§ 28-06 Unincorporated Business Deductions.

(1) Except as otherwise specifically provided in this chapter of these rules, an unincorporated business means any trade, business, profession or occupation conducted, engaged in or being liquidated by an individual or by an unincorporated entity, including a partnership or fiduciary, a corporation in liquidation, or an unincorporated entity that has elected under § 11-602(1)(b) of the Administrative Code to continue to be subject to the tax imposed by Chapter 5 of Title 11 of the Administrative Code for the period during which such election is in effect, but not including any entity subject to any city corporate business tax imposed pursuant to Chapter 6 of Title 11 of the Administrative Code.

(2) For all taxable years beginning on or after January 1, 1978, the term "unincorporated business" shall not include any entity conducting an insurance business as a member of the New York Insurance Exchange as described in Article 62 of the State Insurance Law.

(3) (i) An unincorporated business which is a utility business subject to the supervision of the State Department of Public Service and which is subject to the tax on utilities pursuant to Chapter 11 of Title 11 of the Administrative Code shall not be subject to tax under Chapter 5 of Title 11 of the Administrative Code.

(ii) An incorporated business which is subject to the tax on vendors of utility services under Chapter 11 of Title 11 of the Administrative Code shall be subject to the Unincorporated Business Tax under Chapter 5 of Title 11 of the Administrative Code on a portion of its entire net income allocable to the city under § 11-508 of the Administrative Code (see: 19 RCNY § 28-07). Entire net income is the unincorporated business gross income as defined by § 11-506 of the Administrative Code (see: 19 RCNY § 28-05) less the unincorporated business deductions allowed by § 11-507 of the Administrative Code (see: 19 RCNY § 28-06). The portion of the unincorporated business entire net income subject to the unincorporated business tax shall be calculated by multiplying the entire net income allocable to the City by a fraction the numerator of which shall be the total receipts of the unincorporated business less those receipts subject to the tax imposed by Chapter 11 of Title 11 and the denominator of which shall be the total receipts of the unincorporated business.

Example: An unincorporated business has total receipts of $1,000,000. $300,000 of these receipts is subject to the tax imposed by Chapter 11 of Title 11 of the Administrative Code. The entire net income of the business which is allocable to the City is $500,000. $350,000 will be subject to the Unincorporated Business Tax

($700,000 × $500,000 = $350,000)
$1,000,000

(4) (i) Where an individual or other unincorporated entity carries on in whole or in part in the City, two or more distinct unincorporated businesses, all such businesses carried on in whole or in part in the City shall be treated as one unincorporated business for the purposes of Chapter 5 of Title 11 of the Administrative Code. The gross business income and the unincorporated business deductions of all such businesses must be reported in one return. The deductions for the compensation for services of the proprietor or the active partners and the unincorporated business exemptions must be computed without regard to the fact that more than one business activity is carried on by the entity.

(ii) An individual or other unincorporated entity carrying on a number of separate and distinct unincorporated businesses, some located (in whole or in part) in the City and others located entirely outside the City, must treat all the New York City businesses as a single business in computing its tax. The businesses carried on entirely outside the City are not taxable and, therefore, items of income, gain, loss or deduction from such businesses are not included in computing the unincorporated business taxable income of the City business. In addition, these distinct businesses carried on entirely without the City may not serve as a regular place of business for allocation purposes of the business carried on within the City (see: 19 RCNY § 28-07).

(iii) Where a husband and wife each carry on a separate and independent business, each must file a separate and independent tax return even if they file jointly for purposes of the Federal, State or City personal income taxes. Losses incurred in one spouse's business may not be used to reduce the taxable income of the other spouse's business.

(5) In general, the trades, businesses, professions or occupations which constitute an unincorporated business when conducted, engaged in or being liquidated by an individual or an unincorporated entity include, without limitation, all phases of activities such as manufacturing and processing, merchandising, at wholesale or retail, banking and financing, the practice of law, medicine, accounting and other professions, trucking and other transportation services, brokerage services of all types and any other activity which involves the leasing of or trading or dealing in real or personal property or the performing of services of any kind. Where a doubt as to the status of an activity exists, all the relevant facts and circumstances must be considered in determining whether the activity or the transactions involved constitute a trade, business, profession or occupation for the purposes of this section. Generally, the continuity, frequency and regularity of activities, as distinguished from casual or isolated transactions, and the amount of time and resources devoted to the activity or transactions are the factors which are to be taken into consideration.

Example: The composition of a single song by an individual who is not a songwriter by profession does not constitute carrying on an unincorporated business so as to subject his royalty income to the tax.

(6) Ordinarily, an individual or other unincorporated entity, not otherwise subject to tax, engaging in activities relating to the investment and reinvestment of his or its own funds and the receipt or collection of income therefrom, or the sale, purchase or writing of stock options for his or its own account or the consummation of isolated or incidental transactions connected with such investment activities will not be considered to be the carrying on of a trade, business or occupation. See 19 RCNY § 28-02(g). However, a taxpayer who or which invests funds in the purchase of an operating unincorporated business, such as a manufacturing plant, mercantile organization, hotel or other unincorporated activity of the type where the carrying on of business is necessary to realizing on the investment, will be deemed to be engaged in the conduct of a taxable trade, business, profession or occupation, even though only a limited amount of time, thought and energy may be devoted to the activity by the individual taxpayer, or by the members of a partnership or other unincorporated entity.

(7) (i) An individual will not be treated as engaged in any trade, business, profession or occupation carried on within or without the City by an unincorporated entity in which such individual owns an interest.

