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

§ 632. Nonresident partners and electing shareholders of S\ncorporations. (a) Portion derived from New York sources.\n (1) In determining New York source income of a nonresident partner of\nany partnership, there shall be included only the portion derived from\nor connected with New York sources of such partner's distributive share\nof items of partnership income, gain, loss and deduction entering into\nhis federal adjusted gross income, as such portion shall be determined\nunder regulations of the tax commission consistent with the applicable\nrules of section six hundred thirty-one of this part. If a nonresident\nis a partner in a partnership where a sale or transfer of the membership\ninterest of the partner is subject to the provisions of section\none-thousand sixty of the internal revenue code, then any gain\nrecognized on the sale or transfer for federal income tax purposes shall\nbe treated as New York source income allocated in a manner consistent\nwith the applicable methods and rules for allocation under this article\nin the year that the assets were sold or transferred.\n (2) In determining New York source income of a nonresident shareholder\nof an S corporation where the election provided for in subsection (a) of\nsection six hundred sixty of this article is in effect, there shall be\nincluded only the portion derived from or connected with New York\nsources of such shareholder's pro rata share of items of S corporation\nincome, loss and deduction entering into his federal adjusted gross\nincome, increased by reductions for taxes described in paragraphs two\nand three of subsection (f) of section thirteen hundred sixty-six of the\ninternal revenue code, as such portion shall be determined under\nregulations of the commissioner consistent with the applicable methods\nand rules for allocation under article nine-A of this chapter,\nregardless of whether or not such item or reduction is included in\nentire net income under article nine-A for the tax year. If a\nnonresident is a shareholder in an S corporation where the election\nprovided for in subsection (a) of section six hundred sixty of this\narticle is in effect, and the S corporation has distributed an\ninstallment obligation under section 453(h)(1)(A) of the Internal\nRevenue Code, then any gain recognized on the receipt of payments from\nthe installment obligation for federal income tax purposes will be\ntreated as New York source income allocated in a manner consistent with\nthe applicable methods and rules for allocation under article nine-A of\nthis chapter in the year that the assets were sold. In addition, if the\nshareholders of the S corporation have made an election under section\n338(h)(10) of the Internal Revenue Code, then any gain recognized on the\ndeemed asset sale for federal income tax purposes will be treated as New\nYork source income allocated in a manner consistent with the applicable\nmethods and rules for allocation under article nine-A of this chapter in\nthe year that the shareholder made the section 338(h)(10) election. For\npurposes of a section 338(h)(10) election, when a nonresident\nshareholder exchanges his or her S corporation stock as part of the\ndeemed liquidation, any gain or loss recognized shall be treated as the\ndisposition of an intangible asset and will not increase or offset any\ngain recognized on the deemed assets sale as a result of the section\n338(h)(10) election.\n (b) Special rules as to New York sources. In determining the sources\nof a nonresident partner's income, no effect shall be given to a\nprovision in the partnership agreement which--\n (1) characterizes payments to the partner as being for services or for\nthe use of capital, or\n (2) allocates to the partner, as income or gain from sources outside\nNew York, a greater proportion of his distributive share of partnership\nincome or gain than the ratio of partnership income or gain from sources\noutside New York to partnership income or gain from all sources, except\nas authorized in subsection (d), or\n (3) allocates to the partner a greater proportion of a partnership\nitem of loss or deduction connected with New York sources than his\nproportionate share, for federal income tax purposes, of partnership\nloss or deduction generally, except as authorized in subsection (d).\n (c) Partner's and shareholder's modifications. Any modification\ndescribed in subsection (b) or (c) of section six hundred twelve, which\nrelates to an item of partnership or S corporation income, gain, loss or\ndeduction, shall be made in accordance with the partner's distributive\nshare or the shareholder's pro rata share for federal income tax\npurposes of the item to which the modification relates, but limited to\nthe portion of such item derived from or connected with New York\nsources.\n (d) Alternate methods. The tax commission may, on application,\nauthorize the use of such other methods of determining a nonresident\npartner's portion of partnership items derived from or connected with\nNew York sources, and the modifications related thereto, as may be\nappropriate and equitable, on such terms and conditions as it may\nrequire.\n (e) Application of rules for resident partners and shareholders to\nnonresident partners and shareholders.\n (1) A nonresident partner's distributive share or S corporation\nshareholder's pro rata share of items shall be determined under\nsubsection (a) of section six hundred seventeen.\n (2) The character of partnership or corporation items for a\nnonresident partner or S corporation shareholder shall be determined\nunder subsection (b) of section six hundred seventeen.\n (3) The effect of a special provision in a partnership agreement\n(other than a provision referred to in subsection (b) of this section)\nhaving the principal purpose of avoidance or evasion of tax under this\narticle shall be determined under subsection (c) of section six hundred\nseventeen.\n