How does a New York S corporation figure out how much of a nonresident shareholder's income counts as New York source income?

Plain-English summary

Renaissance Technologies Corporation is an electing federal S corporation, subject to New York's Article 9-A franchise tax, whose shareholders made the New York State election to be treated as a New York S corporation. Its principal offices are in New York City, but it conducts business both within and outside New York State, and it has both resident and nonresident individual shareholders. Renaissance asked the Department of Taxation and Finance how to determine, for purposes of Article 22 (personal income tax), how much of each nonresident shareholder's pro rata share of the corporation's income counts as New York source income.

The Department explained that under Tax Law § 632(a)(2), a nonresident shareholder of a New York S corporation includes in income only the portion of his or her pro rata share of the corporation's income, loss, and deduction items that is derived from or connected with New York sources. Critically, that New York-source determination is made at the corporation level, not by each shareholder separately - using the same allocation methods that apply to the corporation itself under Article 9-A (or Article 32, for banking corporations). For example, if 35% of the S corporation's business income is New York-source under its business allocation percentage, then 35% of each nonresident shareholder's pro rata share of that business income is New York source income.

The same corporate-level sourcing also carries over to the addition and subtraction modifications under Tax Law § 612(b) and (c) that relate to S corporation pass-through items: under § 632(c), the New York-source portion of a modification follows the source of the pass-through item it relates to. The character of each item (e.g., whether it is business income, investment income, capital gain, etc.) is likewise the same for the shareholder as it was for federal income tax purposes, or as it would be if realized directly by the corporation, per Tax Law §§ 617(b) and 632(e)(2).

Applying this framework, the Department concluded that Renaissance, as a New York S corporation doing business both within and outside the state, must compute its own business allocation percentage and investment allocation percentage under the Article 9-A methods that would apply to it, and then report those percentages - together with each nonresident shareholder's pro rata share of income, gain, loss, and deduction items and related § 612(b)/(c) modifications - to its nonresident shareholders, who use that information to compute their New York source income.

What this means for you

New York S corporations with out-of-state operations

If your S corporation has elected New York S corporation status and does business both within and outside New York, you (the corporation) - not your individual nonresident shareholders - are responsible for determining the New York-source portion of each pass-through item. That means computing the business allocation percentage and investment allocation percentage that would apply to you under Article 9-A (or Article 32) and reporting those percentages to shareholders along with their pro rata shares of income, gain, loss, and deduction.

Nonresident shareholders and their accountants

As a nonresident shareholder, you cannot separately source your own share of the S corporation's income; you rely on the percentages and pro rata allocations the corporation reports to you (for example, on Form CT-34SH and its accompanying schedules). Any related Tax Law § 612(b) or (c) modification is sourced the same way as the underlying item - so if 35% of the corporation's business income is New York source, 35% of a related modification (such as the addition for federal ACRS depreciation) is also New York source.

Common questions

Q: Who determines whether an S corporation's income is New York source income - the corporation or the individual shareholder?
A: The corporation. Under Tax Law § 632(a)(2), the sourcing determination is made at the corporate level using the allocation methods that apply to the corporation under Article 9-A or Article 32, not by each shareholder independently.

Q: What allocation methods does a New York S corporation use to source its income?
A: The corporation applies its business allocation percentage to items of business income and its investment allocation percentage to items of investment income, the same methods that would apply to it under Article 9-A of the Tax Law.

Q: Do modifications under Tax Law § 612(b) and (c) get sourced separately from the income item they relate to?
A: No. Under Tax Law § 632(c), the New York source of a § 612(b) or (c) modification follows the source of the S corporation pass-through item to which it relates.

Q: What forms does a New York S corporation use to report this information to its shareholders?
A: Based on Renaissance's filings described in the opinion, a New York S corporation reports allocation and shareholder information via Form CT-3-S (franchise tax return), Form CT-34SH (shareholder's information schedule), and accompanying Schedules A and B listing shareholders' modifications and identifying information.

Q: Does the character of an S corporation item change when it passes through to a nonresident shareholder?
A: No. Under Tax Law §§ 617(b) and 632(e)(2), each item retains the same character for the shareholder as it had for federal income tax purposes, or as it would have if realized directly by the corporation.

Citations and references

• Tax Law § 617(b) - character of S corporation income, gain, loss, or deduction items passes through unchanged
• Tax Law § 632(a)(2) - New York source income of a nonresident S corporation shareholder is determined using Article 9-A/32 allocation methods at the corporate level
• Tax Law § 632(c) - shareholder modifications under § 612(b)/(c) are sourced according to the pass-through item they relate to
• Tax Law § 632(e)(2) - character of S corporation items for a nonresident shareholder is determined under § 617(b)
• Internal Revenue Code § 1366(f)(2)-(3) - certain tax adjustments increasing a shareholder's pro rata share, referenced in § 632(a)(2)
• New York Tax Treatment of S Corporations And Their Shareholders, Publication 35 (3/00), at 24-25 - Department guidance describing the corporate-level allocation method, including the business/investment allocation percentage example

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2008.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a08_1i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-08(1)I
Income Tax
January 4, 2008

Office of Tax Policy Analysis
Taxpayer Guidance Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I070517C

