Buffalo Brass Company, Inc., a foreign corporation that elected both federal and New York S-corporation status, asks whether its shareholders must add back to their New York adjusted gross income their pro rata share of the deduction Buffalo Brass took on its federal return for the new corporate-level franchise tax and surtax that Chapter 190 of the Laws of 1990 imposed on New York S corporations.

Plain-English summary

Buffalo Brass Company, Inc. was a foreign corporation doing business in New York (and other states) that had elected both federal subchapter S status and New York S-corporation status under Tax Law § 660. For its 1990 tax year, Buffalo Brass had positive taxable income, with entire net income allocated to New York exceeding $300,000. That same year, Chapter 190 of the Laws of 1990 imposed two new taxes on New York S corporations at the corporate level: (1) a corporate-level tax under the Article 9-A franchise tax on business corporations, computed as the higher of a fixed-dollar-minimum tax (Tax Law § 210.1(d)) or a tax based on entire net income allocated to New York (Tax Law § 210.1(a)), per new § 210.1(g); and (2) a temporary surtax under § 209-A, whose amount depends on (and here, indirectly, is also based on) that same entire-net-income calculation. Because Buffalo Brass's New York-allocated income was well above $300,000, its corporate-level tax was guaranteed to be computed on the entire-net-income basis, and the surtax would follow suit.

Buffalo Brass could deduct both the corporate-level tax and the surtax on its federal return, either as state taxes paid under IRC § 164(a) or as ordinary and necessary business expenses under IRC § 162. Because Buffalo Brass was a federal S corporation, its income and deductions flowed through and were taxed at the shareholder level for federal purposes - meaning the shareholders' federal income was already reduced to reflect these New York tax deductions. The question was whether, on their New York personal income tax returns, the shareholders would have to add that deduction back to their federal adjusted gross income before arriving at New York taxable income.

The Department answered no, resting its analysis on TSB-M-84(8.5)-C (issued December 29, 1988). Under Tax Law § 607(a), Article 22 terms carry the same meaning as in the Internal Revenue Code unless a different meaning is clearly required. IRC § 164(a)(3) allows a deduction for state, local, and foreign "income" taxes, and federal courts (citing Stratton's Independence, Eisner v. Macomber, and Bank of America National T. & S. Assoc. v. US) require such a tax to be a "net income tax" - a direct tax on gain or profits. The pre-existing New York Corporate Franchise Tax and New York City General Corporation Tax are not "income taxes" under that federal definition (citing Northern Finance Corp. v. Tax Commission and Matter of Bankers Trust New York Corporation v. Department of Finance), so TSB-M-84(8.5)-C had already concluded that shareholders of electing New York S corporations need not add back their pro rata share of the corporation's deduction for those franchise-type taxes (and, symmetrically, may not subtract their pro rata share of any refunds of those taxes).

The Department held that the new taxes Chapter 190 of the Laws of 1990 imposed on New York S corporations are likewise "franchise" taxes, not "income" taxes, in the same sense as the taxes analyzed in TSB-M-84(8.5)-C. Applying that same reasoning, Buffalo Brass's shareholders would not be required, on their New York personal income tax returns, to add back to their federal adjusted gross income their pro rata share of any deduction Buffalo Brass took on its federal return for these new corporate franchise taxes and surtax paid to New York under Chapter 190 of the Laws of 1990.

What this means for you

Shareholders of New York S corporations

If your corporation elected both federal S status and New York S-corporation status under Tax Law § 660, and the corporation pays New York's corporate-level Article 9-A tax and any related surtax on S corporations, you do not need to add back your pro rata share of the corporation's federal deduction for those taxes when computing your New York adjusted gross income. The Department treats these corporate-level charges as "franchise" taxes rather than "income" taxes, so the federal tax benefit of the corporation's deduction passes through to your New York return intact.

Accountants and tax preparers advising S-corporation shareholder clients

When a New York S corporation pays a corporate-level tax or surtax under Article 9-A (including any legislatively created variant, such as the one Chapter 190 of the Laws of 1990 introduced), do not treat the shareholders' pro rata share of the corporation's federal deduction for that tax as an add-back item on their New York personal income tax returns. This opinion, following TSB-M-84(8.5)-C, confirms that New York's Corporate Franchise Tax-type levies fall outside the federal "net income tax" definition under IRC § 164(a)(3), so the ordinary income-tax add-back/subtraction rules that apply to state income taxes do not apply here - and correspondingly, refunds of these taxes are not subtracted either.

