New York Advisory Opinion TSB-A-81(4)I: If the IRS rules that interest on a nonprofit museum foundation's bonds is excludable from federal gross income because the bonds are issued 'on behalf of' New York City, does that interest also escape New York State income tax, New York City income tax, and the unincorporated business tax?

Plain-English summary

The Intrepid Museum Foundation, a nonprofit education corporation being formed to convert the retired aircraft carrier U.S.S. Intrepid into a museum, planned to issue "Gross Revenue Bonds" to finance the project. It had asked the IRS to rule that the bonds would be treated as issued "on behalf of" New York City (making the interest excludable from federal gross income under IRC section 103), that they wouldn't be industrial development bonds, and that the interest would be tax-exempt federally - but as of this opinion, the IRS hadn't yet ruled. The Foundation asked the Department whether, if the IRS does grant that federal exclusion, the same bond interest would also escape New York State personal income tax, New York City personal income tax, and the unincorporated business tax.

The Department worked through each tax base in turn. For New York State income tax, section 612(a) defines a resident's New York adjusted gross income as federal adjusted gross income with certain listed modifications - and none of those modifications require adding back interest excluded from federal gross income, so federally tax-exempt bond interest stays excluded for New York resident and nonresident individuals alike (nonresidents are taxed only on New York-source items under section 632(a), which likewise imposes no addback). For New York City income tax, the city's own Administrative Code provision defining city adjusted gross income (section T46-112.0(a)) is structured the same way - starting from federal adjusted gross income, with no addback modification for this kind of interest. For the unincorporated business tax, section 705(a) defines unincorporated business gross income as items includible in federal gross income for federal tax purposes, again with no modification requiring inclusion of interest excluded federally.

Because all three New York tax bases derive from federal gross or adjusted gross income and none carries a specific addback provision for this type of bond interest, the Department concluded that IF the IRS ultimately rules the interest excludable from federal gross income, that exclusion would automatically carry through to all three New York taxes - no separate New York ruling would be needed. The entire conclusion, though, was expressly contingent on the IRS actually issuing the requested federal ruling, which hadn't happened yet when this opinion was issued.

What this means for you

Nonprofit conduit-bond issuers seeking an "on behalf of" municipality federal tax exemption

Once you secure the federal IRS ruling that your bond interest is excludable from gross income under IRC section 103, that exclusion should automatically extend to New York State income tax, New York City income tax, and the unincorporated business tax - you generally don't need a separate New York exemption ruling, because none of these New York or New York City tax bases contain an addback for this kind of interest.

Bondholders (individuals and unincorporated businesses) considering a conduit bond investment pending IRS action

Understand that the New York tax treatment here rides entirely on the federal outcome - if the IRS denies the "on behalf of" exclusion or the bonds turn out to be industrial development bonds, the interest becomes taxable at both the federal and New York/NYC levels, since the New York exclusion has no independent legal basis apart from the federal one.

Accountants and bond counsel structuring similar nonprofit "on behalf of" bond financings

Verify that the resident/nonresident individual income tax, city income tax, and unincorporated business tax statutes in effect for your bond's issue year each still lack an addback modification for federally excluded interest before assuming automatic New York conformity - this opinion's conclusion is a direct function of the modifications listed (or not listed) in those specific statutes.

Common questions

Q: If my nonprofit's bonds get an IRS ruling excluding the interest from federal gross income, is that interest automatically excluded from New York State and City income tax too?
A: Yes, according to this opinion - none of the modifications in the New York State or New York City income tax statutes require adding back this kind of federally excluded interest, so the exclusion carries through without a separate New York ruling.

Q: Does this cover unincorporated businesses that hold the bonds, not just individuals?
A: Yes - the unincorporated business tax statute (Tax Law section 705(a)) also starts from federally includible gross income with no addback for this type of interest, so the exclusion extends to unincorporated business gross income as well.

Q: What happens if the IRS doesn't grant the requested federal ruling?
A: Then this entire conclusion falls away - the New York tax exclusion described here exists only because it rides on the federal exclusion under IRC section 103, and the opinion was issued while that federal ruling request was still pending.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a81_4i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81 (4) I
Income Tax
July 15, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. Z810608C

