TAF-05-08-00021-P Treatment of Certain Allocations in Partnership Agreements Designed Principally to Avoid or Evade Personal Income Tax

1/30/08 N.Y. St. Reg. TAF-05-08-00021-P

NEW YORK STATE REGISTER

VOLUME XXX, ISSUE 5

January 30, 2008

RULE MAKING ACTIVITIES

DEPARTMENT OF TAXATION AND FINANCE

PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. TAF-05-08-00021-P

Treatment of Certain Allocations in Partnership Agreements Designed Principally to Avoid or Evade Personal Income Tax

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:

Proposed action:

This is a consensus rule making to amend section 3-13.5(a)(1); repeal section 117.5; and add section 117.5 to Title 20 NYCRR.

Statutory authority:

Tax Law, sections 171, subd. First; 697(a) and 1096(a)

Subject:

Treatment of certain allocations in partnership agreements designed principally to avoid or evade personal income tax.

Purpose:

To update the provisions to conform to Internal Revenue Code section 704(b) and continue consistency with Federal statutes.

Text of proposed rule:

Section 1. The ending unnumbered paragraph of paragraph (1) of subdivision (a) of section 3-13.5 of the Business Corporation Franchise Tax regulations is amended to read as follows:

The term “corporate group” means the corporate limited partner itself or, if it is a member of an affiliated group, the corporate limited partner and all other members of such affiliated group. The term “affiliated group” shall have the same meaning as provided in section [3-13.2(c)(1)] 3-13.2(d)(1) of this Subpart.

Section 2. Section 117.5 of the Personal Income Tax regulations is REPEALED and a new section 117.5 is added to read as follows:

Section 117.5 New York State personal income tax avoidance or evasion. (Tax Law, section 617(c))

(a) If a partnership agreement provides for an allocation of any item of partnership income, gain, loss or deduction to a partner but the allocation does not have substantial economic effect in accordance with section 704(b) of the Internal Revenue Code, the allocation shall be disregarded for Federal income tax purposes. In such a case, a partner's distributive share of such item is determined in accordance with the partner's interest in the partnership (determined by taking into account all facts and circumstances). This treatment and distribution of the item is reflected in each partner's Federal adjusted gross income and therefore in each partner's New York adjusted gross income, even if no New York State personal income tax avoidance or evasion may be involved.

(b) An allocation of an item, amount or activity, even if recognized for Federal income tax purposes, will not be recognized where it has as a principal purpose the avoidance or evasion of New York State personal income tax. Where an allocation is not recognized, the partner's distributive share shall be determined in accordance with the partner's interest in the partnership (determined by taking into account all facts and circumstances).

(c) The determination of whether a principal purpose of an allocation of an item, amount or activity is the avoidance or evasion of New York State personal income tax depends on all the surrounding facts and circumstances. Among the relevant circumstances to be considered are the following:

(1) whether the partnership or a partner individually has a business purpose for the allocation;

(2) whether the allocation has substantial economic effect, that is, whether the allocation may actually affect the dollar amount of the partners' shares of the total partnership income or loss independently of the New York State personal income tax consequences;

(3) whether the related items of partnership income, gain, loss or deduction from the same source are subject to the same allocation;

(4) whether the allocation was made without recognition of normal business factors and only after the amount of the allocated item could reasonably be estimated;

(5) the duration of the allocation; and

(6) the overall New York State personal income tax consequences of the allocation.

Text of proposed rule and any required statements and analyses may be obtained from:

John W. Bartlett, Tax Regulations Specialist 4, Department of Taxation and Finance, Bldg. 9, State Campus, Albany, NY 12227, [phone], e-mail: [e-mail]

Data, views or arguments may be submitted to:

William Ryan, Director, Department of Taxation and Finance, Taxpayer Guidance Division, Bldg. 9, State Campus, Albany, NY 12227, [phone], e-mail: [e-mail]

Public comment will be received until:

45 days after publication of this notice.

Consensus Rule Making Determination

The Department of Taxation and Finance has determined that no person is likely to object to the adoption of this rule as written because these amendments merely repeal outdated regulatory provisions and add new provisions to update the provisions relating to treatment of an allocation of partnership income which has as a principal purpose the avoidance or evasion of personal income tax to reflect current federal provisions under Internal Revenue Code section 704(b), and continue the consistency of the New York personal income tax rules with federal treatment of certain allocations contained in partnership agreements. The new rule is not substantially different from the existing regulations and the amendments largely reflect current administrative policy regarding existing statutes.

In addition, the update to personal income tax regulations section 117.5 is consistent with language incorporated in amendments to the Business Corporation Franchise Tax regulations concerning corporate partners (20 NYCRR section 3-13.3(a)(3)), and provides uniformity between corporate and individual partners.

The rule also makes a technical correction to section 3-13.5(a)(1) to correct a cross-reference. This editorial change is not controversial in nature.

Job Impact Statement

A Job Impact Statement is not being submitted with this rule because it is evident from the subject matter that the rule will have no adverse impact on jobs or employment opportunities. The amendments update the personal income tax regulations to reflect the current federal provisions of Internal Revenue Code section 704(b), and continue the consistency of New York personal income tax rules with federal treatment of certain allocations contained in partnership agreements that do not have substantial economic effect. The update to the personal income tax regulations was prompted by amendments to section 3-13.3(a)(3) of the Business Corporation Franchise Tax regulations concerning corporate partners, which incorporated the current federal provisions. The rule also provides for uniformity between corporate and individual partners. The new rule is not substantially different from the existing regulations and the amendments largely reflect current administrative policy regarding existing statutes.

The rule also makes a technical correction to section 3-13.5(a)(1) to correct a cross-reference.