If a trucking company taxed under Article 9 (not Article 9-A) makes an S corporation distribution to its sole shareholder from the accumulated adjustments account, can the shareholder deduct that distribution on their New York personal income tax return?

Plain-English summary

David Duchini is the sole shareholder of Adolph's Trucking Co. Inc., a federal S corporation. For New York franchise tax purposes, the trucking company is taxed not under the general Article 9-A regime but under Article 9, sections 183 and 184 -- a franchise tax based on the net value of issued capital stock, computed as the highest of three methods (a flat rate on allocated capital stock value, a dividend-linked rate, or a $75 minimum). In 1989, Duchini received a distribution from the company's accumulated adjustments account (the federal mechanism tracking S corporation income already taxed to shareholders). He asked whether that distribution -- treated as a dividend for section 183 purposes -- could be subtracted on his personal New York income tax return.

The answer: no subtraction is available. Two separate points combine to close off relief:

• At the corporate level, prior authority (La Flor De Mayo Express Inc., 1975; a 1963 Deputy Commissioner letter) establishes that an S corporation's distributions are treated as dividends paid on capital stock for computing the section 183 tax -- but since section 183 taxes the value of capital stock, not dividends themselves, the distribution isn't separately taxed at the corporate level.
• At the shareholder level, the New York S corporation election under section 660 -- which lets shareholders make certain modifications when computing personal income tax -- is available only to shareholders of a federal S corporation that is subject to Article 9-A. Because Adolph's Trucking is taxed under Article 9 instead, the election (and its associated modifications) simply doesn't apply. Duchini's New York taxable income starts from federal adjusted gross income, and Article 22 contains no provision allowing a modification for a distribution from the accumulated adjustments account. So the distribution is taxable for New York personal income tax purposes exactly to the same extent it is taxable federally -- with no additional New York deduction.

What this means for you

Shareholders of S corporation trucking (or other Article 9) companies

If your S corporation is taxed under Article 9 rather than Article 9-A, don't assume the New York S corporation election and its related modifications apply to you -- section 660 is expressly limited to Article 9-A taxpayers. Your personal income tax treatment of corporate distributions will track the federal result with no New York-specific relief.

Accountants and tax professionals

This ruling highlights a narrow but important gap: the New York S election mechanism in section 660 doesn't reach every federal S corporation -- only those subject to Article 9-A. For companies under Article 9 (trucking, and other specialized franchise tax articles), plan around federal taxation as the controlling baseline for shareholder-level New York income tax.

Trucking company owners weighing distribution timing

Since accumulated-adjustments-account distributions carry through to New York personal income tax exactly as they're treated federally (tax-free to the extent of stock basis, then gain), and there's no New York-specific relief for Article 9 companies, plan distribution timing around your federal S corporation basis calculations.

Common questions

Q: Does the New York S corporation election apply to all federal S corporations?
A: No -- section 660 limits the election to federal S corporations that are subject to Article 9-A. A company taxed under a different article, like Article 9's trucking franchise tax, is excluded.

Q: Is an S corporation distribution separately taxed at the corporate level under section 183?
A: No -- while the distribution is treated as a dividend for computing the capital-stock-value tax rate, section 183 taxes the value of capital stock, not the dividend itself.

Q: How is the shareholder taxed on the distribution for New York personal income tax?
A: Exactly as it is treated for federal income tax purposes -- there is no New York Article 22 modification for accumulated-adjustments-account distributions absent the section 660 election, which doesn't apply here.

Citations and references

Statutes and regulations:

• Tax Law section 183 (Article 9 trucking company franchise tax)
• Tax Law sections 601, 611, 612, 617 (personal income tax computation, S corporation shareholder modifications)
• Tax Law section 660 (New York S corporation election, limited to Article 9-A taxpayers)
• IRC section 1368(c) (accumulated adjustments account distributions)

Prior authority cited in the ruling:

• La Flor De Mayo Express Inc., Dec St Tax Comm, July 3, 1975
• Letter of Morton T. Valley, Deputy Tax Commissioner, to Commerce Clearing House, Inc., September 12, 1963

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a91_15c_7i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-91 (15) C
Corporation Tax
TSB-A-91 (7) I
Income Tax
July 5, 1991