On June 8, 1981, a Petition for Advisory Opinion was received from Intrepid Museum
Foundation, 299 Park Avenue, New York, New York 10017.
THE ISSUES
The issues raised are:
1) whether interest paid by Petitioner to holders of bonds issued by Petitioner, under the
circumstances described below, will be includible in New York adjusted gross income or New York
taxable income of either resident individuals or nonresident individuals under Article 22 of the Tax
Law, if such interest is excludable from the federal gross income of such individuals;
2) whether such interest will be includible in New York City city adjusted gross income or
New York City city taxable income of city resident individuals under Title T of the Administrative
Code of the City of New York, if such interest is excludable from the federal gross income of such
individuals; and
3) whether such interest will be includible in the unincorporated business gross income or
unincorporated business taxable income of unincorporated businesses under Article 23 of the Tax
Law, if such interest is excludable from the federal gross income of such businesses.
THE FACTS
The Intrepid Museum Foundation (hereinafter the "Foundation") will be a nonprofit
education corporation chartered by the New York Board of Regents pursuant to the New York
Education Law. In the near future, the Foundation will issue Intrepid Museum Foundation Gross
Revenue Bonds (hereinafter the "Bonds"). The Bonds will be used to finance the costs of
establishing the obsolete aircraft carrier U.S.S. Intrepid as an air, naval and space museum on the
Hudson River in New York City.
The Bonds will not be obligations of any of the other forty-nine states or of a political
subdivision of any such other state nor will they be obligations or securities of any authority,
commission or instrumentality of the United States.
On April 9, 1981, the Foundation submitted to the Internal Revenue Service a request for
rulings that the Bonds will be considered to be issued "on behalf of" the City of New York within
the meaning of section 1.103-1(b) of the Treasury Regulations and Revenue Ruling 63-20, 1963-1
CB 24; that the Bonds will not be industrial development bonds within the meaning of section
103(b)(2) of the Internal Revenue Code; and that the interest to be paid by the Foundation on the
Bonds will be excludable from the federal gross income of the recipients thereof under section 103
of the Internal Revenue Code. As of this writing, no ruling has yet been issued by the Internal
Revenue Service with respect to such request.
JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-81 (4) I
Income Tax
July 15, 1981
THE LAW
Section 611(a) of the Tax Law provides:
"The New York taxable income of a resident individual shall be his New York adjusted gross
income less his New York deduction and New York personal exemptions, as determined under this
part."
Section 612(a) of the Tax Law provides:
"The New York adjusted gross income of a resident individual means his federal adjusted
gross income as defined in the laws of the United States for the taxable year, with the modifications
specified in this section."
No modification specified in Section 612 of the Tax Law requires the inclusion of interest
on the Bonds in New York adjusted gross income.
Section 631(a) of the Tax Law provides:
"The New York taxable income of a nonresident individual shall be his New York adjusted
gross income less his New York deductions and New York personal exemptions, as determined
under this part."
Section 632(a) of the Tax Law provides:
"The New York adjusted gross income of a nonresident individual shall be the sum of the
following:
(1) The net amount of items of income, gain, loss and deduction entering into his federal
adjusted gross income, as defined in the laws of the United States for the taxable year, derived from
or connected with New York sources, including...
(2) The portion of the modifications described in subsections (b) and (c) of section six
hundred twelve which relate to income derived from New York sources (including any modifications
attributable to him as a partner).
(3) The modification described in paragraph fourteen of subsection (b) of section six
hundred twelve."
Section T46-111.0(a) of the Administrative Code of the City of New York provides:
"The city taxable income of a city resident individual shall be his city adjusted gross income
less his city deduction and city personal exemptions, as determined under this part."
Section T46-112.0(a) of the Administrative Code of the City of New York provides:
"The city adjusted gross income of a city resident individual means his federal adjusted gross
income as defined in the laws of the United States for the taxable year; with modifications specified
in this section."

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TSB-A-81 (4) I
Income Tax
July 15, 1981
No modification specified in Section T46-112.0 of the Administrative Code of the City of
New York requires the inclusion of interest on the Bonds in New York City city adjusted gross
income.
Section 704 of the Tax Law provides:
"The unincorporated business taxable income of an unincorporated business shall be the
excess of its unincorporated business gross income over its unincorporated business deductions,
allocated to New York .... "
Section 705(a) of the Tax Law provides:
"Unincorporated business gross income of an unincorporated business means the sum of the
items of income and gain of the business, of whatever kind and in whatever form paid, includible
in gross income for the taxable year for federal income tax purposes, including income and gain from
any property employed in the business, or from liquidation of the business, or from collection of
installment obligations of the business, with the modifications specified in this section."
No modification specified in section 705 of the Tax Law requires the inclusion of interest
on the Bonds in unincorporated business gross income.
Section 62 of the Internal Revenue Code provides that federal "adjusted gross
income" means federal "gross income" minus certain deductions not here relevant.
THE OPINION
Accordingly, Petitioner is advised that if the interest paid by Petitioner to holders of the
Bonds is held by the Internal Revenue Service to be excludable from the federal gross income (and
hence from federal adjusted gross income) of such holders of the Bonds,
1) such interest shall also be excludable from New York adjusted gross income and New
York taxable income of resident and nonresident individuals under Article 22 of the Tax Law;
2) such interest shall also be excludable from New York City city adjusted gross income and
New York City city taxable income of city resident individuals under Title T of the Administrative
Code of the City of New York; and
3) such interest shall also be excludable from unincorporated business gross income and
unincorporated business taxable income of unincorporated businesses under Article 23 of the Tax
Law.

DATED: June 18, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau