Can a New York resident estate that owns 100% of an out-of-state S corporation claim New York's resident tax credit for the income tax it pays to that other state on the S corporation's pass-through gain?

Plain-English summary

Jeffrey M. Palley petitioned on behalf of a New York resident estate that owns 100% of a "State X" corporation -- a federal S corporation that is also treated as an S corporation under State X law. The corporation doesn't do business in New York, isn't subject to New York's Article 9-A corporate franchise tax, and hasn't made a New York S election. The corporation is selling all of its assets, all of which are located in State X, and the resulting gain will pass through to the estate. Because the gain is sourced to State X, the estate will owe State X nonresident income tax on it.

Separately, after the asset sale the estate will increase its basis in the S corporation's stock under Internal Revenue Code § 1367, and the corporation will then be liquidated at a loss. The estate will deduct that liquidation loss on both its federal and New York returns. But because the loss comes from selling an intangible asset (the stock itself), and that intangible isn't sourced to State X, State X won't let the loss offset the gain for its own tax purposes -- so the estate genuinely owes State X tax on the gain. For New York purposes, by contrast, the liquidation loss does offset the gain, so the estate expects no net New York tax on this transaction. The question was whether the estate can still claim New York's resident tax credit under Tax Law § 620 for the real income tax it pays to State X.

The Department held that the estate potentially may claim the credit, subject to all of § 620's requirements. Tax Law § 620(a) allows a New York resident a credit against New York tax for income tax paid to another state on income that is both derived from that state and also subject to New York tax. Section 620(d) extends this specifically to S corporation shareholders: the credit reaches tax imposed on or payable by the shareholder with respect to the corporation's income (not any tax imposed on the corporation itself). Section 620(c)(2) and 20 NYCRR 120.1(a)(1) extend the same mechanics to a resident estate or trust, which computes its "New York income" for credit purposes as if it were an individual computing New York adjusted gross income under Tax Law § 612.

The credit is not unlimited: § 620(b) caps it at the proportion of New York tax attributable to the income taxed by State X, and it can never reduce New York tax below what it would have been had the State X-taxed income simply been excluded from New York income altogether. And under 20 NYCRR 120.4(d), "income derived from sources within" State X is measured the same way New York sources a nonresident individual's income under Tax Law § 631 -- meaning income from intangible property (like gain on S corporation stock or assets) only counts as State X-sourced if the property was employed in a business, trade, or profession actually carried on in State X. Ordinary passive intangible income, such as plain dividends, generally would not qualify. Applying this framework, the Department concluded the estate may be allowed the credit for the State X tax on the S corporation's gain -- but emphasized that whether all of § 620's criteria are actually satisfied on the real facts is a determination outside the scope of an Advisory Opinion, citing Tax Law § 171.Twenty-fourth and 20 NYCRR 2376.1(a).

What this means for you

Estate fiduciaries and executors holding out-of-state S corporation interests

If an estate you administer owns stock in an S corporation that operates and sells assets in another state, and the estate pays real income tax to that state on the pass-through gain, New York's resident credit under Tax Law § 620 may let the estate offset its New York tax for that same income -- even though, viewed purely under New York's own computations (for example, where a later liquidation loss zeroes out the gain), the estate might otherwise appear to owe no New York tax on the transaction at all. Being a resident estate rather than a resident individual doesn't change this analysis; § 620(c)(2) and the regulations put estates and trusts on the same footing as individuals.

Accountants and tax professionals computing multistate resident credits

Confirming that the credit is available requires working through each of § 620's moving parts: whether the income is truly "derived from" the other state under the § 631 sourcing rules (which treat intangible income, including S corporation gains, as sourced to that state only if tied to a business, trade, or profession actually carried on there); whether the same income is also subject to New York tax; and then applying § 620(b)'s two caps -- the proportional limitation and the floor tied to what New York tax would have been if the other state's income were excluded. Don't assume an advisory opinion's "may be allowed" is the final word; it isn't a substitute for actually running the numbers on the specific return.

Common questions

Q: Does the fact that the estate expects no net New York tax on this transaction (because the liquidation loss offsets the gain for New York purposes) block it from claiming the resident credit for the State X tax paid?
A: No. Tax Law § 620(a) only requires that the income be both derived from the other state and "subject to tax" under the New York income tax article -- it doesn't require that the estate actually owe net New York tax on that specific item after every offsetting item is applied. The opinion still treats the estate as a potential candidate for the credit even though its own facts show the loss largely erasing the New York tax on the gain.

