New York Advisory Opinion TSB-A-89 (5)I: Issue raised is whether, for personal income tax purposes, Petitioner can take a resident credit, pursuant to section 620 of the Tax Law, for 'C Corp' taxes paid to North Carolina on 'S Corp' earnings reported in New York State.

Plain-English summary

James F. Matthews, a New York resident, was the sole shareholder of Port City Electric Company, an electrical contracting business that operated entirely in North Carolina and had no New York operations or income. Company became a federal S corporation effective July 1, 1987. Because Company did no business in New York, no New York corporate return or New York S-corporation election was ever filed for it. The wrinkle: North Carolina does not recognize S corporation status at all. Instead of passing Company's income through to Matthews the way federal law does, North Carolina taxed Company's net income directly at the corporate level, with no flow-through to the shareholder.

That created a mismatch. For federal (and therefore New York resident) purposes, Company's income flowed through to Matthews and landed on his federal adjusted gross income - and from there onto his New York resident return - under IRC section 1366(f)(2)-(3). But North Carolina had already taxed that same income once, at Company's corporate level, before any of it reached Matthews. Matthews argued this amounted to double taxation on identical business income and that he should be allowed to claim New York's section 620 resident credit for the North Carolina tax, even though that tax was nominally a corporate-level tax rather than a tax on him individually.

The Department agreed Matthews could claim the credit, but only by way of a specific mechanical route, not because "double taxation" alone entitles a taxpayer to relief. Tax Law section 620(a) allows a resident credit only for income tax paid to another state on income that is both derived from that state and subject to tax under New York's Article 22. The Department found that route through section 612(b)(3), which requires adding back to federal adjusted gross income any income tax paid to another taxing jurisdiction, to the extent that tax was deducted in computing federal income and not credited against federal tax. When Company computed its federal ordinary income, it deducted the North Carolina corporate income tax it paid under Chapter 105, Article 4, Division I of the North Carolina General Statutes. Because each item of Company's income, loss, or deduction keeps the same character for Matthews under Article 22 that it has federally (Tax Law section 617(b)), Matthews's pro rata share of that North Carolina tax deduction had to be added back to his federal adjusted gross income under section 612(b)(3) when computing his New York adjusted gross income.

That addback was the key: once the North Carolina tax was included in Matthews's own New York taxable income, it satisfied section 620(a)'s requirement that the credited income be "subject to tax under Article 22." The Department relied on the Appellate Division's decision in W. Mason Smith v New York State Tax Commission, 120 AD2d 907, which held that a taxpayer required to include in her New York adjusted gross income the tax a trust paid to Massachusetts had thereby "constructively paid" that state's tax and was entitled to the section 620(a) credit for it. Applying the same principle, the Department concluded Matthews could claim a section 620 resident credit for the North Carolina tax paid by Company, computed under section 620's ordinary rules - precisely because the section 612(b)(3) addback first pulled that tax into his New York taxable income.

What this means for you

New York residents who own S corporations operating in states that don't recognize S-corp status

If your S corporation does business only in a state (like North Carolina, at the time of this opinion) that taxes the corporation's income directly rather than passing it through, you may be facing the same mismatch Matthews faced: the same income taxed once at the corporate level out of state, and again as pass-through income on your New York resident return. This opinion shows the credit isn't automatic just because you're being taxed twice on the same income - it depends on the section 612(b)(3) addback mechanism actually applying to your facts.

Accountants computing the section 620 resident credit for out-of-state corporate-level taxes

The sequence matters: first confirm the out-of-state corporate tax was deducted in computing the S corporation's federal ordinary income (and not credited against federal tax), then add the shareholder's pro rata share of that tax back to federal adjusted gross income under section 612(b)(3), and only then compute the section 620 credit on that added-back amount. Skipping the addback step and just claiming a credit against the "double-taxed" income directly would not track the Department's reasoning here.

