Sec. 118.3. Modifications for certain gains excluded from Federal distributable net income

Tax Law, § 618(2)

(a) In determining the New York taxable income of a resident estate or trust, Federal taxable income is reduced by the amount of the modifications described in subdivisions (d) and (e) of section 112.3 of this Article, but only with respect to gains (from the sale or other disposition of property) which are excluded from Federal distributable net income of the estate or trust. With respect to gains which are includible in Federal distributable net income, any applicable modifications are reflected in the New York fiduciary adjustment (see sections 118.4 of this Part and Part 119 of this Article).

(b) The modifications provided by section 112.3(d) of this Article reduce, to the extent applicable, the gains reported by the estate or trust for Federal income tax purposes from the sale or other disposition of property having a higher New York State basis (on the last effective date of article 16 of the Tax Law) than the Federal basis on that date. The modifications provided by section 112.3(e) of this Article exclude any item of income or gain currently reported by the estate or trust for Federal income tax purposes which was taxed by New York State in a previous year under article 16 of the Tax Law. See subdivisions (d) and (e) of section 112.3 for a general discussion of these modifications as they apply to items of income or gain received directly by resident individuals.

(c) The following discussion in this section covers the application of these modifications in the case of estates and trusts.

(1) Computation of the amount of modifications for different Federal and New York State bases.

Where the sale or other disposition of a particular asset results in a gain which is taxable in total to the estate or trust, the gain is subject to a modification under section 112.3(d) of this Article if the property sold had a higher New York State income tax basis on the last day of the last year taxable under article 16 of the Tax Law than the Federal basis on such date. The amount to be subtracted from Federal taxable income is the portion of the gain reported for Federal income tax purposes which is not in excess of the difference between the two bases, except that if the gain is considered a long-term capital gain for Federal income tax purposes, the modification is limited to 40 percent of such portion of the gain (60 percent for taxable years beginning in 1972 and before 1982; 50 percent for taxable years beginning prior to January 1, 1972). The application of section 112.3(d) of this Article to such a gain by an estate is shown in the following example:

Example:

A testamentary trust created by a decedent contained stock which had a fair market value of $100,000 on July 1, 1958, the date of the decedent's death, and the stock was valued at this amount for New York State estate tax purposes. One year later the fair market value was $90,000, and the executor/trustee elected to use the lower value for Federal estate tax purposes. In 1985 the executor/trustee for the testamentary trust of the decedent sold the stock for $104,000, realizing a gain of $14,000 for Federal income tax purposes.

In accordance with the terms of the will, this gain was allocated to the corpus of the estate, so that it is excluded from distributable net income for Federal income tax purposes, and is taxable to the estate. Since it is a long-term capital gain, only 40 percent thereof is included in the estate's Federal taxable income.

The difference between the higher New York State basis and the Federal basis is $10,000 ($100,000 minus $90,000), so that the portion of the gain not in excess of the difference in basis is also $10,000. However, since this is a long-term capital gain, the modification is limited to $4,000, 40 percent of the difference in basis and it is this amount which should be subtracted from the estate's Federal taxable income in determining its New York taxable income.

Note:

If the sale of this stock by the executor and the resulting long-term capital gain had occurred in a taxable year beginning in 1972 and before 1982, the modification to be subtracted from Federal taxable income would be 60 percent of the difference in basis, or $6,000. If the sale of the stock by the executor and the resulting long-term capital gain had occurred in a taxable year beginning prior to 1972, the modification to be subtracted from Federal taxable income would be 50 percent of the difference in basis, or $5,000.

(2) Modification for gains previously taxed under article 16 of the Tax Law.

These modifications are allowed in order to prevent a gain from being taxed under article 22 of the Tax Law, where the same gain was previously taxed under article 16 of the Tax Law either to the estate or trust, or to a decedent by reason of whose death the estate or trust acquired the right to receive the gain, or to another estate or trust from which the subject estate or trust received the gain.

Example:

On July 1, 1956, a resident individual, C, who filed his Federal and New York State personal income tax returns on a calendar year basis, sold certain real property, realizing a short-term capital gain of $6,000. He elected to report the gain on the installment method for both Federal and New York State personal income tax purposes. By reason of this election $1,000 of this gain was reportable on the 1956 calendar year Federal income tax return of C, and thereafter on each Federal income tax return for the succeeding five years, as the annual installment payments on July first each year were received. C died on April 30, 1959. In accordance with the applicable provisions of article 16 of the Tax Law then in force, C's executor included the entire amount of the previously unreportable gain ($3,000) in C's New York State personal income tax return for the period ending with his death; that is, from January 1 to April 30, 1959. C's executor properly reported $1,000 of such gain as income in respect of a decedent in each of the Federal income tax returns of the estate for 1959 and 1960. The $1,000 properly reported on the Federal income tax return is automatically reflected in the New York State personal income tax return for 1960, since the New York taxable income of a resident estate or trust is the same as the Federal taxable income, with certain modifications. Since the $1,000 was previously included in the gain properly reported in C's New York State personal income tax return for the period ending with his death in 1959, a modification reducing the estate's New York taxable income by $1,000 is allowed for 1960. (The same modification would be applicable for 1961 if the remaining $1,000 gain is properly included in the estate's Federal taxable income for 1961.) In this example, all of the capital gain is allocable to principal for estate accounting purposes and is thus taxable to the estate. No portion of the gain is therefore includible in the estate's Federal distributable net income, and no part of the above modification enters into the computation of the New York fiduciary adjustment. Accordingly, the entire amount of the modification is subtracted by C's executor from the estate's Federal taxable income in order to properly compute the New York taxable income of the estate.