A school bus company's entire net income, computed after excluding its school-transportation income and related deductions, comes out low or negative. Does the franchise tax's 'salaries add-back' alternative tax basis still require including officers' salaries tied to that excluded school-bus business?

Plain-English summary

Glide Corporation's entire business is transporting students to and from school districts by school bus. Tax Law § 208.9(a)(4) excludes both the income and the deductions related to school-district transportation contracts from a corporation's "entire net income" for franchise tax purposes. That exclusion could leave a company like Glide with low or even negative entire net income once the school-bus activity (its only activity) is stripped out.

Article 9-A's franchise tax has four alternative computation methods, and a taxpayer must use whichever produces the HIGHEST tax: (1) entire net income, (2) business and investment capital, (3) a portion of entire net income plus officers' salaries and certain other compensation (aimed at preventing companies from paying inflated officer salaries to artificially depress entire net income), or (4) a flat $250 minimum. Glide asked: if its entire net income comes out low or negative because of the school-bus exclusion, could it still be pushed onto the higher-yielding "third alternative," which adds back officers' salaries?

The Department confirmed a taxpayer must tentatively compute all four and use the highest -- so the third alternative remains a live possibility in the abstract. But it doesn't help here in the way the state's audit might otherwise hope: because § 208.9(a)(4) already excludes BOTH the income AND the deductions tied to the school-bus operation from entire net income, officers' salaries attributable to that same school-bus business are not deductible in computing entire net income in the first place. Since they were never deducted, they can't be "added back" under the third alternative either -- there's nothing to add back. So salaries tied to the excluded school-bus business simply don't factor into the third alternative computation.

What this means for you

School bus companies and other section 208.9(a)(4)-exempt operators

If your business's income and deductions are excluded from entire net income under a specific Tax Law provision like § 208.9(a)(4), don't assume officer salaries tied to that same excluded activity will resurface as a tax base under the "salaries add-back" alternative computation -- if the salary was never deducted from entire net income to begin with, there's nothing to add back.

The "third alternative" targets excessive-salary tax avoidance, not exempt businesses

The third alternative basis exists specifically to stop companies from shrinking their entire net income tax base through inflated officer pay. Where a statutory exclusion (rather than a salary deduction) is what produced the low income figure, the third alternative's anti-avoidance purpose isn't implicated, and the Department's reasoning here reflects that.

Common questions

Q: If my entire net income is low because of a statutory exclusion (not high officer salaries), can the state still tax me on the "salaries plus income" alternative basis?
A: You must still tentatively compute all four alternative bases and pay tax on the highest, but if the salaries in question relate to activity whose income and deductions are excluded under a provision like § 208.9(a)(4), those specific salaries won't be part of that alternative computation.

Q: Does this mean school bus companies never owe more than the $250 minimum?
A: Not necessarily -- other income, capital, or salaries unrelated to the excluded school-transportation business could still produce a higher result under one of the other three bases; this ruling addresses only the salaries tied to the excluded activity itself.

Q: Can another school bus company rely on this Opinion?
A: No. It binds the Department only as to Glide Corporation's own facts and can't be relied upon by other taxpayers, even those with an identical single-business school-transportation model.

Citations and references

Statutes and regulations:

• Tax Law § 210.1(a); § 210.1(a)(3) (four alternative tax bases; the salaries-plus-income alternative)
• Tax Law § 208.9(a)(4) (exclusion of school-district transportation income/deductions)
• 20 NYCRR 3-3.1(b) (purpose of the salary add-back)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a82_9c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-82(9)C
Corporation Tax
June 25, 1982

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

PETITION NO. C811218A

On December 18, 1981 a Petition for Advisory Opinion was received from Glide
Corporation, 127-16 34th Avenue, Flushing, N.Y. 11368.
Petitioner, a corporation subject to the Franchise Tax on Business Corporations imposed
under Article 9-A of the Tax Law, is "engaged solely in the transportation of students to and from
school districts through the utilization of school buses." Petitioner inquires as to whether it may
be required to compute its tax on the alternative basis provided for in section 210.1(a)(3) of the
Tax Law.
Section 210.1(a) of the Tax Law, contained in Article 9-A thereof, sets forth four alternative
methods of computing tax and provides for the utilization of whichever one yields the greatest
result. The tax, accordingly, may be computed on the basis of (1) entire net income, (2) business
and investment capital, or (3) a portion of entire net income plus salaries and certain compen­
sation, or (4) may be set at $250, "whichever is greater."
Section 208.9(a)(4) of the Tax Law excludes from entire net income "income and
deductions with respect to amounts received from school districts" and from certain organizations
"organized and operated exclusively for religious, charitable or educational purposes." Petitioner
asks whether, assuming its entire net income, computed in accordance with the statutory provision
just quoted, takes the form of a low or negative figure, it might be required to compute its tax on
the basis of a portion of entire net income plus salaries and other compensation (the "third
alternative"), as provided for in section 210.1(a)(3) of the Tax Law.
As provided in section 210.1(a) of the Tax Law, Petitioner is required tentatively to
compute its tax by the four specified alternate methods, and must utilize that method which yields
the greatest tax. If the third alternative yields the greatest figure, then such is the alternative
which must be employed. However, the third alternative was enacted in order to prevent the
diminution of state tax revenues by the payment of excessive officers' salaries, thereby reducing
entire net income. 20 NYCRR 3-3.1(b). Since Section 208.9(a)(4) of the Tax Law already
excludes from entire net income both income and deductions attributable to the operation of
school buses, officers' salaries which are so attributable are not deductible in the computation of
entire net income. Therefore, such officers' salaries would not be includible in the tax
computation by the third alternative.

DATED: June 25, 1982

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

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