Douglas Condon (Trager, Glass & Co., CPAs) asked how New York's Article 22 personal income tax treats a New York resident's income or loss from a corporation that has federal S-corporation status but has not made (and cannot make) a New York S-corporation election, because the corporation does not do business in New York and is not subject to New York's Article 9-A corporate franchise tax.

Plain-English summary

Douglas Condon, a CPA with Trager, Glass & Co., asked the Department how New York's Article 22 personal income tax treats a resident individual's income or loss from a corporation that has federal S-corporation approval but is not an S corporation for New York purposes. The hypothetical facts: a New York resident owns 100% of a New Jersey corporation with federal S-corporation status. That corporation does not do business in New York and is not subject to New York's Article 9-A corporate franchise tax at all.

The Department walked through the mechanics. Tax Law § 601 taxes the New York taxable income of resident individuals; § 611 defines that income as federal-conformity-based New York adjusted gross income less New York deductions and exemptions; and New York adjusted gross income starts from federal adjusted gross income, adjusted only by the modifications in § 612. Because federal adjusted gross income already includes the shareholder's pro-rata share of the S corporation's income, loss, deduction, and tax-reduction items under IRC § 1366(f)(2)-(3), that starting point already reflects the corporation's pass-through results. Tax Law § 617(a) then directs that, for a resident shareholder of an S corporation not subject to Article 9-A tax, any § 612(b)/(c)/(d) or § 615(c)/(d)(2)-(3) modification tied to an S-corporation item is applied based on the shareholder's federal pro-rata share, and § 617(b) preserves the same character for each item under Article 22 that it has federally.

The key move in the opinion: because this particular federal S corporation does not do business in New York and is not subject to Article 9-A tax, the joint election mechanism in Tax Law § 660 - by which shareholders of a federal S corporation that IS subject to Article 9-A tax may elect New York S-corporation treatment - simply has nothing to attach to. There is no New York S-election to make, because the corporation was never within Article 9-A's reach to begin with. As a direct consequence, the S-election-related modifications in § 612(b)(18)-(21) and § 612(c)(21)-(22) do not apply, and if the taxpayer itemizes deductions under § 615, the § 615(c)(6) modification does not apply either. So the resident shareholder's New York taxable income here is computed through the plain, generic §§ 611/612 framework - not through any special New York S-corporation modification scheme, since that scheme was never triggered in the first place.

The opinion closes with a related aside, without applying it to Condon's facts: for tax years beginning after 1986 and before 1989, Tax Law § 601(d)(1) imposed a tax on certain "unearned income" of a resident individual with New York adjusted gross income over $100,000, with "New York unearned income" and its adjustments defined in § 601(d)(4)-(6). A companion opinion issued a few weeks later to the same petitioner and accounting firm took up that unearned-income surtax question directly, but for a different, related scenario - a federal S corporation that HAD made the New York S-election under section 660 (meaning it was subject to Article 9-A tax in the first place). This opinion, issued first, addresses only the non-electing scenario.

What this means for you

New York residents who own out-of-state S-corps that never elected NY S-corp status

If your federal S corporation doesn't do business in New York and isn't subject to New York's Article 9-A corporate franchise tax, there's no New York S-corporation election available or needed - Tax Law § 660 simply doesn't reach a corporation outside Article 9-A's scope. Your share of the corporation's income or loss flows into your New York adjusted gross income the ordinary way, through federal adjusted gross income and the generally applicable § 612 modifications, without any special New York S-corporation adjustment.

Accountants determining which NY S-corporation modifications apply

Before applying the S-corporation-specific modifications in § 612(b)(18)-(21), § 612(c)(21)-(22), or the itemized-deduction modification in § 615(c)(6), confirm whether the corporation is actually subject to Article 9-A tax and doing business in New York. Those modifications are keyed to the existence (or availability) of a section 660 election; if the corporation was never within Article 9-A's reach, the modifications simply don't apply, and the client's New York taxable income is computed under the plain §§ 611/612 framework instead.

Small-business owners with multi-state entity structures

Where you elect federal S-corporation status matters, but where your corporation does business and pays franchise tax matters just as much for New York income-tax purposes. A corporation with no New York business presence and no Article 9-A liability doesn't trigger New York's parallel S-corporation election regime at all - your New York tax treatment as a shareholder rides on the ordinary federal-conformity rules in §§ 611 and 612, with character preserved under § 617(b).

Common questions

Q: If my S-corp doesn't do business in New York and isn't subject to the New York corporate franchise tax, do I still need to worry about the New York S-election?
A: No. The section 660 election is only available to shareholders of a federal S corporation that is subject to Article 9-A tax. If the corporation isn't within Article 9-A's reach in the first place - as here, where it neither does business in New York nor owes Article 9-A tax - the election mechanism is simply inapplicable, and so are the modifications tied to it.

Q: How is my New York taxable income computed if the S-election doesn't apply?
A: Through the plain §§ 611 and 612 framework: New York adjusted gross income is your federal adjusted gross income (which already includes your pro-rata share of the S corporation's income, loss, and deductions under IRC § 1366(f)) adjusted only by the generally applicable § 612 modifications, followed by your New York deductions and exemptions under § 611. The S-election-specific modifications in § 612(b)(18)-(21), § 612(c)(21)-(22), and § 615(c)(6) don't come into play.

Q: Does my S-corporation income keep the same character on my New York return as it has federally?
A: Yes. Tax Law § 617(b) provides that each item of S-corporation income, loss, or deduction has the same character for the shareholder under Article 22 as it does for federal income tax purposes.

