New York Advisory Opinion TSB-A-11(6)C: Are receipts from selling a company's entire inventory as part of selling its whole business and ceasing operations included in the Article 9-A receipts factor?

Plain-English summary

The petitioner, a New York S corporation, sold its entire inventory to a third party as part of an asset purchase agreement that conveyed the whole business. After the sale it did nothing but wind down -- the activities needed to close out its affairs and distribute to shareholders. The question was whether the receipts from that inventory sale belong in the receipts factor of the business allocation percentage (which matters for sourcing income to a nonresident S-corp shareholder under Tax Law § 632(a)(2)).

The Department said no. Business income is allocated using the receipts factor (Tax Law § 210.3(a)(2)), and business receipts means gross income received in the regular course of the taxpayer's business (20 NYCRR § 4-4.1(a)). Selling the entire inventory as part of selling the whole business, followed by ceasing operations, is not in the regular course of business -- it is the disposition of the business itself. Citing the Tax Appeals Tribunal's International Nickel decision and the CaComm advisory opinion (a one-time license sale wasn't regular-course), the Department concluded the inventory-sale receipts are excluded from the business allocation percentage.

What this means for you

Owners selling a business

When you sell the whole business -- inventory included -- as a single asset deal and then wind down, the proceeds from that sale generally aren't 'business receipts' for apportionment. That can meaningfully change how much income a nonresident owner sources to New York.

Accountants and tax professionals

The dividing line is regular-course vs. disposition-of-the-business. A liquidating, one-time bulk sale tied to ceasing operations falls outside 20 NYCRR § 4-4.1(a), so it stays out of the receipts factor. Contrast routine inventory turnover, which is regular-course and stays in.

Common questions

Q: Are receipts from selling all the inventory in a business sale 'business receipts'?
A: No, when the sale is part of disposing of the whole business and the company then winds down -- they aren't received in the regular course of business.

Q: Why does it matter?
A: Business receipts go into the receipts factor that allocates income to New York; excluding them changes the allocation, including for a nonresident S-corp shareholder under Tax Law § 632(a)(2).

Q: What's the test?
A: Whether the receipts were received in the regular course of business (20 NYCRR § 4-4.1(a)); a one-time liquidating sale tied to ceasing operations is not.

Citations and references

• Tax Law § 210.3(a)(2) (receipts factor of the business allocation percentage)
• Tax Law § 632(a)(2) (New York source income of a nonresident S corporation shareholder)
• 20 NYCRR § 4-4.1(a) (business receipts = gross income received in the regular course of business)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2011.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a11_6c.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-11(6)C
Corporation Tax
March 11, 2011

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C101229B

A petition received by the Department requests an advisory opinion as to whether the sale
of assets by name redacted, (“Petitioner”) should be treated as business receipts and included in
the denominator of the receipts factor of Petitioner’s business allocation percentage (“BAP”)
under Tax Law Article 9-A. We conclude that Petitioner’s receipts from the sale of the assets are
not business receipts and therefore are not included in its BAP.
Facts
Petitioner, a Rhode Island S Corporation, was a family-owned industrial service company
in the business of distributing sealing and filtration products and pumps from its warehouse in
Rhode Island. Petitioner did not manufacture any products but merely purchased products in
large quantities and resold them at wholesale to third-party customers. Petitioner’s shareholders
were all residents of Rhode Island. On January 7, 2007, pursuant to an asset purchase
agreement, Petitioner sold all its assets, including its entire inventory, to an unrelated private
equity group, name redacted. After the sale, Petitioner no longer actively operated its business.
Petitioner, a New York taxpayer, filed its final CT-3-S, New York State S Corporation
franchise tax return, and treated the amounts from the sale of inventory as business income.
Petitioner also included those amounts in the denominator of its business receipts factor for
purposes of calculating its New York State BAP. The shareholders of Petitioner filed nonresident individual income tax returns and used the BAP calculated by Petitioner to determine
their New York source income attributable to the S corporation.
Analysis
In determining the 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. Tax Law § 632(a)(2). 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. New York Tax
Treatment of S Corporations and Their Shareholders, Publication 35 (3/00) at 24-25.
In determining a taxpayer’s entire net income under Tax Law Article 9-A, business
income is sourced to New York State using a BAP. In general, the BAP consists entirely of the
receipts factor, Tax Law § 210.3(a)(10)(A)(ii). The portion of the business income sourced to

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TSB-A-11(6)C
Corporation Tax
March 11, 2011

New York is determined by dividing a taxpayer’s New York business receipts by its total
business receipts within and without New York. Tax Law § 210.3(a)(2).
The term “business receipts” means gross income received in the regular course of the
taxpayer’s business, provided such receipts are includable in the computation of the taxpayer’s
entire net income for the taxable year. 20 NYCRR § 4-4.1(a). The issue in this case is whether
the receipts from the sale of petitioner’s inventory are “business receipts,” that is, income that
was received in the regular course of the taxpayer’s business. A prior advisory opinion and Tax
Appeals Tribunal decision addressing whether income is received in the “regular course of
business” do not involve, as this case does, the sale of a taxpayer’s entire inventory to a third
party as part of an asset purchase agreement that included the sale of the taxpayer’s business.1
Moreover, after the sale, the present petitioner did not actively engage in business, except for
activities necessary to wind down its business affairs and make distributions to its shareholders
before ending its business operations. Accordingly, the receipts from petitioner’s sale of
inventory in this matter are not considered “business receipts” because they were not sold in the
regular course of business. Rather, they were part of the sale of all of petitioner’s assets and the
cessation of business operations. Therefore, the receipts from Petitioner’s sale of inventory
should not be included in its BAP.

DATED: March 11, 2011

NOTE:

1

/S/
DANIEL SMIRLOCK
Deputy Commissioner and Counsel

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.

See International Nickel, Inc. and Inco Alloys International, Inc., Tax Appeals Tribunal, Oct. 19, 1995, income
received by affiliated corporations from a pension plan reversion was not includable in business receipts because it
was not received in the ordinary course of business, and CaComm, Inc., Adv Op Comm T&F, October 16, 2008,
TSB-A-08(5)C, partnership’s one-time sale of a Federal Communications Commission (“FCC”) broadcast license
that occurred once in a twenty year period is not in the “regular course of business”.