & O’Connell was a sole

proprietorship and that, during the Tax Years, Kathleen M.

O’Connell: (a) was not his business partner; (b) was not

entitled to profits from Murphy & O’Connell; and (c) derived no

income from Murphy & O’Connell.

22. Kathleen O’Connell testified that, during the Tax

Years, she did not practice law as a member of the firm of

Murphy & O’Connell, that she had not contributed capital or

5 These deductions include $26,255 for professional services, $6,000 for business materials, $134,266 for office expenses, $6,607 for service to co-tenants, and $26,924 for paralegal/word processing.

13

assets to the law practice known as Murphy & O’Connell, that she

had no liability for any debts incurred by the law practice of

Murphy & O’Connell, and that she never intended to enter into a

partnership with Patrick J. Murphy for the practice of law.6 Ms.

O’Connell testified that she did not receive income from any

source during the Tax Years and that she therefore did not file

any city, state or federal income tax returns during that

period. Ms. O’Connell further testified that during the Tax

Years she engaged in pro bono legal work wherein she made use of

Murphy & O’Connell’s office, business cards, and stationery for

her own purposes.

Murphy & O’Connell’s Activities

23. Murphy & O’Connell maintained a checking account at

Chemical Bank under the name “Murphy & O’Connell” during the Tax

Years. Patrick J. Murphy and Kathleen M. O’Connell each had

signatory authority over that account and each separately signed

checks from that account on behalf of Murphy & O’Connell during

the Tax Years.

24. During the Tax Years, Mr. Murphy and Ms. O’Connell

each used stationery entitled “Murphy & O’Connell” which listed

both their names. Also during the Tax Years, Ms. O’Connell used

business cards containing the name “Murphy & O’Connell” and made

use of the offices and business equipment of Murphy & O’Connell.

25. Listings for Murphy & O’Connell appeared in the

Martindale-Hubbell Law Directory for the years 1983 through

6 Ms. O’Connell stated that she became a partner in Murphy & O’Connell only in 1989.

14

1986. The listing for each of those years contained the names

Patrick J. Murphy and Kathleen M. O’Connell.

26. In the four page “Plaintiff’s Supplemental Affidavit

in Opposition to Defendant’s Motion to Compel Answers by Patrick

J. Murphy, Esq.,” filed in MLC, Inc. v. North American Philips,

et al., 78 Civ. 6080 (GLG), with the United States District

Court for the Southern District of New York on July 27, 1981,

Kathleen M. O’Connell, having been duly sworn, deposed and

stated in paragraph 1: “I am a member of the firm of Murphy &

O’Connell, Esqs., attorneys for Plaintiff in this action.”

27. In the eleven page “Plaintiff’s Supplemental Affidavit

in Opposition to Defendant’s Motion to Disqualify Plaintiff’s

Counsel,” filed in MLC, Inc. v. North American Philips, et al.,

78 Civ. 6080 (GLG), with the United States District Court for

the Southern District of New York on December 31, 1981, Kathleen

M. O’Connell, having been duly sworn, deposed and stated in

paragraph 1: “I am an attorney duly qualified to practice in the

State of New York and a member of the firm of Murphy &

O’Connell, Esqs., Counsel to the Plaintiff in this action. As

such I am fully familiar with the prior proceedings in that

action.”

28. A two page letter to the Honorable Nina M. Gershon,

United States Magistrate dated September 17, 1981 was submitted

as a required status report of the action in MLC, Inc. v. North

American Philips, et al., 78 Civ. 6080 (GLG). That letter was

typed on stationery that bore in the center of the page the name

“Murphy & O’Connell” and listed on the top left hand side the

names: “Patrick J. Murphy” and “Kathleen M O’Connell.” The

letter was submitted by Murphy & O’Connell by Kathleen M.

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O’Connell, Esq. Three pages of transcript further indicated

that Ms. O’Connell appeared before the federal magistrate judge

in that action.

29. In the ten page “Plaintiff’s Reply to Defendants’

Opposition to Plaintiff’s Motion to Have Plaintiff’s Requests

for Admission Deemed Admitted by Defendants Pursuant to Rule 36

F.R.C.P.” filed in MLC, Inc. v. North American Philips, et al.,

78 Civ. 6080 (GLG), with the United States District Court for

the Southern District of New York on April 13, 1982, Kathleen M.

O’Connell, having been duly sworn, deposed and stated in

paragraph 1: “I am a member of the firm of Murphy & O’Connell,

Esqs., counsel to Plaintiff in this action and as such I am

fully familiar with all of the prior proceedings in this

action.”

