New York Advisory Opinion TSB-A-82(9)I: Does a taxpayer's capital gains tax preference item get taxed twice under New York's minimum income tax computation - once directly, and again by reducing the net operating loss carried forward?

Plain-English summary

Henry and Lois Schwaeber had, for 1980, both a capital gains tax preference item and a net operating loss. New York's minimum income tax under Tax Law § 601-A applies a 6% rate (per § 602(f)) to a taxpayer's "items of tax preference" (defined by reference to federal tax preference items under Internal Revenue Code § 57), reduced by three things under § 622(a): a specific dollar deduction, State personal income tax after credits, and - to the extent the tax preference items still exceed those first two reductions - the taxpayer's federal net operating loss carryover to a later year.

The Schwaebers believed their capital gains preference item was effectively being taxed twice: once when it's included and summed as a tax preference item in Part I of Form IT-220 (the minimum tax computation schedule), and a second time because they thought the net operating loss carryover reduction on Line 6 of Form IT-220 was their net operating loss reduced by the capital gains preference amount - meaning less of a loss carryforward was preserved for future years, in their view because of the same capital gain being counted against them twice.

The Department corrected that misunderstanding. The amount entered on Form IT-220's net operating loss carryover line isn't the Schwaebers' net operating loss reduced by anything - it's simply their entire 1980 federal net operating loss carryover available to a future taxable year, used directly as one of the three offsetting reductions against the tax preference total. Because the full, unreduced net operating loss carryover is what's used as the reduction (not some smaller, capital-gains-adjusted figure), there's no double counting of the capital gains preference item anywhere in the computation.

What this means for you

Taxpayers with both a capital gains tax preference and a net operating loss in the same year

Don't assume your net operating loss carryforward is reduced by your capital gains preference item as part of the minimum tax computation - Form IT-220's net operating loss line uses your full federal carryover amount, and the capital gains preference is accounted for only once, as a tax preference item in Part I.

Taxpayers confused about Form IT-220's three-part reduction structure

Understand that the specific dollar deduction, State tax after credits, and net operating loss carryover are three independent reductions against your total tax preference items - none of them is computed by first subtracting one of your other tax preference items.

Accountants preparing minimum income tax computations involving capital gains preferences and NOLs

Verify that the net operating loss carryover entered on Form IT-220 is the client's full federal NOL carryover under Tax Law § 622(a)(3), not a figure already netted against a capital gains (or other) tax preference item - conflating the two produces exactly the double-counting confusion this opinion corrects.

Common questions

Q: I have both a capital gains tax preference and a net operating loss - is my capital gain being taxed twice under New York's minimum income tax?
A: No. The net operating loss carryover reduction used in the computation is your full federal NOL carryover, not a figure already reduced by your capital gains preference - so there's no double taxation.

Q: What is Form IT-220 and how does it relate to this?
A: It's New York's minimum income tax computation schedule. Part I sums your items of tax preference (including capital gains); Line 6 separately enters your full net operating loss carryover as one of three reductions against that total.

Q: Are there other reductions besides the net operating loss carryover?
A: Yes - Tax Law § 622(a) also allows a specific dollar deduction and a reduction for State personal income tax paid after credits, applied before the net operating loss carryover reduction comes into play.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a82_9i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82 (9) I
Income Tax
November 3, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I810803C

On August 31, 1981 a Petition for Advisory Opinion was received from Henry and Lois
Schwaeber, 190 Harbor Lane, Roslyn Harbor, New York 11576.
The issue raised is the role of a net operating loss in computing the New York minimum
income tax of a resident individual, where such individual has an item of tax preferences for capital
gains.
Section 601-A of the Tax Law imposes the State minimum income tax, at the rate prescribed
in section 602(f), on the New York minimum taxable income of every individual, estate or trust.
Section 602(f) provides for a minimum income tax rate of 6%, applicable to taxable years
commencing after December 31, 1971. Section 622 provides that the New York minimum taxable
income of a resident individual "shall be the sum of the items of tax preference," subject to three
reductions. These reductions are (a) a "specific deduction," specified as a dollar amount in section
622(c), (b) State personal income tax after credits, and (c) to the extent that the sum of the items of
tax preference exceeds the sum of (a) and (b), "the amount of any net operating loss of the taxpayer,
as determined for federal income tax purposes, which remains as a net operating loss carryover to
a succeeding taxable year." Tax Law, §622(a)(3). The expression "items of tax preference" is defined
in section 622(b) as "The federal items of tax preference, as defined in the laws of the United States,"
with certain modifications not applicable herein. The applicable provision of Federal statutory law
is section 57 of the Internal Revenue Code. 20 NYCRR 123.1(b)(1).
In 1980 Petitioners had a tax preference item for capital gains and a net operating loss.
Petitioners contend that their item of tax preference for capital gains is in effect taxed twice, "once
under Part I of Form IT-220 and a second time by reducing the 1980 Federal income necessary
to arrive at the carryforward." Form IT-220 is the minimum income tax computation schedule.
Part I provides for an enumeration and summing of items of tax preference. Petitioners' item of
tax preference for capital gains is properly includable in Part I. Part II provides for certain
modifications to Federal items of tax preference not germane to the present discussion. Part III
provides for the actual computation of minimum income tax. The total of items of tax
preference is to be entered on line 1, while lines 2, 4 and 6 provide for the three reductions
described earlier. Line 6 calls for the "net operating loss carryover reduction." The amount to
be entered here is not, as Petitioners appears erroneously to understand it, Petitioners' net

ROBERT W. BOUCHARD, ACTING COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (8/82)

-2­
TSB-A-82 (9) I
Income Tax
November 3, 1982

operating loss reduced by their item of tax preference for capital gains, but rather their entire 1980
net operating loss available as a net operating loss carryover to a succeeding taxable year. There is,
thus, no improper double taxation.

DATED: October 22, 1982

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau