Can a corporation subtract from its New York entire net income the amount of stock it contributes to a federal tax-credit employee stock ownership plan (ESOP), which isn't deductible for federal income tax purposes?

Plain-English summary

Goulds Pumps maintains a tax-credit employee stock ownership plan (ESOP) as defined under IRC § 41(c), contributing company stock each year equal to half of one percent of covered employees' compensation. The federal government allows Goulds a tax credit equal to that contribution amount -- but as a tradeoff, § 41(c) disallows any federal income tax deduction for the contribution itself, even though it's booked as an employee benefit expense and must be added back to book income when computing federal taxable income. Goulds noticed this federal mechanic looks a lot like a DIFFERENT federal provision, IRC § 280C, which similarly disallows a wage deduction equal to a company's targeted jobs tax credit under § 51(a) -- and New York's own statute (§ 208.9(a)(7)) specifically lets companies subtract that § 280C-disallowed wage amount back out when computing New York entire net income. Since the ESOP mechanic seemed functionally identical, Goulds argued New York should allow a similar subtraction for its non-deductible ESOP contribution.

The Department disagreed, based purely on the text of the statute rather than any policy objection to Goulds' analogy. New York's entire net income starts from federal taxable income and is then adjusted only by the SPECIFIC modifications listed in § 208.9(a) and (b) -- and the only wage/labor-cost-related subtraction on that list, § 208.9(a)(7), is worded to match § 280C specifically (targeted jobs credit wages), not § 41(c) (ESOP contributions). Because Goulds' ESOP contribution is disallowed under § 41(c) rather than § 280C, it simply falls outside the one modification that might have applied, and there's no other provision in § 208.9 that covers ESOP contributions either. The Department concluded that, however similar the two federal mechanics may be in substance, New York's statute doesn't provide the subtraction Goulds wanted -- so the company must compute its entire net income without any offset for the ESOP contribution that federal law required it to add back to book income.

What this means for you

Companies maintaining tax-credit ESOPs or other IRC-credit-linked, non-deductible contributions

Don't assume a New York modification exists just because a federal book-to-tax addback resembles one that DOES have a New York offset (like the § 280C targeted-jobs-credit wage disallowance). New York's entire net income modifications are keyed to SPECIFIC Internal Revenue Code sections -- a functionally similar but differently-numbered federal provision generally won't qualify unless the New York statute names it (or a broader category covering it) explicitly.

Tax professionals analogizing between similar federal credit/deduction-disallowance mechanics

This ruling is a reminder that New York's conformity to federal taxable income is modification-specific, not general-purpose -- the Department will not extend a named modification (like § 208.9(a)(7)) by analogy to a different, unlisted Internal Revenue Code section, even where the two federal provisions are structurally near-identical.

Common questions

Q: Would the answer differ if the ESOP contribution were somehow tied to the targeted jobs credit instead?
A: Yes -- if the disallowed deduction actually arose under IRC § 280C, the § 208.9(a)(7) subtraction would apply; the ruling turns entirely on which Code section causes the federal disallowance.

Q: Does New York have ANY provision addressing ESOP contributions?
A: Not one that provides this subtraction, based on the Department's review of § 208.9 -- it explicitly stated no modification exists for ESOP contributions there.

Q: Can another company with a similar ESOP rely on this specific ruling?
A: No. It binds the Department only for this petitioner's specific facts and can't be relied upon by other taxpayers, though the underlying statutory reasoning (§ 208.9(a)(7) is § 280C-specific) would apply generally to any similarly structured ESOP.

Citations and references

Statutes and regulations:

• Tax Law § 208.9, § 208.9(a)(7) (entire net income; § 280C wage subtraction)
• IRC § 41(c) (ESOP tax credit and deduction disallowance); § 280C (targeted jobs credit wage disallowance); § 51(a) (targeted jobs credit)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a87_5c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87 (5) C
Corporation Tax
March 11, 1987

STATE TAX COMMISSION
STATE OF NEW YORK
ADVISORY OPINION

PETITION NO. C861203A

On December 3, 1986, a Petition for Advisory Opinion was received from Goulds Pumps,
Inc., 240 Fall Street, Seneca Falls, New York 13148.
The issue raised is the proper treatment to be accorded to contributions to a tax credit
employee stock ownership plan for purposes of computing New York State entire net income
under Article 9-A of the Tax Law.
Petitioner states that it maintains an employee stock ownership plan, as defined in section
41(c) of the Internal Revenue Code, to which it annually contributes Petitioner's stock in an
amount equal to ½ of 1% of the compensation of all employees covered by the plan. A federal
tax credit is allowed equal to the amount of the contribution. This contribution, which is reflected
on the books of the company as an employee benefit expense, must be added to "book income" in
arriving at federal taxable income. Thus, it is not deductible for federal income tax purposes.
Section 280C of the Internal Revenue Code disallows a deduction for wages paid in an
amount equal to a corporation's targeted jobs credit under section 51(a) of the Internal Revenue
Code. However, section 208.9(a)(7) of the Tax Law provides that entire net income shall not
include that portion of wages and salaries paid or incurred for the taxable year for which a
deduction is not allowed pursuant to the provisions of section 280C of the Internal Revenue
Code.
Petitioner contends that since the federal income tax treatment of contributions to an
employee stock ownership plan is virtually identical to that accorded wages qualifying for the
targeted jobs credit, it would appear that in computing entire net income, pursuant to section
208.9 of the Tax Law, an adjustment similar to section 208.9(a)(7) should be allowed to enable
the taxpayer to subtract from its federal taxable income the amount of the contribution to the
employee stock ownership plan that was not deducted for federal income tax purposes.
Section 208.9 of the Tax Law defines entire net income as "total net income from all
sources, which shall be presumably the same as the entire taxable income which the taxpayer is
required to report to the United States treasury department ... except as hereinafter provided ...."
When computing entire net income, the starting point is federal taxable income. After
determining federal taxable income, it must be modified as required by section 208.9(a) and (b)
of the Tax Law. The modification contained in section 208.9(a)(7) specifically provides for a
subtraction of the portion of wages and salaries paid or incurred for which a deduction is not
allowed pursuant to section 280C of the Internal Revenue Code.
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-87 (5) C
Corporation Tax
March 11, 1987

Section 41(c) of the Internal Revenue Code, rather than section 280C, contains the
provision that disallows a deduction for federal income tax purposes for the amount of the contri­
bution to the employee stock ownership plan. Accordingly, section 208.9(a)(7) of the Tax Law
cannot be applied to allow a subtraction modification for such a contribution.
In addition, section 208.9 of the Tax Law does not provide for a modification that allows
for a subtraction from federal taxable income for the amount of a contribution to an employee
stock ownership plan.
Therefore, when computing entire net income, pursuant to section 208.9 of the Tax Law,
Petitioner may not adjust federal taxable income by subtracting from it the amount of the
contribution to the employee stock ownership plan that is not allowed as a deduction for federal
income tax purposes pursuant to section 41(c) of the Internal Revenue Code.

DATED: March 11, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.