S corporation owners doing business in multiple states

Not every state treats S corporations the way New York and the IRS do. Before assuming pass-through treatment applies uniformly, check whether each state where your corporation operates recognizes the federal S election - some states, like North Carolina at the time of this ruling, tax the corporation directly regardless of the federal election, which can trigger this same addback-then-credit analysis on your New York return.

Common questions

Q: Why do I have to ADD BACK the out-of-state corporate tax to my New York income before I can get a credit for it?
A: Because Tax Law section 620(a) only allows a credit for tax paid to another state on income that is also "subject to tax under Article 22" in New York. Simply having the same underlying business income taxed twice isn't enough on its own - the out-of-state tax itself has to show up in your New York taxable income first. Section 612(b)(3) does that by requiring you to add back any income tax paid to another jurisdiction that was deducted in computing federal adjusted gross income. Once that addback happens, the tax is "subject to tax under Article 22," and the credit becomes available under the reasoning in W. Mason Smith v New York State Tax Commission, 120 AD2d 907.

Q: Why did North Carolina tax Company's income at the corporate level instead of passing it through to Matthews?
A: Because North Carolina, at the time, did not recognize S corporation status. It taxed corporate net income directly under Chapter 105, Article 4, Division I of the North Carolina General Statutes, with no flow-through to the shareholder - even though federal law (and by extension, New York, since Company never filed a New York corporate return or S-election) treated the same income as passed through to Matthews.

Q: Does the New York S corporation election under section 660 matter here?
A: No. Section 660 lets shareholders of a federal S corporation that is subject to tax under Article 9-A elect New York S-corporation treatment. Because Company did no business in New York, it was never subject to Article 9-A, so section 660 and its related modifications (sections 612(b)(18)-(21), 612(c)(21)-(22), and 615(c)(6)) simply did not apply to Matthews's situation at all.

Q: Is Matthews entitled to the credit just because the same income was taxed twice?
A: Not directly. The Department's holding turns on the specific mechanics of section 612(b)(3): because Company deducted the North Carolina tax in computing its own federal ordinary income, and that item keeps the same character for Matthews under Article 22 (section 617(b)), Matthews had to add his pro rata share of that deduction back to his federal adjusted gross income. It's that addback - not the double-taxation argument by itself - that makes the North Carolina tax "subject to tax under Article 22" and therefore credit-eligible under section 620(a).

Q: How is the credit amount actually computed?
A: The opinion states the credit is computed under Tax Law section 620's ordinary rules, applied to the North Carolina tax paid by Company that has been included in Matthews's New York taxable income through the section 612(b)(3) addback. The opinion doesn't provide a numeric example; it establishes only that the mechanism applies and that ordinary section 620 computation rules govern the amount.

Citations and references

• Tax Law § 620(a) - resident credit against Article 22 tax for income tax imposed by another state, political subdivision, DC, or a Canadian province, on income both derived from that jurisdiction and subject to tax under Article 22
• Tax Law § 601 - imposes New York personal income tax on the New York taxable income of resident individuals
• Tax Law § 611 - defines New York taxable income as New York adjusted gross income less New York deductions and exemptions
• Tax Law § 612(b)(3) - requires adding back to federal adjusted gross income any income tax paid to New York or another taxing jurisdiction, to the extent deducted federally and not credited against federal tax
• Tax Law § 617(a)-(b) - S corporation modifications apply pro rata based on the shareholder's federal share, and each item retains the same character under Article 22 as for federal purposes
• Tax Law § 660 - New York S corporation election, applicable only to federal S corporations subject to tax under Article 9-A
• IRC § 1366(f)(2)-(3) - shareholder's pro rata share of an S corporation's income, loss, deduction, and reduction for taxes paid
• North Carolina General Statutes, Chapter 105, Article 4, Division I - North Carolina's corporate net income tax, imposed without an S-corporation pass-through election
• W. Mason Smith v New York State Tax Commission, 120 AD2d 907 - a taxpayer required to include another state's tax in New York adjusted gross income has constructively paid that tax and is entitled to a section 620(a) credit for it