Q: Why doesn't stock gain automatically count as income "derived from" State X for credit purposes?
A: Under 20 NYCRR 120.4(d), income from intangible property (including S corporation stock or the corporation's underlying gains passed through to a shareholder) is sourced to another state only if that property was employed in a business, trade, or profession carried on in that state -- the same rule Tax Law § 631 uses to source a nonresident individual's income to New York. Passive intangible income, like ordinary dividends unconnected to a trade or business in the other state, would not qualify.

Q: Does a resident estate get the § 620 credit the same way a resident individual does?
A: Yes. Tax Law § 620(c)(2) and 20 NYCRR 120.1(a)(1) direct that a resident estate or trust computes its "New York income" for credit purposes as if it were an individual computing New York adjusted gross income under Tax Law § 612, and is entitled to the same credit, computed the same way and subject to the same limitations, as a resident individual.

Q: How does the credit apply when the income at issue is passed through from an S corporation rather than earned directly?
A: Tax Law § 620(d) makes clear the credit reaches tax that is imposed on or payable by the shareholder (here, the estate) with respect to the S corporation's income -- not any tax imposed on the corporation itself -- regardless of whether a separate state-level S election (apart from the federal one) was needed to trigger that shareholder-level tax.

Q: What limits could still reduce or eliminate the credit even if the income is properly State X-sourced?
A: Tax Law § 620(b) imposes two caps: the credit cannot exceed the proportion of New York tax attributable to the income taxed by State X, and it cannot reduce New York tax below what it would have been if that State X-taxed income were simply excluded from the estate's New York income in the first place.

Q: Why didn't the Department just confirm outright that this estate's credit applies?
A: Because an Advisory Opinion, under Tax Law § 171.Twenty-fourth and 20 NYCRR 2376.1(a), only applies the law to the facts as stated -- it doesn't adjudicate or verify disputed or unresolved factual questions. Whether every one of § 620's criteria and limitations is actually met on the real numbers is a fact-intensive inquiry the Department says must be resolved elsewhere (typically at return-filing or audit), not inside the opinion itself.

Citations and references

• Tax Law § 620(a) - resident credit for income tax paid to another state on income both derived from that state and subject to New York tax
• Tax Law § 620(b) - limitations capping the credit at the proportion of New York tax attributable to the other state's taxed income, with a floor equal to New York tax computed excluding that income
• Tax Law § 620(c)(2) - New York income of a resident estate or trust computed as if it were an individual computing New York adjusted gross income under § 612
• Tax Law § 620(d) - resident credit for S corporation shareholders, covering tax imposed on or payable by the shareholder with respect to the corporation's income
• Tax Law § 612 - New York adjusted gross income of a resident individual
• Tax Law § 631 - New York source income of a nonresident individual, used to determine whether income is "derived from sources within" another state for credit purposes
• 20 NYCRR 120.1(a) - extends the resident credit mechanics, computation, and limitations to resident estates and trusts
• 20 NYCRR 120.4(c) - defines "income tax imposed by the other jurisdiction" for credit purposes
• 20 NYCRR 120.4(d) - income derived from sources within another state is determined the same way as New York sources a nonresident individual's income under § 631
• Tax Law § 171.Twenty-fourth and 20 NYCRR 2376.1(a) - an Advisory Opinion applies the law to a stated set of facts and does not adjudicate disputed factual questions

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a95_8i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-95 (8) I
Income Tax
November 14, 1995