Common questions

Q: Why does it matter whether the new tax is a "franchise" tax versus an "income" tax?
A: Under Tax Law § 607(a), New York personal income tax terms generally track the meaning given to comparable terms in the Internal Revenue Code. IRC § 164(a)(3) allows a federal deduction for state and local "income" taxes, and federal case law requires such a tax to be a direct tax on gain or profits - a "net income tax." If a state-level charge doesn't meet that federal definition, it isn't treated as an "income tax" for these purposes, and the specific add-back/subtraction regime that TSB-M-84(8.5)-C built around New York's Corporate Franchise Tax and the New York City General Corporation Tax applies to it as well.

Q: What exactly are shareholders excused from doing?
A: They don't have to add back to their federal adjusted gross income, on their New York personal income tax returns, their pro rata share of any deduction the S corporation claimed on its federal return for the Chapter 190 corporate-level tax or surtax. In other words, the federal benefit of that deduction (which already reduced the shareholders' federal adjusted gross income, since S-corporation income and deductions flow through to shareholders) is not clawed back on the New York side.

Q: Does the flip side also apply - could shareholders subtract a refund of these taxes?
A: No. TSB-M-84(8.5)-C's rule is symmetric: because these are franchise taxes rather than income taxes, shareholders may not subtract from federal adjusted gross income their pro rata share of any refund of these taxes, just as they need not add back their pro rata share of the deduction.

Q: What two new taxes did Chapter 190 of the Laws of 1990 actually create for New York S corporations?
A: First, a corporate-level tax under Article 9-A, computed as the higher of a fixed-dollar-minimum amount (Tax Law § 210.1(d)) or an amount based on entire net income allocated to New York (Tax Law § 210.1(a)), imposed under new § 210.1(g). Second, a temporary surtax under new § 209-A, the amount of which depends on the corporate-level tax just described (and so is indirectly tied to entire net income allocated to New York whenever the corporate-level tax is computed on that basis, as it was for Buffalo Brass).

Q: Does this opinion apply only to Buffalo Brass, or more broadly?
A: Formally, an Advisory Opinion binds the Department only as to the petitioner who requested it, based on the facts that petitioner described. But the legal reasoning here - that the Chapter 190 corporate-level tax and surtax are franchise taxes, not income taxes, under the same analysis TSB-M-84(8.5)-C applied to the pre-existing Corporate Franchise Tax and General Corporation Tax - is a general statutory-interpretation conclusion, not a fact-specific one, so it would be expected to apply consistently to other similarly situated New York S corporations and their shareholders.

Citations and references

• Tax Law § 607(a) - Article 22 terms carry the same meaning as in the Internal Revenue Code unless a different meaning is clearly required
• Tax Law § 210.1(a) - Article 9-A franchise tax measured by entire net income allocated to New York
• Tax Law § 210.1(d) - Article 9-A franchise tax fixed-dollar minimum
• Tax Law § 210.1(g), added by 1990 N.Y. Laws Ch. 190 § 12 - imposes the new corporate-level tax on New York S corporations
• Tax Law § 209-A, added by 1990 N.Y. Laws Ch. 190 § 31 - imposes the temporary surtax on New York S corporations
• Tax Law § 660 - the New York S-corporation election Buffalo Brass's shareholders made
• IRC § 164(a)(3) - allows a deduction for state, local, and foreign income taxes, requiring a "net income tax"
• IRC § 162 - allows a deduction for ordinary and necessary business expenses
• TSB-M-84(8.5)-C (issued December 29, 1988) - established that New York's Corporate Franchise Tax and NYC General Corporation Tax are not "income taxes," so no add-back or subtraction applies to S-corporation shareholders' pro rata share of the corporation's deduction or refund of those taxes
• Stratton's Independence, Ltd. v. Howbert, 231 US 399, 415 - defines "net income tax" as a direct tax on gain or profits
• Eisner v. Macomber, 252 US 189, 207 - gain is a necessary ingredient of income
• Bank of America National T. & S. Assoc. v. US, 459 F.2d 513, 517-8 - applying the net-income-tax definition
• Northern Finance Corp. v. Tax Commission, 290 U.S. 601 - New York Corporate Franchise Tax is not an "income tax" under the federal definition
• Matter of Bankers Trust New York Corporation v. Department of Finance, 120 AD2d 992 - New York City General Corporation Tax is not an "income tax" under the federal definition

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a91_4i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-91 (4) I
Income Tax
January 29, 1991