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a89_5i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (5) I
Income Tax
June 14, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I890202B

On February 2, 1989, a Petition for Advisory Opinion was received from James F. Matthews,
7 Dellwood Place, Binghamton, New York 13903.
The issue raised is whether, for personal income tax purposes, Petitioner can take a resident
credit, pursuant to section 620 of the Tax Law, for "C Corp" taxes paid to North Carolina on "S
Corp" earnings reported in New York State.
Petitioner is a New York State resident who is the sole shareholder of Port City Electric
Company (hereinafter "Company"). Company is engaged in electrical contract construction in North
Carolina and has no operations or income in New York State. Since Company does not do business
in New York State, no corporate return and no S corporation election was made for New York State
purposes. For federal income tax purposes, Company became an S corporation effective July 1,
1987.
North Carolina does not provide an S corporation election. Therefore, Company paid the
North Carolina net income tax at the corporate level with no flow through of earnings to the
stockholder.
It is Petitioner's opinion that the "C Corporation" level tax paid to North Carolina would be
duplicated by New York State if the resident credit is not allowed. Petitioner contends that even
though the tax is at the corporate level rather than at an individual level in North Carolina, it is on
the identical business income that flows into the New York State resident income tax return.
Section 620(a) of the Tax Law provides that a resident shall be allowed a credit against the
tax otherwise due under Article 22 for any income tax imposed for the taxable year by another state
of the United States, a political subdivision of such state, the District of Columbia or a province of
Canada, upon income both derived therefrom and subject to tax under Article 22 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.

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TSB-A-89 (5) I
Income Tax
June 14, 1989

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 (B) 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(b)(18),(19),(20),(21) and section 612(c)(21) and (22) of the Tax Law relating to such election
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.
Section 612(b)(3) of the Tax Law contains a modification increasing federal adjusted gross
income for income taxes imposed by New York State or any other taxing jurisdiction, to the extent
deductible in determining federal adjusted gross income and not credited against federal income tax.
When computing federal adjusted gross income, Petitioner must include his pro rata share
of Company's income, loss, deduction and reduction for taxes, described in section 1366(f)(2) and
(3) of the Internal Revenue Code. When Company computes ordinary income from trade or business
activities, Company is allowed a deduction for the income taxes Company paid to North Carolina.
North Carolina imposes an income tax on the net income of corporations under Division I of Article
4, Chapter 105, General Statutes of North Carolina, as amended.
Since each item of Company's income, loss or deduction shall have the same character for
Petitioner under Article 22 as for federal income tax purposes, the income tax paid to North Carolina
that is deducted in computing Company's ordinary income for federal income tax purposes must be
added to Petitioner's federal adjusted gross income, pursuant to section 612(b)(B) of the Tax Law,
when computing New York adjusted gross income.
In the matter of W. Mason Smith v New York State Tax Commission (120 AD2d 907) the
New York State Appellate Division, Supreme Court held that if a taxpayer is required to include in
gross income the amount of tax paid to another state, the taxpayer must be allowed a credit for that
tax. Therein, the petitioner was required to include in her New York adjusted gross income, the

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TSB-A-89 (5) I
Income Tax
June 14, 1989

income tax paid to Massachusetts by a trust. The resultant effect of this was that the petitioner had
borne the burden of the income taxes paid to Massachusetts, and as such, the petitioner
constructively paid "income taxes imposed for the taxable year by another state" and was therefore
entitled to a credit under section 620(a) of the Tax Law.
Accordingly, herein Petitioner may claim a resident credit under section 620 of the Tax Law
for income taxes paid by Company to North Carolina, when such taxes are included in Petitioner's
New York taxable income pursuant to the modification contained in section 612(b)(3) of the Tax
Law. The amount of resident credit allowed must be computed pursuant to such section 620 of the
Tax Law.

DATED: June 14, 1989

s/FRANK J. PUCCIA
Director
Technical Services

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