On May 17, 2007, a Petition for Advisory Opinion was received from Renaissance
Technologies Corporation, 800 Third Avenue, New York, New York 10022.
The issue raised by Petitioner, Renaissance Technologies Corporation, is how to
determine the amount of income derived from New York sources for nonresident shareholders of
a New York S Corporation for purposes of Article 22 of the Tax Law.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is an electing federal S corporation that is currently subject to tax under Article
9-A of the New York State Tax Law. Petitioner’s shareholders have made a New York State
election to be treated as a New York S Corporation. Its principal offices are located in the city of
New York. Petitioner conducts business within and without New York State. Petitioner has
shareholders who are New York State resident individuals and shareholders who are New York
State nonresident individuals.
For federal income tax purposes, Petitioner has filed Form 1120S, U.S. Income Tax
Return for an S Corporation, along with Schedule K-1, Shareholder’s Share of Income,
Deductions, Credits, etc., for each shareholder. For New York State tax purposes, Petitioner has
filed Form CT-3-S, New York S Corporation Franchise Tax Return. Petitioner also files Form
CT-34SH, New York S Corporation Shareholder’s Information Schedule, and Schedules A and B
listing shareholders’ New York State modifications and shareholders’ identifying information.
Applicable law
Section 617(b) of the Tax Law provides, in part:
Character of items. Each item of partnership and S corporation income, gain, loss,
or deduction shall have the same character for a partner or shareholder under this article
as for federal income tax purposes. Where an item is not characterized for federal income
tax purposes, it shall have the same character for a partner or shareholder as if realized
directly from the source from which realized by the partnership or S corporation or
incurred in the same manner as incurred by the partnership or S corporation.
Section 632(a)(2) of the Tax Law provides:
In determining New York source income of a nonresident shareholder of an S
corporation where the election provided for in subsection (a) of section six hundred sixty

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of this article is in effect, there shall be included only the portion derived from or
connected with New York sources of such shareholder's pro rata share of items of S
corporation income, loss and deduction entering into his federal adjusted gross income,
increased by reductions for taxes described in paragraphs two and three of subsection (f)
of section thirteen hundred sixty-six of the internal revenue code, as such portion shall be
determined under regulations of the commissioner consistent with the applicable methods
and rules for allocation under article nine-A or thirty-two of this chapter.
Section 632(c) of the Tax Law provides:
Partner’s and shareholder’s modifications. Any modification described in
subsection (b) or (c) of section six hundred twelve, which relates to an item of partnership
or S corporation income, gain, loss or deduction, shall be made in accordance with the
partner’s distributive share or the shareholder’s pro rata share for federal income tax
purposes of the item to which the modification relates, but limited to the portion of such
item derived from or connected with New York sources.
Section 632(e)(2) provides, in part:
The character of . . . corporation items for a nonresident . . . S corporation
shareholder shall be determined under subsection (b) of section six hundred seventeen.
New York Tax Treatment of S Corporations And Their Shareholders, Publication 35
(3/00), at 24-25, provides, in part:
The determination of the source of S corporation items is made at the corporation level,
using the same allocation methods that apply to a corporation under Article 9-A or
Article 32 of the Tax Law. For example, for an Article 9-A corporation, the corporation's
business allocation percentage is applied to items of business income, and the
corporation's investment allocation percentage is applied to items of investment income.
In addition, the shareholders must also include in the numerator any of the section 612
modifications that relate to the S corporation pass-through items. The New York source
of a section 612 modification follows the source of the pass-through item to which it
relates. For example, if 35% of the S corporation's business income is derived from New
York sources, 35% of the section 612(b)(25) addition modification for federal ACRS
depreciation would also be derived from New York sources.
Opinion
For New York State personal income tax purposes, nonresident shareholders include only
the New York S corporation items of income, gain, loss, and deduction derived from New York
sources as New York source income. Section 632(a)(2) of the Tax Law provides, in part, that in

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January 4, 2008

determining New York source income of a nonresident shareholder of a New York S
corporation, only the portion derived from or connected with New York sources of such
shareholder's pro rata share of items of S corporation income, loss, and deduction entering into
his or her federal adjusted gross income is included. The determination of the source of S
corporation items is made at the corporation level using the allocation methods that apply to the
S corporation under Article 9-A or Article 32 of the Tax Law (e.g., the corporation's business
allocation percentage is applied to items of business income and the corporation's investment
allocation percentage is applied to items of investment income). See Publication 35, supra.
New York source income of a nonresident individual also includes any New York
addition and subtraction modifications under section 612(b) and (c) of the Tax Law that relate to
income derived from or connected with New York sources. See section 632(c) of the Tax Law.
The New York source of a section 612 modification follows the source of the pass-through item
to which it relates. For example, if 35% of the S corporation's business income is derived from
New York sources, 35% of the section 612(b)(25) addition modification for federal ACRS
depreciation would also be derived from New York sources.
Accordingly, as a New York S corporation subject to tax under Article 9-A of the Tax
Law that conducts its business within and without New York State, Petitioner is required to
compute its business allocation percentage and its investment allocation percentage using the
method that applies to Petitioner under Article 9-A of the Tax Law. Petitioner must then report
these percentages to its nonresident shareholders along with each shareholder’s pro rata share of
Petitioner’s items of income, gain, loss, and deduction included in federal adjusted gross income
as well as those items that relate to section 612(b) and (c) of the Tax Law.

DATED: January 4, 2008

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Taxpayer Guidance Division

An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the
person or entity fully and accurately describes all relevant facts. An
Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific
time period at issue in the Opinion.