How does an interstate trucker that switches from Article 9 (sections 183/184) to Article 9-A as a New York S corporation compute its short-period entire net income, and how does that flow through to nonresident shareholders?

Plain-English summary

H.O. Wolding, Inc., a Wisconsin-based interstate motor carrier, had been taxed under Article 9 (sections 183 and 184). Effective January 1, 1998 it became subject to Article 9-A and elected to be a New York S corporation with a fiscal year ending June 30. Its first 9-A report covers a short period -- January 1 to June 30, 1998. All its shareholders are Wisconsin residents who file on a calendar year. It asked (1) how to compute its short-period taxable income, and (2) how the change affects its nonresident shareholders.

Computing entire net income (Issue 1). A New York S corporation's starting point is still its federal taxable income computed as if no S election had been made (section 208.9(ii)). The company computes entire net income as if it were a New York C corporation for its full federal taxable year, then -- because the New York short year differs from the federal year -- prorates that income for the six months it is subject to Article 9-A under section 208.9(h)(1) and 20 NYCRR 3-2.9 (divide by the months in the federal year, multiply by the months in the 9-A period). The prorated income is then allocated to New York by mileage under section 210.3(a)(8) (New York mileage over total mileage), since the company is principally engaged in trucking. As an S corporation it pays tax only at the differential rate (or the fixed-dollar minimum tax if greater) and is not subject to the alternative minimum or capital-base taxes.

Nonresident shareholders (Issue 2). Under section 632(a)(2), a nonresident's New York S corporation items are determined using the Article 9-A allocation rules. So the Wisconsin shareholders include their pro-rata shares of the corporation's income, loss, and deduction (for calendar 1998) in New York adjusted gross income, and the New York source portion is fixed using both the proration and the mileage allocation the corporation applied.

What this means for you

Compute full-year, then prorate

Even a short New York year starts from a full-federal-year computation of entire net income; the proration formula then carves out the months actually subject to Article 9-A.

Trucking is allocated by mileage

A company principally engaged in trucking uses the New York-mileage-over-total-mileage business allocation percentage under section 210.3(a)(8).

Nonresident owners inherit the same methodology

The shareholders' New York source income flows from the corporation's own proration and mileage allocation -- the Article 9-A rules govern, not the shareholders' separate facts.

Common questions

Q: Does the S election change the income starting point?
A: No. Entire net income still starts from federal taxable income computed as if no S election had been made.

Q: What tax does a New York S corporation pay?
A: Only the tax at the differential rate on New York-allocated entire net income, or the fixed-dollar minimum if that is greater.

Q: How is the shareholders' New York source income figured?
A: Using the same proration and mileage allocation the corporation used under Article 9-A.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 183 (franchise tax on transportation and transmission corporations)
- Tax Law section 184 (additional franchise tax on transportation corporations)
- Tax Law section 208.1-A (definition of New York S corporation)
- Tax Law section 208.9 (entire net income)
- Tax Law section 208.9(h)(1) (proration of entire net income for a short period)
- Tax Law section 210.1(g) (S corporation taxed at the differential rate)
- Tax Law section 210.3(a)(8) (trucking business allocation by mileage)
- Tax Law section 631(a) (New York source income of a nonresident)
- Tax Law section 632(a)(2) (nonresident S corporation items use Article 9-A allocation)
- 20 NYCRR 3-2.9 (proration of entire net income for a short period)
- H.O. Wolding, Inc., TSB-A-98(14)C / TSB-A-98(9)I (Sept. 4, 1998)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a98_14c_9i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(14)C
Corporation Tax
TSB-A-98(9)I
Income Tax
September 4, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z980601B

On June 1, 1998, a Petition for Advisory Opinion was received from H.O.
Wolding, Inc., P.O. Box 56, Nelsonville, Wisconsin 54458.
The issues raised by Petitioner, H.O. Wolding, Inc., are (1) how to compute
the taxable income for a short period as a Subchapter S corporation under Article
9-A of the Tax Law where the corporation was previously an Article 9 taxpayer,
and (2) how this change in status from an Article 9 taxpayer to an Article 9-A
S corporation affects the nonresident shareholders for purposes of Article 22 of
the Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is an interstate motor carrier that was previously subject to
tax under sections 183 and 184 of Article 9 of the Tax Law. Effective January
1, 1998, Petitioner is subject to tax under Article 9-A of the Tax Law.
Petitioner has received approval to be treated as a New York State S corporation
with a fiscal year ending June 30. Petitioner's first report under Article 9-A
will be for a short period � January 1, 1998 through June 30, 1998.
All of Petitioner's shareholders are residents of Wisconsin, and are
calendar year taxpayers for federal income tax purposes.
Discussion
Issue 1

The corporation franchise tax treatment for a New York S corporation is
explained in the New York State Department of Taxation and Finance Publication
35 (2/96) New York Tax Treatment of S Corporations and their Shareholders in
Parts V and VI.
Section 208.1-A of the Tax Law provides that the term "New York S
corporation" means, with respect to any taxable year, a corporation subject to
tax under Article 9-A of the Tax Law for which an election is in effect pursuant
to section 660(a) of the Tax Law for the year.
Section 210.1(g) of the Tax Law provides that a New York S corporation is
not subject to the alternative minimum tax or the capital base tax. It is only
subject to the tax on the portion of its entire net income allocated within New
York State at a rate reduced to the differential rate.
If the tax at the
differential rate is less than the fixed dollar minimum tax, the fixed dollar
minimum tax applies.
The differential rate is the difference between the

