A corporation elected New York optional depreciation on manufacturing-plant assets it bought in 1968, claiming a modest optional-depreciation deduction that year while adding back the (much larger) federal depreciation in later years. Ten years later, it sold the plants as part of a larger installment-sale transaction without separately allocating any of the sale proceeds to the optionally-depreciated property. How should it compute the New York gain or loss on that portion of the sale?

Plain-English summary

Martin Marietta Corporation bought various assets for its plants in Haverstraw and Tarrytown, New York, in 1968, for $3,075,256. On its 1968 New York franchise tax report, it elected the New York "optional depreciation" method under Tax Law § 210.3(e)(1), which let it claim a large, accelerated deduction ($75,569) in the year of acquisition rather than depreciating the assets over their normal useful life for New York purposes. In each subsequent year, the (much larger) ordinary federal depreciation on the same assets -- totaling $2,968,694 -- had to be added back in computing New York entire net income, since New York had already given the accelerated write-off up front.

In 1978, ten years later, the Haverstraw and Tarrytown plants were sold as part of a larger transaction, generating a $2,115,261 federal gain reported on the installment method. Petitioner didn't allocate any specific portion of the sale proceeds to the optionally-depreciated property, and provided no information to establish how such an allocation should be made.

Tax Law § 210.3(e)(6) and its implementing regulation, 20 NYCRR § 4-8.6(d), require the New York basis of optionally-depreciated property to be adjusted downward -- but only by the amount actually allowed as optional depreciation, not by the ordinary federal depreciation that was separately added back. So Petitioner's New York basis was $3,075,256 (original cost) minus $75,569 (optional depreciation actually claimed) = $2,999,687 -- a far smaller downward adjustment than federal depreciation would have produced. Because Petitioner hadn't separately allocated any of the 1978 sale price to this specific property, the Department directed that the portion of the total New York plants' sale price attributable to it be determined using the ratio of that property's fair market value to the fair market value of everything sold in the transaction.

What this means for you

New York optional depreciation and federal depreciation produce two very different bases for the same asset

If you elected New York optional depreciation on an asset years ago, don't assume its New York basis tracks its federal basis (which reflects ordinary depreciation) -- the New York basis is reduced only by the optional depreciation actually claimed, which is typically a much smaller adjustment.

Failing to allocate sale proceeds among different assets in a larger sale can leave you dependent on a fair-market-value ratio

If you sell a group of assets together (especially in a multi-asset, multi-year installment sale) without separately pricing each component, expect any component with special New York basis treatment (like optionally-depreciated property) to require a fair-market-value-ratio allocation after the fact -- it's simpler to allocate the price yourself at the time of sale if you can substantiate it.

Track your optional depreciation election details for the life of the asset

Because the basis consequences on eventual sale depend on exactly how much optional depreciation was claimed (not on ordinary depreciation), keep clear records of the optional depreciation election and the specific dollar amount claimed, potentially decades before the asset is eventually sold.

Common questions

Q: Does my New York optional-depreciation basis track the federal depreciated basis of the same asset?
A: No -- the New York basis is reduced only by the optional depreciation actually allowed under section 210.3(e)(1), which is typically much smaller than cumulative federal depreciation.

Q: What happens if I sell optionally-depreciated property together with other assets in one transaction without separately pricing it?
A: The portion of the total sale price attributable to that property is determined by the ratio of its fair market value to the fair market value of everything sold in the transaction.

Citations and references

Statutes and guidance:

• Tax Law § 210.3(e)(1)
• Tax Law § 210.3(e)(6)
• 20 NYCRR § 4-8.6(d)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a81_1c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-81 (1) C
Corporation Tax
July 1, 1981

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C801112A

On November 12, 1980 a Petition for Advisory Opinion was received from Martin Marietta
Corporation, 6801 Rockledge Drive, Bethesda, Maryland 20034.
The issue raised is the proper method for computing the gain or loss on the disposition of
assets acquired in 1968, and upon which New York optional depreciation was claimed.
In 1968, Petitioner purchased various assets for its plants located in Haverstraw and
Tarrytown, New York, at a cost of $3,075,256. On its 1968 franchise tax report, Petitioner elected
to claim optional depreciation with respect to this property, pursuant to Section 210.3(e)(1) of the
Tax Law. The total amount of allowable optional depreciation, based upon the allocated cost of the
property, was $75,569, and such amount was claimed in full in 1968. In subsequent years, a total
of $2,968,694, representing federal depreciation, was added back in the computation of New York
entire net income.
In 1978 the Haverstraw and Tarrytown, New York plants were sold, realizing a gain for
federal purposes of $2,115,261 on the entire transaction, which is being reported on the installment
basis. Petitioner allocated none of the proceeds of the sale to the property on which optional
depreciation was claimed. However, no information was furnished establishing a basis for such
allocation.
Section 210.3(e)(6) of the Tax Law provides, in pertinent part, that in computing the gain or
loss upon the sale or disposition of property upon which optional depreciation had been claimed, the
basis of the property sold or disposed of shall be adjusted to reflect the deduction allowed with
respect to such property under Section 210.3(e)(1). The Franchise Tax Regulations provide, in this
regard, as follows: "To determine the basis of the property, in computing the gain or loss for
purposes of article 9-A the sum of the amounts allowed as depreciation under this section for all
taxable years from the year of acquisition to and including the year of the sale or other disposition
is subtracted from the original federal cost or other basis." 20 NYCRR §4-8.6(d).
As the cost of the property in question, acquired in 1968, was $3,075,256, and as only
$75,569 was allowed as a deduction for optional depreciation, the New York basis for the property,
as of the date of the sale, was $2,999,687. The sales price of such property is a portion of the total
sales price of the New York plants. The sales price may be determined by applying to the total sales
price of the New York plants, the ratio of the fair market value of the property on which optional
depreciation was claimed to the fair market value of all the property sold.

DATED: June 30, 1981

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR