New York Advisory Opinion TSB-A-86 (16)I: Must a shareholder of a New York S corporation add back, under section 612(b)(3) of the Tax Law, their distributive share of the New York City General Corporation Tax paid by the S corporation?

Plain-English summary

AD Rutland Realty Inc., a New York S corporation, asked whether its shareholders had to add back, when computing their New York adjusted gross income, their pro rata share of the New York City General Corporation Tax the corporation had paid. Under Tax Law §§ 617(a) and 637(c), S-corp shareholders must make any section 612(b) modification that relates to an S-corp item of income, loss, or deduction according to their pro rata share - and section 612(b)(3) requires adding back "income taxes imposed by this state or any other taxing jurisdiction" that were federally deductible and not credited against federal tax. The question was whether the NYC General Corporation Tax counts as an "income tax" for this purpose.

The Department answered no, relying on federal conformity. Tax Law § 607(a) says Article 22 terms carry the same meaning as under comparable federal law unless a different meaning is clearly required, and IRC § 164(a) allows a federal deduction for state and local "income" taxes. Federal courts interpreting what counts as an "income tax" under IRC § 164(a)(3) require it to be a "net income tax" - a direct tax on gain or profits, with gain being a necessary ingredient of income (citing Stratton's Independence v. Howbert, Eisner v. Macomber, and Bank of America v. United States). Applying that standard, the Department determined that the New York City General Corporation Tax does not qualify as an income tax for section 612(b)(3) purposes. As a result, AD Rutland Realty's shareholders were not required to add back their distributive share of the NYC General Corporation Tax the corporation paid.

This opinion became foundational precedent within a few weeks: the companion opinion TSB-A-86(17)I, issued about three weeks later for a different S-corp shareholder (Alan Langer) raising the identical section 612(b)(3)/NYC General Corporation Tax question, cited this AD Rutland Realty opinion by name as controlling authority and reached the same result.

What this means for you

Shareholders of New York S corporations that pay the NYC General Corporation Tax

You are not required to add back your distributive share of the New York City General Corporation Tax under Tax Law § 612(b)(3), because the Department has determined that tax does not qualify as an "income tax" within the meaning of that provision - it fails the federal "net income tax" standard borrowed from IRC § 164(a)(3) case law.

Accountants preparing New York returns for S-corp shareholders in New York City

When determining which state or local taxes paid by an S corporation must be added back under section 612(b)(3), don't assume every tax with "tax" in its name that touches corporate income qualifies as an "income tax" for this purpose - check whether it functions as a direct tax on gain or profits under the federal case-law standard the Department applies.

Business owners structuring NYC operations through an S corporation

This ruling removes one potential double-counting concern for S-corp shareholders: NYC General Corporation Tax paid at the corporate level does not also get added back at the shareholder level under section 612(b)(3), keeping the shareholder's New York taxable income computation cleaner.

Common questions

Q: Do I have to add back my share of the NYC General Corporation Tax paid by my S corporation on my personal New York return?
A: No. The Department ruled the NYC General Corporation Tax is not an "income tax" within the meaning of Tax Law § 612(b)(3), so no addback modification is required for a shareholder's distributive share of that tax.

Q: How does the Department decide whether a particular state or local tax is an "income tax" for section 612(b)(3) purposes?
A: It borrows the federal standard under IRC § 164(a)(3): an income tax must be a "net income tax," meaning a direct tax on gain or profits, with gain as a necessary ingredient of the tax base. The NYC General Corporation Tax did not meet that standard here.

Q: Is this a one-off ruling, or does it apply more broadly?
A: It was quickly treated as controlling precedent - the companion opinion TSB-A-86(17)I, issued about three weeks later for a different taxpayer raising the identical question, cited this opinion by name and reached the same conclusion.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a86_16i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (16) I
Income Tax
November 13, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I860625A

On June 25, 1986, a Petition for Advisory Opinion is received from AD Rutland Realty Inc.,
c/o Harbor Management, 150 East 58th St., New York, New York 10155.
The issue raised is whether section 612(b)(3) of Article 22 of the Tax Law requires the New
York City General Corporation tax to be an addition to a shareholder's distributive share of income
from a New York S corporation.
Section 617(a) of the Tax Law, relating to resident shareholders and section 637(c) of the Tax
Law, relating to non-resident shareholders, require that in determining New York adjusted gross
income, shareholders of an electing New York S Corporation must make any of the modifications
in section 612(b) of the Tax Law that relate to an S corporation item of income, loss or deduction
in accordance with their pro rata shares.
Section 612(b)(3) of the Tax Law provides that "[i]ncome taxes imposed by this state or any
other taxing jurisdiction, to the extent deductible in determining federal adjusted gross income and
not credited against federal income tax" must be added to federal adjusted gross income when
computing New York adjusted gross income.
Section 607(a) of the New York State Tax Law provides that any term used in Article 22
shall have the same meaning as when used in a comparable context in the Internal Revenue Code,
unless a different meaning is clearly required. Section 164(a) of the Internal Revenue Code allows
a deduction for: "State and local, and foreign, income.., taxes." In determining what constitutes an
"income tax" under section 164(a)(3) of the Code, the Federal courts agree that such a tax must be
a "net income tax"; that is, a direct tax on gain or profits, and that gain is a necessary ingredient of
income. See Stratton's Independence, Ltd. v Howbert, 231 US 399, 415; Eisner v Macomber, 252
US 189, 207; and Bank of America National T. & S. Assoc. v U.S., 459 F.2d 513, 517-8. In addition,
the United States Tax Court, in McGowan v. Commissioner, 67 T.C. 599, 610 recently stated: "A
'tax' is an 'income tax' even though it is restricted to various forms of income." Technical Services
Bureau Memorandum TSB-M-85-(2)-I.
The New York City General Corporation Tax is not an income tax that is required to be
added back to federal adjusted gross income, pursuant to section 612(b)(3) of the Tax Law, when
computing New York adjusted gross income.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-86 (16) I
Income Tax
November 13, 1986

Accordingly, a shareholder of a New York S corporation is not required to make the
modification required by section 612(b)(3) of the Tax Law for the shareholder's distributive share
of the New York City General Corporation Tax paid by the S corporation.

DATED: November 13, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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