30. The two page “Plaintiff’s Notice of Motion for an

Order that Plaintiff’s Requests for Admissions of Fact be Deemed

Admitted, Pursuant to Rule 36(a) F.R.C.P. and for Sanctions

under Rule 37(b)2(E) F.R.C.P.” filed in MLC, Inc. v. North

American Philips, et al., 78 Civ. 6080 (GLG), with the United

States District Court for the Southern District of New York on

July 1, 1982, indicates that the motion would be made by “the

Plaintiff, by its attorneys, MURPHY & O’CONNELL, ESQS” and is

signed by Kathleen M. O’Connell above the typewritten lines

“KATHLEEN M. O’CONNELL, ESQ.” and “MURPHY & O’CONNELL, ESQS.”

31. “Plaintiff’s Notice of Cross Motion for Partial

Summary Judgment” filed in MLC, Inc. v. North American Philips,

et al., 78 Civ. 6080 (GLG), with the United States District

Court for the Southern District of New York on January 24, 1983,

was signed for “MURPHY & O’CONNELL Esqs” by Kathleen O’Connell.

16

32. Three letters, dated January 9, 1984, February 1,

1984, and February 7, 1984, to the Honorable Shirley Wohl Dram

concerning Plaintiff’s Fourth Motion for Sanctions in MLC, Inc.

v. North American Philips, et al., 78 Civ. 6080 (GLG), were

submitted on stationery that bore in the center of the page the

name “Murphy & O’Connell” and listed on the top left hand side

the names “Patrick J. Murphy” and “Kathleen M O’Connell.” Each

of these letters were signed by Kathleen M. O’Connell, Esq. The

docket sheet in this action indicated that other filings were

made by Ms. O’Connell, including Plaintiff’s Reply in Support of

Motion to Amend its Amended Complaint and Plaintiff’s Rule 3(f)

Affidavit.

The Three Partnerships

33. During the Tax Years, Mr. Murphy was, in his

individual capacity, a general partner in the Three

Partnerships. Mr. Murphy was the only common partner of each

of the Three Partnerships. Ms. O’Connell had no interest in,

nor did she perform any work for, any of the Three Partnerships.

34. The activities of the Three Partnerships were separate

and distinct from each other and from the law practice of Murphy

& O’Connell. Kips Bay owned an apartment complex in New Jersey;

Irak was a research and development company which invested

capital for the development of computer software; and Lone Star

was engaged in the acquisition of technology used to manufacture

products made from the chemical chloralkaline.

35. Lone Star filed U.S. Partnership Returns of Income

(Forms 1065) for the years 1983, 1984, 1985, and 1986, which

17

were signed by Patrick J. Murphy as General Partner, and issued

Schedules K-1 to its partners. The record does not indicate

whether Lone Star filed New York State or City income tax

returns during those years.

36. There is no indication in the record whether Kips Bay

filed federal, state or city income tax returns, including

Schedules K-1, for 1981, 1982, 1983, or 1984.

37. There is no indication in the record whether Irak

filed federal, state or city income tax returns, including

Schedules K-1, for 1981, 1982, 1983, or 1984.

38. In 1983, Lone Star, by Patrick J. Murphy as its

general partner, entered into an agreement with Electro Systems

Limited of Fermoy, Ireland to license and lease to Electric

Systems Limited a system for the production of chlorine and

caustic soda.

39. From October, 1983 until December, 1985, Lone Star

maintained a checking account at City Trust Bank headquartered

in Bridgeport, Connecticut. The bank statements are addressed

to the partnership in care of “P.J. Murphy” at 220 East 42nd

Street, New York, New York 10017.

STATEMENT OF POSITIONS

Petitioners assert that during the Tax Years the law

practice known as “Murphy & O’Connell” was not a partnership but

a sole proprietorship owned and operated by Patrick J. Murphy

and that any UBT arising with regard to this law practice should

18

be imposed on Patrick J. Murphy as its sole proprietor.

Petitioners further contend that since Mr. Murphy was a general

partner in the Three Partnerships, the Three Partnerships and

the law practice must be considered and taxed as one

unincorporated business.7 Thus, they assert, the income from the

law practice/sole proprietorship must be treated as Mr. Murphy’s

income and be offset by the losses passed through to Mr. Murphy

from the Three Partnerships.8

Respondent counters that Murphy & O’Connell was a

partnership. He therefore asserts that the losses passed

through to Mr. Murphy personally from the Three Partnerships

cannot offset the income generated by the law practice.

Respondent alternatively asserts that even if Murphy & O’Connell

was a sole proprietorship, Mr. Murphy’s share of the Three

Partnerships’ losses cannot be taken into account for UBT

purposes because his interests in the Three Partnerships were of

an investment nature.