Q: Does this opinion address the New York "unearned income" surtax?
A: Only in passing, as a flag. The opinion notes that for tax years beginning after 1986 and before 1989, Tax Law § 601(d)(1) imposed a surtax on certain unearned income of a resident with New York adjusted gross income over $100,000, but it doesn't apply that surtax to Condon's facts. A companion opinion issued a few weeks later to the same petitioner and accounting firm took up that surtax question for a related but different scenario, where the corporation had made the New York S-election.

Q: What if my out-of-state S-corp later starts doing business in New York or becomes subject to Article 9-A tax?
A: That would change the analysis. Once a federal S corporation is subject to Article 9-A tax, the section 660 election becomes available, and if the shareholders make it, the S-corporation-specific modifications this opinion found inapplicable would come into play instead of the generic §§ 611/612 framework.

Citations and references

• Tax Law § 601 - imposes the personal income tax on the New York taxable income of resident individuals
• Tax Law § 611 - New York taxable income equals New York adjusted gross income less New York deductions and exemptions
• Tax Law § 612 - modifications applied to federal adjusted gross income to compute New York adjusted gross income
• Tax Law § 617(a) - for a resident shareholder of an S corporation not subject to Article 9-A tax, S-corporation-related modifications are applied based on the shareholder's federal pro-rata share
• Tax Law § 617(b) - an S-corporation item keeps the same character for the shareholder under Article 22 as it has federally
• Tax Law § 660 - joint election allowing shareholders of a federal S corporation subject to Article 9-A tax to elect New York S-corporation treatment
• Tax Law § 612(b)(18)-(21) and § 612(c)(21)-(22) - New York S-corporation-election-related modifications, inapplicable here
• Tax Law § 615(c)(6) - itemized-deduction modification tied to the New York S-corporation election, inapplicable here
• Tax Law § 601(d)(1), (4)-(6) - repealed surtax on certain "unearned income" of a resident with New York AGI over $100,000, flagged but not applied
• IRC § 1366(f)(2)-(3) - shareholder's pro rata share of S-corporation income, loss, deduction, and tax-reduction items included in federal adjusted gross income

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a88_12i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (12) I
Income Tax
August 24, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I880601A

On June 1, 1988, a Petition for Advisory Opinion was received from Douglas Condon,
Trager, Glass & Co., CPA's, P.C., 1790 Broadway, New York, N.Y. 10019.
The issue raised is the treatment for purposes of the personal income tax under Article 22 of
the Tax Law of income or loss relating to the ownership by a resident individual of an interest in a
corporation which is an S corporation for federal purposes but is not an S corporation for New York
State purposes.
Petitioner has set forth a hypothetical situation wherein a taxpayer who is a New York State
resident has a 100% ownership interest in a New Jersey corporation which has federal approval to
be an S corporation. It is assumed for purposes of this Advisory Opinion that the federal S
corporation does not do business in New York State and is not subject to tax under Article 9-A of
the Tax Law.
Section 601 of the Tax Law imposes the personal income tax on the New York taxable
income of resident individuals. Section 611 of the Tax Law provides that the New York taxable
income of a resident individual is computed by subtracting from the individual's New York adjusted
gross income, the individual's New York deduction and New York exemptions. The New York
adjusted gross income of a resident individual is the individual's federal adjusted gross income with
the modifications required by section 612 of the Tax Law. An individual's federal adjusted gross
income includes a shareholder's pro rata share of a S corporation's income, loss, deduction and
reduction for taxes, described in section 1366(f)(2) and (3) of the Internal Revenue Code.
Section 617(a) of the Tax Law provides that when computing New York adjusted gross
income and New York taxable income of a resident shareholder of an S corporation not subject to
tax under Article 9-A, any modification described in section 612(b), (c) or (d) or section 615 (c) or
(d)(2) or (3) of the Tax Law which relates to an item of S corporation income, loss or deduction shall
be made in accordance with the shareholder's pro rata share, for federal income tax purposes, of the
item to which the modification relates. Section 617(b) of the Tax Law provides that each item of
S corporation income, loss or deduction shall have the same character for a shareholder under Article
22 as for federal income tax purposes.
When a federal S corporation is not subject to tax under Article 9-A and does not do business
in New York State, the election provided for in section 660 of the Tax Law, whereby all shareholders
of a federal S corporation that is subject to tax under Article 9-A may elect to treat the corporation
as a New York S corporation, does not apply and the modifications contained in section 612 of the
Tax Law relating to such election do not apply.

-2­
TSB-A-88 (12) I
Income Tax
August 24, 1988
Accordingly, when a taxpayer is a New York State resident and is a shareholder of a federal
S corporation that is not subject to tax under Article 9-A and that does not do business in New York
State, the taxpayer's New York taxable income is computed pursuant to sections 611 and 612 of the
Tax Law. However, the modifications contained in section 612(b)(18), (19), (20), (21) and section
612(c)(21) and (22) of the Tax Law do not apply. In addition, if such taxpayer computes the New
York itemized deduction pursuant to section 615 of the Tax Law, the modification contained in
section 615(c)(6) of the Tax Law does not apply.
It should be noted that for taxable years beginning after 1986 and before 1989, section
601(d)(1) of the Tax Law imposes a tax on certain unearned income of a resident individual who has
New York adjusted gross income in excess of $100,000. The tax is imposed on New York unearned
income. Section 601(d)(4) of the Tax Law provides that "New York unearned income" means New
York adjusted gross income with certain adjustments. The adjustments are contained in section
601(d)(5) and (6) of the Tax Law.

DATED: August 24, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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