N.Y. Tax Law § 632: Nonresident partners and electing shareholders of S corporations

§ 632. Nonresident partners and electing shareholders of S

corporations. (a) Portion derived from New York sources.

(1) In determining New York source income of a nonresident partner of

any partnership, there shall be included only the portion derived from

or connected with New York sources of such partner's distributive share

of items of partnership income, gain, loss and deduction entering into

his federal adjusted gross income, as such portion shall be determined

under regulations of the tax commission consistent with the applicable

rules of section six hundred thirty-one of this part. If a nonresident

is a partner in a partnership where a sale or transfer of the membership

interest of the partner is subject to the provisions of section

one-thousand sixty of the internal revenue code, then any gain

recognized on the sale or transfer for federal income tax purposes shall

be treated as New York source income allocated in a manner consistent

with the applicable methods and rules for allocation under this article

in the year that the assets were sold or transferred.

(2) In determining New York source income of a nonresident shareholder

of an S corporation where the election provided for in subsection (a) of

section six hundred sixty of this article is in effect, there shall be

included only the portion derived from or connected with New York

sources of such shareholder's pro rata share of items of S corporation

income, loss and deduction entering into his federal adjusted gross

income, increased by reductions for taxes described in paragraphs two

and three of subsection (f) of section thirteen hundred sixty-six of the

internal revenue code, as such portion shall be determined under

regulations of the commissioner consistent with the applicable methods

and rules for allocation under article nine-A of this chapter,

regardless of whether or not such item or reduction is included in

entire net income under article nine-A for the tax year. If a

nonresident is a shareholder in an S corporation where the election

provided for in subsection (a) of section six hundred sixty of this

article is in effect, and the S corporation has distributed an

installment obligation under section 453(h)(1)(A) of the Internal

Revenue Code, then any gain recognized on the receipt of payments from

the installment obligation for federal income tax purposes will be

treated as New York source income allocated in a manner consistent with

the applicable methods and rules for allocation under article nine-A of

this chapter in the year that the assets were sold. In addition, if the

shareholders of the S corporation have made an election under section

338(h)(10) of the Internal Revenue Code, then any gain recognized on the

deemed asset sale for federal income tax purposes will be treated as New

York source income allocated in a manner consistent with the applicable

methods and rules for allocation under article nine-A of this chapter in

the year that the shareholder made the section 338(h)(10) election. For

purposes of a section 338(h)(10) election, when a nonresident

shareholder exchanges his or her S corporation stock as part of the

deemed liquidation, any gain or loss recognized shall be treated as the

disposition of an intangible asset and will not increase or offset any

gain recognized on the deemed assets sale as a result of the section

338(h)(10) election.

(b) Special rules as to New York sources. In determining the sources

of a nonresident partner's income, no effect shall be given to a

provision in the partnership agreement which--

(1) characterizes payments to the partner as being for services or for

the use of capital, or

(2) allocates to the partner, as income or gain from sources outside

New York, a greater proportion of his distributive share of partnership

income or gain than the ratio of partnership income or gain from sources

outside New York to partnership income or gain from all sources, except

as authorized in subsection (d), or

(3) allocates to the partner a greater proportion of a partnership

item of loss or deduction connected with New York sources than his

proportionate share, for federal income tax purposes, of partnership

loss or deduction generally, except as authorized in subsection (d).

(c) Partner's and shareholder's modifications. Any modification

described in subsection (b) or (c) of section six hundred twelve, which

relates to an item of partnership or S corporation income, gain, loss or

deduction, shall be made in accordance with the partner's distributive

share or the shareholder's pro rata share for federal income tax

purposes of the item to which the modification relates, but limited to

the portion of such item derived from or connected with New York

sources.

(d) Alternate methods. The tax commission may, on application,

authorize the use of such other methods of determining a nonresident

partner's portion of partnership items derived from or connected with

New York sources, and the modifications related thereto, as may be

appropriate and equitable, on such terms and conditions as it may

require.

(e) Application of rules for resident partners and shareholders to

nonresident partners and shareholders.

(1) A nonresident partner's distributive share or S corporation

shareholder's pro rata share of items shall be determined under

subsection (a) of section six hundred seventeen.

(2) The character of partnership or corporation items for a

nonresident partner or S corporation shareholder shall be determined

under subsection (b) of section six hundred seventeen.

(3) The effect of a special provision in a partnership agreement

(other than a provision referred to in subsection (b) of this section)

having the principal purpose of avoidance or evasion of tax under this

article shall be determined under subsection (c) of section six hundred

seventeen.