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I901211B

On December 11, 1990 a Petition for Advisory Opinion was received from
Buffalo Brass Company, Inc. c/o Richard F. Campbell, Esq., Hodgson, Russ,
Andrews, Woods & Goodyear, 1800 One M&T Plaza, Buffalo, New York 14203.
The issue raised by Petitioner, Buffalo Brass Company, Inc., is whether
shareholders of Petitioner may deduct their pro rata share of the business
corporation franchise tax imposed by Chapter 190 of the Laws of 1990 on
Petitioner, a subchapter "S" corporation for New York State tax purposes.
Petitioner is a foreign corporation doing business in New York State, as
well as other states. Petitioner's shareholders have made an election to have
Petitioner treated as a pass-through entity under subchapter S of the Internal
Revenue Code. Petitioner's shareholders have also made an election to be treated
as an "S" corporation for New York State tax purposes under Section 660 of the
Tax Law. Petitioner recognized positive taxable income during its 1990 tax year.
The amount of Petitioner's entire net income allocated to New York State for its
1990 tax year exceeds $300,000.
In 1990 New York State enacted provisions which impose a corporate-level
tax on New York S corporations. The corporate-level tax is imposed under the
Article 9-A Franchise Tax on Business Corporations. The tax imposed is the
higher of a tax calculated on the basis of a fixed-dollar minimum pursuant to
Section 210.1(d) of the Tax Law, or on the basis of entire net income allocated
to New York pursuant to Section 210.1(a) of the Tax Law. See Tax Law §210.1(g),
added by 1990 N.Y. Laws Ch. 190, §12. Petitioner's entire net income allocable
to New York State for 1990 is at a level which guarantees that the corporate­
level tax paid will be calculated on the basis of entire net income allocable to
New York State.
Also enacted in 1990 was a temporary surtax which was imposed upon New York
S corporations. The provisions relating to imposition of the surtax are also
contained in the Article 9-A Franchise Tax on Business Corporations. The amount
of surtax depends wholly upon the amount of tax calculated pursuant to the
preceding paragraph. Thus, if the tax calculated pursuant to the preceding
paragraph is based on entire net income allocated to New York the surtax will
also be indirectly based on entire net income allocated to New York. Tax Law
§209-A, added by 1990 N.Y. Laws Ch. 190, §31.
The corporate-level tax and the surtax will be deductible by Petitioner in
calculating its income for federal tax purposes either as state taxes paid in the

TP-9 (9/88)

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TSB-A-91 (4) I
Income Tax
January 29, 1991

pursuance of a trade or business activity pursuant to Section 164(a) of the
Internal Revenue Code or as ordinary and necessary business expenses pursuant to
Section 162 of said code. Since Petitioner is an S corporation for federal tax
purposes, its income and deductions are taken into account and taxed at the
shareholder level for federal tax purposes. The amount of Petitioner's income
taken into account by Petitioner's shareholders for federal tax purposes will be
reduced to reflect Petitioner's deductions for the New York State corporate-level
tax and surtax.
TSB-M-84-(8.5)-C issued December 29, 1988 provides in part as
follows:
Section 607(a) of the Tax Law provides that any term used in Article
22 of the Tax Law 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)(3) 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. US, 459 F.2d 513, 517-8.
The New York State Corporate Franchise Tax and the New York City
General Corporation Tax are not "income taxes" within the above
definition. Northern Finance Corp. v. Tax Commission, 290 U.S. 601,
54 Sup. Ct. 230; and Matter of Bankers Trust New York Corporation v.
Department of Finance, 120 AD 2d 992, 502 N.Y.S. 2d 567.
Accordingly, shareholders of electing New York S corporations, in
determining New York adjusted gross income, are not required to add
to federal adjusted. . . gross income their pro rata share of the S
corporation's deduction for these taxes, and may not subtract from
federal adjusted gross income their pro rata share of the S
corporation's refunds of these taxes.
The Taxes imposed on New York "S" corporations by Chapter 190 of the Laws
of 1990 are "franchise" taxes and not "income" taxes. Therefore in accordance
with the provisions of TSB-M-84(8.5)-C shareholders of Petitioner will not be
required on their New York State personal income tax returns to add back to their
federal adjusted gross income their pro rata share of any deductions taken by

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TSB-A-91 (4) I
Income Tax
January 29, 1991

Petitioner on its federal income tax return for corporation franchise taxes paid
to New York State pursuant to Chapter 190 of the Laws of 1990.

DATED: January 29, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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