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z910325B

On March 25, 1991, a Petition for Advisory Opinion was received from David
Duchini, 2 Windsor Road, Scarsdale, New York 10583.
The issue raised by Petitioner, David Duchini, is whether S corporation
distributions from the accumulated adjustments account that are treated as
dividends for purposes of section 183 of Article 9 of the Tax Law, are allowed
as a subtraction on the shareholder's personal income tax return.
Petitioner is the sole shareholder of Adolph's Trucking Co. Inc., a federal
S corporation. For tax year ended December 31, 1989, Petitioner received a
distribution from Adolph's Trucking Co. Inc.'s accumulated adjustments account.
For New York State franchise tax purposes, Adolph's Trucking Co. Inc. is subject
to tax under sections 183 and 184 of Article 9 of the Tax Law.
Section 183 of the Tax Law provides for a franchise tax on trucking
companies based on the net value of issued capital stock employed in New York
State. The franchise tax required to be paid under section 183 is the highest
tax computed by the following three methods:
1.

Allocated value of issued capital stock multiplied by the tax rate
of 1.5 mills.

2.

Allocated value of issued capital stock on which dividends are paid
at a rate of 6% or more multiplied by the tax rate of .375 mills for
each l% of dividends paid. The rate of 1.5 mills is applied to
capital stock on which dividends are not paid or are paid at a rate
of less than 6%.

3.

Minimum tax of $75.

For purposes of computing the tax under section 183 of the Tax Law,
distributions of an S corporation are treated as dividends paid on capital stock.
La Flor De Mayo Express Inc., Dec St Tax Comm, July 3, 1975. See letter of Morton
T. Valley, Deputy Tax Commissioner, to Commerce Clearing House, Inc., September
12, 1963.
Accordingly, the distribution that Adolph's Trucking made to Petitioner
from the accumulated adjustments account is treated as a dividend for purposes
of computing the franchise tax based on the net value of capital stock under
section 183 of the Tax Law. However, since the tax under section 183 is based on
the net value of capital stock, it is not a tax on dividends, and the
distribution itself is not subject to tax under section 183.
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
TP-9 (9/88)

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TSB-A-91 (15) C
Corporation Tax
TSB-A-91 (7) I
Income Tax
July 5, 1991

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.
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.
Section 660 of the Tax Law provides for an election 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. However, when
a federal S corporation is not subject to tax under Article 9-A but is subject
to tax under Article 9 of the Tax Law, such election does not apply and the
modifications contained in section 612 of the Tax Law relating to such election
do not apply.
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 but is subject to tax under Article 9 of the Tax Law, 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.
For federal income tax purposes, the undistributed income of an S
corporation is taxed to the shareholders not the corporation. That is, the
individual shareholder's federal adjusted gross income will reflect the
individual's pro rata share of the S corporation's income, loss, deduction and
reduction for taxes, described in section 1366(f)(2) and (3) of the Internal
Revenue Code.
Section 1368 of the Internal Revenue Code provides the S corporation
distribution rules including the use of an accumulated adjustments account to
keep track of how much undistributed net income has been taxed to shareholders.
Under section 1368(c) of the Internal Revenue Code, distributions from the
accumulated adjustments account are non dividends. These distributions are tax­
free to the shareholders to the extent of the shareholder's stock basis and then
result in gain if such basis is exceeded.
For New York State personal income tax purposes, Petitioner's starting
point for computing New York taxable income is federal adjusted gross income.

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TSB-A-91 (15) C
Corporation Tax
TSB-A-91 (7) I
Income Tax
July 5, 1991

There is no modification contained in Article 22 to make an adjustment for the
distribution from the accumulated adjustments account. Accordingly, the
distribution from the accumulated adjustments account is taxable to Petitioner
for New York personal income tax purposes only to the extent such distribution
is taxable to Petitioner for federal income tax purposes.
In conclusion, there is no provision in Article 22 for a deduction on
Petitioner's personal income tax return for the distribution in 1989 from the
accumulated adjustments account of Adolph's Trucking Co. Inc. that is treated as
a dividend for purposes of computing the capital stock tax under section 183 of
the Tax Law.

DATED: July 5, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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