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

PETITION NO. I950714A

On July 14, 1995, a Petition for Advisory Opinion was received from Jeffrey
M. Palley, c/o Seymour Schneidman & Associates, 400 Park Avenue, New York, New
York 10022.
The issue raised by Petitioner, Jeffrey M. Palley, is whether a New York
resident estate may claim a resident tax credit, pursuant to section 620 of the
Tax Law, for estate income taxes paid to another state.
Petitioner states that a New York resident estate owns 100 percent of a
foreign State X S corporation. The foreign State X S corporation is a Federal S
corporation that is treated as an S corporation in State X. The S corporation
does not do business in New York State, is not subject to tax under Article 9-A
of the Tax Law and has not made the New York S election. The corporation is
selling all its assets (100 percent are located in State X) and the gains will
be passed through to the estate. The estate will pay nonresident State X income
tax on the gains.
Petitioner also states that the estate will increase its basis in the S
corporation stock, pursuant to section 1367 of the Internal Revenue Code,
following the sale of the assets. Subsequently, the corporation will be
liquidated at a loss which will be deducted on the estate's Federal and New York
Income Tax returns.
Since the loss is from the sale of an intangible asset which will not be
sourced in State X, Petitioner states that the loss will not be available to
offset the gain in State X. Therefore, the estate will have to pay income tax
to State X on the gain flowing through the S corporation.
Petitioner further states that the estate will not have to pay tax on the
capital gain to New York because the loss on liquidation will offset the gain.
Section 620 of the Tax Law provides as follows:
(a) General. A resident shall be allowed a credit against the
tax otherwise due under this article for any income tax imposed for
the taxable year by another state of the United States ... upon
income both derived therefrom and subject to tax under this article.
The term "income tax imposed" in the previous sentence shall not
include the portion of such tax (determined in the manner provided
for in section six hundred twenty-A) which is imposed upon the
ordinary income portion (or part thereof) of a lump sum distribution
which is subject to the separate tax imposed by section six hundred
one-C.
(b) Limitations.
TP-9 (9/88)

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Income Tax
November 14, 1995

(1) The credit under this section shall not exceed the
percentage of the tax otherwise due under this article determined by
dividing the portion of the taxpayer's New York income subject to
taxation by such other jurisdiction by the total amount of the
taxpayer's New York income.
(2) The credit under this section shall not reduce the tax
otherwise due under this article to an amount less than would have
been due if the income subject to taxation by such other
jurisdiction were excluded from the taxpayer's New York income.
. . .
(c) Definition. For purposes of this section New York income
means:
. . .
(2) the amount of the income of an estate or trust, determined
as if the estate or trust were an individual computing [the
individual's] New York adjusted gross income under section six
hundred twelve.
(d) S corporation shareholders. In the case of a shareholder
of an S corporation, the term "income tax" in subsection (a) of this
section shall not include any such tax imposed upon or payable by
the corporation, but shall include any such tax with respect to the
income of the corporation imposed upon or payable by the
shareholder, without regard to whether an election independent of
the federal S election was required to effect such imposition upon
the shareholder.
Section 120.1(a) of the Personal Income Tax Regulations ("Income Tax
Regulations") provides:
(1) Where a resident individual receives income derived from sources
within another state of the United States . . . [the individual] is
entitled to a credit against [the individual's] ordinary tax . . .
for any income tax imposed on such income by the other
jurisdiction.... A resident estate or trust is also entitled to a
similar credit against ordinary tax, computed in the same way and
subject to the same exception and limitations . . . as in the case
of a resident individual....
(2) The credit against ordinary tax is allowable only for that
portion of the income tax imposed by another state of the United
States ... which is applicable to the income derived from sources
within such other taxing jurisdiction ....
Section 120.4(c) of the Income Tax Regulations states that:
[t]he "income tax imposed by the other jurisdiction" means the total
income tax payable thereto for the taxable year, exclusive of the
portion of such tax ... which is imposed on the ordinary income
portion (or part thereof) of a lump sum distribution, and any
interest or penalties. No resident credit is allowable if no tax is
actually due to the other jurisdiction ....

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TSB-A-95 (8) I
Income Tax
November 14, 1995

Section 120.4(d) of the Income Tax Regulations states that:
"[i]ncome derived from sources within" another state ... is
construed so as to accord with the definition of the term "derived
from or connected with New York State sources", as set forth in
[section 631 of the Tax Law] in relation to the [New York source
income of a nonresident individual].
Thus, the resident credit
against ordinary tax is allowable for income tax imposed by another
jurisdiction upon compensation for personal services performed in
the other jurisdiction, income from a business, trade or profession
carried on in the other jurisdiction, and income from real or
tangible personal property situated in the other jurisdiction. On
the other hand, the resident credit is not allowed for tax imposed
by another jurisdiction upon income from intangibles, except where
such income is from property employed in a business, trade or
profession carried on in the other jurisdiction. Thus, for example,
no resident credit is allowable for an income tax of another
jurisdiction on dividend income not derived from property employed
in a business, trade or profession carried on in such jurisdiction.
Section 631(a) of the Tax Law provides that:
It]he New York source 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 [the individual's] 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:
(A) [the individual's] distributive share of partnership
income, gain, loss and deduction, determined under section six
hundred thirty-two, and
(B) [the individual's] pro rata share of New York S
corporation income, loss and deduction, increased by reductions for
taxes described in [section 1366(f)(2) and (3) of the Internal
Revenue Code], determined under section six hundred thirty-two, and
(C) [the individual's] share of estate or trust income, gain,
loss and deduction, determined under section six hundred thirty­
four, and
(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 [the individual] as a partner or shareholder of a
New York S corporation).