CONCLUSIONS OF LAW

Former §S46-3.0(a) (now §11-503(a)) of the Code imposed the

UBT on the taxable income of every unincorporated business

wholly or partly carried on in the City. An unincorporated

7 Petitioner cites Matter of Joseph Faraldo, TAT(H) 93-967(UB) (December 13, 1995), in which an Administrative Law Judge of this Tribunal held that a taxpayer who conducted a law practice as a sole proprietor and a horse racing business in the City was entitled, under Section 11-502(a) of the Code, to aggregate the two businesses and thus offset the income from his law practice with the losses generated from his horseracing business. 8 Petitioner cites Merrick v. Tully, 68 A.D.2d 289 3rd Dept., 1979) in which the taxpayer was treated as being in the trade or business of being a general partner in various entertainment partnerships and, as such, was subject to the UBT on his distributive share of income from those partnerships.

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business was defined in former §S46-2.0(a) (now §11-502(a)) of

the Code to include “any trade, business, profession or occupa-

tion conducted, engaged in . . . by an individual or unincor-

porated entity, including a partnership . . ..”

The central issue in this case is the interpretation of

former §S46-2.0(a) (now §11-502(a)) which provided that “[I]f an

individual or an unincorporated entity carries on [wholly or

partly in the city] two or more unincorporated businesses, all

such businesses shall be treated as one unincorporated business

for the purposes of this chapter. Petitioners assert that under

this provision, the law practice known as “Murphy & O’Connell”

and the Three Partnerships must be treated as a single

unincorporated business conducted by Mr. Murphy. Therefore,

they assert, the pass-through losses generated by the Three

Partnerships offset the income generated by Murphy & O’Connell.

To prevail in this argument, Petitioners must, as they have

asserted, prove that Mr. Murphy individually conducted the law

practice known as “Murphy & O’Connell.”9 For if “Murphy &

O’Connell” was a partnership and not a sole proprietorship, its

income could not be offset by losses generated by the Three

Partnerships in which Mr. Murphy was, in his individual

capacity, a partner.

In determining whether Murphy & O’Connell was a

partnership, former §S46-1.0 (now §11-501(a)) of the Code

provides that “any term used in this chapter shall have the same

meaning as when used in a comparable context in the laws of the

United States relating to federal income taxes, and any

9 Petitioners bear the burden of proof on this issue under former §S46-33.0 (now §11-529(e)) of the Code.

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reference in this chapter to the laws of the United States shall

mean the provisions of the internal revenue code of nineteen

hundred fifty-four, and amendments thereto, and other provisions

of the laws of the United States relating to federal income

taxes, . . ..”

The term “partnership” is defined in §7701(a)(2) of the

Internal Revenue Code as follows:

(2) PARTNERSHIP AND PARTNER – The term “partnership” includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term “partner” includes a member in such a syndicate, group, pool, joint venture, or organization.

A partnership exists, for tax purposes, where it is the

intent of the parties to engage in business as partners. Fullam

v. Peterson, 21 N.Y.S.2d 797 (Sup. Ct. N.Y. Cty., 1940); 15A

N.Y. Jur.2d §1379. A partnership agreement is not required as

evidence of this intent. Intent can be gleaned from a variety

of facts, including, the filing of a federal partnership return.

Martin v. Peyton, 246 N.Y. 213, 217 (1927); In the Matter of

Mink, TSB-H-83-(315)-I, Nov. 29, 1983; Halstead v. Commissioner,

296 F.2d 61 (2d Cir., 1961)(per curiam).

Although Petitioners have demonstrated that Ms. O’Connell

had a limited financial interest in Murphy & O’Connell, they

have failed to prove that Murphy & O’Connell was not a joint

venture in which Mr. Murphy and Ms. O’Connell were members.

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Indeed, the objective evidence indicates that Murphy & O’Connell

was a partnership.

On several occasions during the Tax Years, Ms. O’Connell

represented to the United States District Court for the Southern

District of New York that she was a “member” of Murphy &

O’Connell. She and Mr. Murphy each used stationery and business

cards which indicated that they were involved in a joint

venture.

Moreover, Patrick J. Murphy filed under penalties of

perjury: (1) UBT Returns under the name “d/b/a Murphy &

O’Connell” and as “d/b/a Patrick J. Murphy” which listed the

principal business activity as “general partner;” (2) U.S.