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Corporation Tax
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corporate rate under Article 9-A and the Article 22 personal income tax
equivalent rate.
Section 208.9(ii) of the Tax Law provides that the term "entire net income"
means total net income from all sources, which shall be presumably the same as
the entire taxable income (but not alternative minimum taxable income) which the
taxpayer would have been required to report to the United States Treasury
Department if it had not made an election under Subchapter S of Chapter one of
the IRC, except as modified as required by section 208.9 and section 210.3(d) and
(e) of the Tax Law.
Pursuant to section 208.9(ii) of the Tax Law, Petitioner's starting point
for computing entire net income, even though a New York S corporation, is
Petitioner's federal taxable income computed as if Petitioner had not made the
election to be treated as a federal S corporation.
Section 2-1.1(a) of the Business Corporation Franchise Tax Regulations (the
"Article 9-A Regulations") provides that, in most cases, the taxable year for
which a franchise tax report is to be filed is the same as the taxpayer's taxable
year for federal income tax purposes, or that portion of the federal taxable year
for which the taxpayer is subject to tax under Article 9-A of the Tax Law.
Section 208.9(h)(1) of the Tax Law and section 3-2.9(a) of the Article 9-A
Regulations provides that if the entire net income required to be reported under
Article 9-A is for a period different from the period covered by the taxpayer's
federal income tax return, the taxpayer's entire net income must be prorated to
correspond with the period covered by the report under Article 9-A. The prorated
entire net income is computed as follows:
(1) adjust federal taxable income as required by section 208.9 and
section 210.3(d) and (e) of the Tax Law, sections 3-2.3, 3-2.4, 3­
2.5 and 3-2.6 of the Regulations;
(2) divide the entire net income by the number of calendar months,
or major parts thereof, covered by the return for federal income tax
purposes; and
(3) multiply the result by the number of calendar months, or major
parts thereof, covered by the report under Article 9-A.
Section 3-2.9(d) of the Article 9-A Regulations provides that, if in the
opinion of the Commissioner, the method described above does not properly reflect
the taxpayer's entire net income for purposes of Article 9-A during the period
covered by its report, the Commissioner may determine entire net income solely
on the basis of the taxpayer's income during such period.
Accordingly, Petitioner computes its entire net income pursuant to section
208.9 of the Tax Law, as if it is a New York C corporation for the entire taxable
year covered by its federal income tax return. If Petitioner's federal taxable

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year is different than its New York short taxable year of January 1, 1998 through
June 30, 1998, Petitioner must prorate its entire net income, pursuant to section
208.9(h)(1) of the Tax Law and section 3-2.9 of the Article 9-A Regulations, for
the six months that it is subject to tax under Article 9-A.
Further, the portion of Petitioner's prorated entire net income shall be
allocated within New York state pursuant to section 210.3 of the Tax Law.
Pursuant to section 210.3(a)(8) of the Tax Law, if Petitioner is principally
engaged in a trucking business, it shall compute its business allocation
percentage by dividing Petitioner's mileage within New York State during the
period covered by its report by Petitioner's mileage within and without New York
State during the period.
Issue 2

The personal income tax treatment for S corporation shareholders is
explained in the New York State Department of Taxation and Finance Publication
35 (2/96) New York Tax Treatment of S Corporations and their Shareholders in
Parts VII, VIII and IX.
Section 601(e) of the Tax Law imposes a personal income tax for each
taxable year on a nonresident individual's taxable income which is derived from
sources in New York State. The tax is computed as if the individual were a
resident, reduced by certain credits, and apportioned to New York by the New York
source fraction, the numerator of which is the individual's New York source
income and the denominator of which is the individual's New York adjusted gross
income.
Section 631(a) of the Tax Law provides that the New York source income of
a nonresident individual includes (1) the net amount of items of income, gain,
loss and deduction entering into the individual's federal adjusted gross income
that is derived from or connected with New York sources, including the
individual's pro rata share of New York S corporation income, loss and deduction,
increased by reductions for taxes described in section 1366(f)(2) and (3) of the
Internal Revenue Code, and (2) the portion of the modifications described in
section 612(b) and (c) of the Tax Law which relate to income derived from New
York sources, including any modifications attributable to the individual as a
shareholder of a New York S corporation.
In determining the amount of a nonresident's New York S corporation items
which are derived from or connected with New York sources, section 632(a)(2) of
the Tax Law provides that the methods and rules for allocation under Article 9-A
of the Tax Law shall be used. Since, under Article 9-A, Petitioner's entire net
income has been both (1) prorated to correspond with the period during which
Petitioner is taxable under such Article, and (2) allocated by mileage to reflect
its New York activity, it is appropriate that the Article 9-A methods and rules
prescribed by section 632(a)(2) for the nonresident shareholders' allocation take
into account both the proration and the mileage allocation.

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Accordingly, the nonresident shareholders of Petitioner that are calendar
year taxpayers will include in New York adjusted gross income their pro rata
shares of Petitioner S corporation's items of income, loss and deduction that are
includable in their federal adjusted gross income for the calendar year 1998.
Likewise, the nonresident shareholders will include in New York source income
their prorata shares of such items of income, loss and deduction which are
sourced to New York. The source of such items shall be determined using both the
proration and mileage allocation methodologies employed by the Petitioner under
Article 9-A of the Tax Law with respect to its entire net income for its fiscal
year ending June 30, 1998.

DATED: September 4, 1998

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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