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Volume 11 - Opinions of Counsel SBRPS No. 71

Opinions of Counsel index

Persons with disabilities and limited incomes exemption (income requirement) (Subchapter S corporate income); Senior citizens exemption (income requirement) (Subchapter S corporate income) - Real Property Tax Law, §§ 459-c, 467:

A shareholder’s pro rata share of Subchapter S corporation income should be treated as “net income from self-employment” for the purposes of section 459-c or section 467 of the RPTL.

We have received an inquiry concerning the persons with disabilities and limited incomes exemption (Real Property Tax Law, § 459-c) and the senior citizens exemption (RPTL, § 467). An applicant for one of those exemptions {1} is a shareholder in an S corporation (see, Subchapter S of the Internal Revenue Code, 26 U.S.C. §§ 1371 to 1379). The question is whether her pro rata share of the corporation’s income as reported on her federal income tax return (see, IRS 2001 Form 1040, Item 17) should be considered “income” for the purpose of section 459-c or section 467.

The definitions of “income” set forth in sections 459 c(5)(a) and 467(3)(a) are similar (though not identical), and neither specifically encompasses a shareholder’s pro rata share of an S corporation’s income. Both, however, include “net income from self-employment.”

While it is true that whether moneys are taxable or nontaxable for income tax purposes is not dispositive for purposes of determining whether they are income for purposes of section 467 or 459-c (see, Engle v. Talarico, 33 N.Y.2d 237, 306 N.E.2d 796, 351 N.Y.S.2d 677 (1973)), as we have stated in numerous opinions, this does not mean that we are precluded from looking to the tax laws for guidance (e.g., 10 Op.Counsel SBRPS Nos. 12, 31). The Internal Revenue Service defines “self-employed persons” as including “a member of a partnership” (IRS Tax Guide 2001, Publication 17, p.7). A “partnership” has many of the characteristics associated with an S corporation. Both types of organizations are “Pass-Through Entities” (IRS Tax Guide 2001, Publication 17, p.201). Partners and S corporation shareholders report their share of the income, gains, losses, deductions and credits of their partnerships and S corporations on their individual federal and State income tax returns (26 U.S.C. §§ 702, 1366; Tax Law, § 617). {2}  It therefore is our opinion that a shareholder’s pro rata share of S corporation income should be treated as "net income from self-employment” for the purposes of section 459-c or section 467 of the RPTL. {3}

We have concluded, “Net rental income is gross rental income less the ordinary and necessary expenses attributable to the portion of the property used to produce income” (1 Op.Counsel SBEA No. 8). Net income from self-employment would be computed similarly. {4}  Note, however, that if the applicant has S corporation share losses, she may not claim entitlement to exemption by using those losses to offset other forms of income that she may have received (5 Op.Counsel SBEA No. 36).

May 2, 2002

{1}  Both exemptions may not be granted for the same taxing purpose (RPTL, § 459-c(3)).

{2}  Tax Law, section 617, provides that the “New York adjusted gross income and New York taxable income of a resident partner or a resident shareholder of an S corporation . . . 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.”

{3}  We are aware that there are differences in the method by which the tax liability of partners and of S corporation shareholders is calculated. The Internal Revenue Service has recognized that distinction by advising that “[u]nlike most partnership income, S corporation income is not self-employment income” (IRS 2001 Instructions for Form 1120S, p.18).

{4}  Note that RPTL, sections 459-c(5)(a) and 467(3)(a), provide that “[i]n computing . . . net income from self-employment no depreciation deduction shall be allowed for the exhaustion, wear and tear of real or personal property held for the production of income.”