Individual Income Tax Returns (Forms 1040) which listed his

occupation as “general partner” to which he attached schedules

that, under the word “partnerships,” listed the net income

derived from Murphy & O’Connell; and (3) U.S. Partnership

Returns of Income (Forms 1065) under the name Murphy & O’Connell

which: (a) listed Mr. Murphy as being the general partner of

Murphy & O’Connell, (b) indicated that Murphy & O’Connell had

“2” partners, (c) attached Schedules K-1 which indicated, albeit

inconsistently and at various times, that Mr. Murphy’s partner’s

percentage of profit sharing, loss sharing, and ownership of

capital of Murphy & O’Connell was 99% and Ms. O’Connell’s

partner’s percentage of profit sharing, loss sharing, and

ownership of capital was 1%.

Although no income was ever allocated to Ms. O’Connell on

the Schedules K-1, this does not negate the fact that Mr. Murphy

represented on federal tax returns, under penalties of perjury,

that Murphy & O’Connell was a partnership and that Ms. O’Connell

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had a one percent interest in that partnership. Mr. Murphy’s

statement made under penalties of perjury in tax returns that

Murphy & O’Connell was a partnership bears far greater weight

than does his self-serving and contradictory testimony.

Moreover, courts have consistently prohibited businesses that

have filed federal partnership returns from disavowing their

partnership status. McManus v. Commissioner, 583 F.2d 443 (9th

Cir., 1978), cert. denied, 440 U.S. 959 (1979); Halstead v.

Commissioner, supra; Maletis v. United States, 200 F.2d 97 (9th

Cir., 1952), cert. denied, 345 U.S. 924 (1953); Haag v.

Commissioner, 59 F.2d 514 (7th Cir., 1932).

Similarly, Ms. O’Connell’s affirmation to the United States

District Court for the Southern District of New York that she

was a “member” of Murphy & O’Connell bears far greater weight

than her self-serving and contradictory testimony that during

the Tax Years she did not practice law as a member of the firm

of Murphy & O’Connell. Moreover: (1) Ms. O’Connell acknowledged

that during the Tax Years she engaged in legal work in which she

made use of Murphy & O’Connell’s office, business equipment,

business cards, and stationery; (2) Mr. Murphy and Ms. O’Connell

each had signatory authority over Murphy & O’Connell’s checking

account and each separately signed checks from that account on

behalf of Murphy & O’Connell during the Tax Years; and (3)

listings for Murphy & O’Connell appeared in the Martindale-

Hubbell Law Directory which contained both their names.

It is therefore found that Murphy & O’Connell was a

partnership during the Tax Years and that the UBT deficiencies

at issue were thus properly assessed against Murphy & O’Connell

as a partnership, and against Patrick J. Murphy and Kathleen M.

O’Connell as its partners. Any losses that may have passed

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through to Mr. Murphy in his individual capacity from the Three

Partnerships are not material to the computation of liability

under this determination as Mr. Murphy’s liability under this

determination is solely derivative, arising secondarily as a

result of his being a partner in Murphy & O’Connell. As Murphy

& O’Connell conducted no other unincorporated business,10 its UBT

liability cannot be affected by the fact that one of its general

partners happened to have been a general partner in three other

partnerships.11

ACCORDINGLY, IT IS CONCLUDED THAT:

A. Murphy & O’Connell was a partnership whose members

during the Tax Years were Patrick J. Murphy and Kathleen M.

O’Connell.

B. Murphy & O’Connell, the partnership, cannot offset its

income as a result of losses passed through by the Three

Partnerships to Patrick J. Murphy, one of the members of Murphy

& O’Connell, in his individual capacity.

For the reasons set out above, the deficiencies set forth

in the Notice of Determination dated April 12, 1990, as modified

10 Unlike Faraldo, supra, the businesses at issue here were not conducted by the same individual but were conducted by separate partnerships which had different partners. Merrick, supra, is similarly inapplicable because the taxpayer here was found to be one of the partnerships (Murphy & O’Connell) and not the individual who is the general partner of all the partnerships at issue. 11 As a result of the above holding, it is not necessary to address Respondent’s assertion that Mr. Murphy’s interests in the three partnerships were of an investment nature. All other arguments raised by the parties were considered and found to be unpersuasive.

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in the manner provided in Finding of Fact 4, supra, are

sustained.

Dated: May 4, 2000

New York, New York

________________________ JOHN J. PICUCCI Administrative Law Judge

Documents

MURPHY & O'CONNELL, PATRICK J. MURPHY AND KATHLEEN …archive.citylaw.org/tat/2000/931768det0500.pdf · 4 3. Murphy & O’Connell, Patrick J. Murphy, and Kathleen M. O’Connell each