Is a nonresident's gain on redeeming S-corporation stock, and the interest on the installment note, New York source income when the corporation owns New York real estate?

Plain-English summary

A Georgia resident inherited a 33% interest in a New York S corporation (69% parking operation, 31% real-estate rentals; owns New York real estate). In 2012 she sold her stock back to the corporation under a redemption plan and took an installment note. She asked whether the gain and the note interest are New York source income.

The Office of Counsel concluded:
- The interest on the installment note is not New York source income. It comes from intangible personal property (the note), not from property used in a New York business (Tax Law § 631(b)(2)); see Matter of Epstein.
- The gain is New York source to the extent it's attributable to the corporation's New York real property - but only if that real property is at least 50% of the corporation's assets (owned 2+ years) on the sale date (Tax Law § 631(b)(1)(A)(1)). If so, the New York portion is the gain times a fraction: New York real-property value over total asset value, and that flows through each installment payment.

What this means for you

Nonresidents selling interests in New York closely held entities

Selling stock is usually intangible (not New York-taxable), but New York reaches the real-estate slice: if a corporation (or partnership/LLC) is at least half New York real property by value, your gain on the interest is New York source to that extent. Note interest, though, stays nontaxable to a nonresident.

Accountants and tax preparers

Run the § 631(b)(1)(A)(1) 50% asset test on the sale date (using assets held 2+ years), then apportion gain by the NY-real-property/total-assets fraction across installment principal. Keep interest out of New York source income.

Common questions

Q: Is my whole gain New York source because the company owns New York real estate?
A: Only the real-property-attributable portion, and only if New York real property is at least 50% of assets. Otherwise the stock gain is nontaxable intangible income.

Q: Is the interest on my installment note taxable to New York?
A: No. It's income from intangible personal property and not New York source for a nonresident.

Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner. Use it as guidance and confirm your own facts.

Citations and references

Statutes and regulations:
- Tax Law §§ 631(a), 631(b)(1)(A)(1), 631(b)(2)
- 20 NYCRR 132.5(b); Matter of Epstein v. State Tax Commission

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2015.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a15_5i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(5)I
Income Tax
May 29, 2015

Office of Counsel
Advisory Opinion Unit

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE

ADVISORY OPINION

PETITION NO. I140128A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTEDREDACTEDREDACTEDREDACTEDRE
DACTED (“Petitioner”), a non-resident of New York State, sold stock in a New York
Subchapter S corporation to the S corporation under a stock redemption plan and received an
installment note as part of the stock sale. Petitioner asks whether the gain on the redemption of
the stock and the interest income on the installment note payments are subject to New York State
personal income tax.
We conclude that the interest paid to Petitioner pursuant to the installment note is not
subject to New York State personal income tax. However, a portion of the gain on Petitioner’s
stock that was included in the principal payments on the installment note would be attributable to
an interest in real property in New York and would be New York source income subject to New
York State personal income tax, if the conditions in Tax Law § 631(b)(1)(A)(1) are met.
Facts
Petitioner inherited stock in an S corporation operating in New York State. The S
corporation, which made the New York S election, owns New York State real estate and derives
69% of its income from an active parking operation and 31% from real estate rentals. The
company has been in business for over 20 years and has no plans to liquidate. In 2012,
Petitioner, who has been a resident of Georgia since 1997 and has never been active in the
business, sold her entire 33% interest in the S corporation back to the S Corporation pursuant to a
stock redemption plan and received an installment note from the S Corporation as part of the
stock sale. Petitioner asks whether the gain from the stock redemption and the interest income
on installment note payments are subject to New York State personal income tax.
Analysis
Generally, a nonresident of New York is subject to New York State personal income tax
on his or her New York source income that enters into his or her federal adjusted gross income
(FAGI). See Tax Law § 631(a). New York source income is defined as the sum of income, gain,
loss, and deduction derived from or connected with New York sources. See Tax Law §

-2-

TSB-A-15(5)I
Income Tax
May 29, 2015

631(b)(1). Those tax items include items attributable to the ownership of any interest in real
property located in this state. See Tax Law § 631(b)(1)(A). The term “real property located in
this state” includes an interest in an S corporation that owns real property in New York, if the
real property in New York has a fair market value that equals or exceeds 50% of the value of all
the assets of the entity on the date of the sale that were owned for a least two years before the
date of the sale of the S Corporation’s stock. See Tax Law § 631(b)(1)(A)(1). Thus, if the
valuation conditions in § 631(b)(1)(A)(1) are met, a portion of the gain on the redemption of
Petitioners’ stock in the S corporation, reflected in the principal payments of the installment note,
would be New York source income and subject New York State personal income tax. The
portion of the gain that constitutes New York source income would be determined by
multiplying the amount of the gain by a fraction, the numerator of which is the fair market value
of the New York real property on the date of the sale or exchange and the denominator of which
is the fair market value of all of the entity’s assets (owned for at least two years) on the date of
the sale or exchange. To the extent that this gain is paid to the taxpayer under an installment
payment agreement, a portion of each installment payment would be New York source income.
Items of income, gain, loss, and deduction attributable to intangible personal property,
including interest and gain from the disposition of intangible personal property, shall constitute
income derived from New York sources only to the extent that such income is from property
employed in a business, trade, profession, or occupation carried on in New York. See Tax Law §
631(b)(2). Generally, where a nonresident individual sells real or tangible personal property
located in New York State and, as a result of such sale, receives as payment intangible personal
property, e.g., a note, that generates interest income, such interest income is not attributable to
the sale of the property but is attributable to nontaxable intangible personal property. See 20
NYCRR § 132.5(b).
In Matter of Epstein v. State Tax Commission, 89 A.D.2d 256 (1982), the taxpayers, who
were nonresidents of New York during the taxable years in question, sold an apartment building
located in New York and took back a purchase-money mortgage for the unpaid balance of the
purchase price. The note provided for interest at the rate of 6% per annum with quarterly
payments of principal and interest. The Appellate Division concluded that the income-producing
personal property was the mortgage note, i.e., intangible personal property, and not the real
estate apartment building, and thus the interest income was not taxable. However, with regard to
the amount of principal payments included on the mortgage installments, the amounts that
represented gains on the sale of the stock were reported correctly as nonresident New York State
personal income. See also, Delmhurst v. State Tax Commission, 92 A.D.2d 981(1983); Katz v.
State Tax Commission, 110 A.D.2d 1029 (1985).
Thus, we conclude that the interest on the installment note that Petitioner receives in
exchange for the stock is not income attributable to property employed in a business, trade,
profession, or occupation carried on in New York and as such is not subject to New York State
personal income tax. However, a portion of the gain on Petitioner’s stock that is included in the
principal payments on the installment note is attributable to an interest in real property in New

-3-

TSB-A-15(5)I
Income Tax
May 29, 2015

York and would be New York source income subject to New York State personal income tax, if
the valuation conditions in Tax Law § 631(b)(1)(A)(1) are met.

DATED: May 29, 2015

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy 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. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.