Section 631(b) of the Tax Law provides that:
(1) [i]tems of income, gain, loss and deduction derived from or
connected with New York sources shall be those items attributable
to:
(A) the ownership of any interest in real or tangible personal

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property in this state; or
(B) a business, trade, profession or occupation carried on in
this state; or
(C) in the case of a shareholder of an S corporation where the
election provided for in subsection (a) of section six hundred sixty
is in effect, the ownership of shares issued by such corporation, to
the extent determined under section six hundred thirty-two.
(2) Income from intangible personal property, including annuities,
dividends, interest, and gains from the disposition of intangible
personal property, shall constitute income derived from New York
sources only to the extent that such income is from property
employed in a business, trade, profession, or occupation carried on
in this state ....
Section 612 of the Tax Law provides that the New York adjusted gross income
of a resident individual means the individual's Federal adjusted gross income as
defined in the Laws of the United States for the taxable year, with the
modifications specified in section 612 of the Tax Law.
Herein, a New York resident estate owns 100 percent of a State X S
corporation. When the S corporation sells all of its assets located in State X
and realizes a gain, the New York resident estate will pay nonresident income tax
to State X on such gain. When the S corporation is liquidated at a loss, such
loss is not sourced in State X because the loss is from the sale of an intangible
asset.
Accordingly, such loss on the liquidation does not offset the gain
realized for purposes of computing the nonresident income tax imposed by State
X on the New York resident estate.
Pursuant to section 620(a) of the Tax Law and section 120.1(a)(1) of the
Income Tax Regulations, a New York resident estate shall be allowed a credit
against its ordinary tax for any income tax imposed by another state on the
income of the New York resident estate that is income derived from sources within
such other state, subject to the limitations contained in section 620 of the Tax
Law and section 120.1 of the Income Tax Regulations. Section 620(d) of the Tax
Law provides that the credit is allowable where the income tax of the other state
is imposed on or payable by the New York resident estate as the shareholder of
the S corporation.
For purposes of computing the credit, section 120.4(d) of the Income Tax
Regulations provides that the "income derived from sources within" another state
is determined the same as income "derived from or connected with New York State
sources" as set forth in section 631 of the Tax Law for determining the New York
source income of a nonresident individual.
When applying the limitations contained in section 620(b) of the Tax Law
and section 120.2 of the Income Tax Regulations, the New York income of the New
York resident estate is the amount of the income of the estate determined as if
the estate were an individual computing the individual's New York adjusted gross
income under section 612 of the Tax Law. A resident individual shareholder's
gain on the sale of assets of an S corporation and a loss on the liquidation of
such S corporation that is included in such individual's Federal adjusted gross
income would be included in the computation of the individual's New York adjusted
gross income.

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Accordingly, the New York resident estate described herein by Petitioner may
be allowed to claim a resident tax credit pursuant to section 620 of the Tax Law
and Part 120 of the Income Tax Regulations for the income tax imposed on the
estate by State X on the income of the estate that is derived from sources within
State X with respect to the State X S corporation. However, before such credit
is allowable, all of the criteria and limitations set forth in section 620 of the
Tax Law and Part 120 of the Income Tax Regulations must be met. However, it is
not within the scope of this Advisory Opinion to make such determination. An
Advisory Opinion merely sets forth the applicability of pertinent statutory and
regulatory provisions to "a specified set of facts." Tax Law, §171.Twenty­
fourth; 20 NYCRR 2376.1(a).

DATED: November 14, 1995

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory 0pinions
are limited to the facts set forth therein.