(ii) For taxable years beginning on or after January 1, 1996, and for purposes of Chapter 5 of Title 11 of the Administrative Code, if an unincorporated entity owns an interest in another unincorporated entity that is carrying on any trade, business, profession or occupation in whole or in part in the City, the first unincorporated entity will be treated as carrying on that same trade, business, profession or occupation in whole or in part in the City, regardless of whether that trade, business, profession or occupation constitutes an unincorporated business for purposes of Chapter 5 of Title 11 of the Administrative Code. If an unincorporated entity owns an interest in another unincorporated entity that is not carrying on any trade, business, profession or occupation in whole or in part in the City, the first unincorporated entity will not be considered engaged in an unincorporated business based solely on such ownership. The provisions of this subparagraph (ii) may be illustrated by the following examples:

Example 1: Partnership A is engaged in the purchase and sale of stocks and securities for its own account in the City. In 1997, Partnership A is a limited partner in Partnership B that operates a hotel located outside the City and is not engaged in any other trade, business, profession or occupation in whole or in part in the City. Partnership A will not be considered to be carrying on a business in the City by reason of its ownership of an interest in B.

Example 2: The facts are the same as in Example 1 except that the hotel is located in the City. Because Partnership B is engaged in a business in the City, under the provisions of paragraph (7) above, Partnership A will be considered engaged in the business carried on in the City by Partnership B.

(b) Persons and entities subject to this tax.

(1) General. The persons and entities which are subject to the unincorporated business income tax when they engage in the carrying on of or the liquidation of a taxable trade, business, profession or occupation, as defined in 19 RCNY § 28-02(a), are any

(i) individual,

(ii) partnership (whether a general, limited or special partnership),

(iii) society,

(iv) association,

(v) estate,

(vi) statutory or common law trust,

(vii) individual carrying on a taxable trade, business, profession or occupation in a fiduciary capacity or relationship, including

(A) an executor,

(B) administrator,

(D) trustee,

(E) liquidator,

(F) referee and

(G) assignee,

(viii) a corporation in liquidation, or

(ix) any other entity which is not taxable as a corporation under Chapter 6 of Title 11 of the Administrative Code.

(2) Executor or administrator. Where an executor or administrator, in his or its fiduciary capacity, continues to carry on or liquidate an unincorporated business of a decedent, the estate of such decedent is an entity subject to the provisions of the unincorporated business tax law. The unincorporated business tax law also applies where a receiver, trustee, liquidator, assignee, referee, or other fiduciary carries on or liquidates an unincorporated business activity of an individual, partnership or other unincorporated entity. The tax likewise applies to the activities of a fiduciary in connection with the liquidation of the business of a corporation, unless such liquidating activities are subject to corporation taxes under Chapter 6 of Title 11 of the Administrative Code. Furthermore, a guardian, trustee, executor, administrator, receiver, conservator, referee, assignee, or any person acting in any fiduciary capacity for any person who carries on or liquidates a business of an individual, partnership or other unincorporated entity, or a corporation in liquidation not subject to Chapter 6 of Title 11 of the Administrative Code, who pays, in whole or in part, any debt due by the party for which he acts before he satisfies and pays the tax due under Chapter 5 of Title 11 of the Administrative Code from such party, shall become answerable in his own person and estate to the extent of such payments for so much thereof as may remain due and unpaid.

(1) Partnership defined. The word "partnership" as used in these rules, includes, in addition to its ordinary meaning, a syndicate, group, pool, joint venture or other unincorporated organization, including a subchapter K limited liability company as defined in § 11-126 of the Administrative Code, through or by means of which any business, financial operation, or venture is carried on and which is not a trust, estate, corporation, or other entity subject to the tax imposed by Chapter 6 of Title 11 of the Administrative Code. See 19 RCNY § 28-02(a)(1) for the treatment of unincorporated entities that elected to be subject to the unincorporated business tax under Administrative Code § 11-602(1)(b).

(2) Additional criteria for partnerships to be deemed unincorporated businesses. For purposes of determining whether the activities of any partnership (including one which has made an election under Section 761 of the Internal Revenue Code; see: subdivision (d) of this section) constitute the carrying on of an unincorporated business, there shall, in addition to the other provisions of these regulations, be taken into account such factors as

(i) the form or type of ownership of any property involved in or connected with the activity,

(ii) whether the participants reserve the right separately to take in kind or to dispose of their shares of any property acquired, retained, produced, extracted or used by the partnership or other venture, and

(iii) whether the participants jointly or as a unit sell services or jointly sell any property produced or extracted by the partnership or other unincorporated organization. For example, if one or more individuals as "co-owners," either in fee or under a lease, undertake the development of "oil property" by agreeing to share in the costs and expenses of the development and in the production of the oil, the resulting partnership or joint venture will not be deemed to be engaged in the conduct of an unincorporated business as an entity if it is established that the participants reserved the right separately to take in kind and to dispose of their individual shares of the oil and if it is shown that the individuals or participants did not sell jointly or as a unit the oil produced by the property. In such a case, the individual member or participant in the operation of the property will be deemed to be engaged in an unincorporated business with respect to his participation in the group operation pertaining to the development of the property and the production of the oil and with respect to the individual or separate sales of the oil for his own account. If, in the example given above, the participants did not have the right to take their individual shares of the oil or if a joint sale of the oil has been made, the activities of the partnership or joint venture would constitute the carrying on of a taxable business by the partnership or venture as an entity.

(d) Effect of elections made for federal income tax purposes.

(1) General. Notwithstanding the provisions of subdivision (a) of this section of these regulations (regarding the meaning of the terms used in the laws of the United States relating to Federal income taxes), an election made for Federal income tax purposes by an individual proprietor, a partner, a partnership or other unincorporated entity or a corporation under Sections 761, 1361 (applicable to taxable years ending prior to January 1, 1969) or 1362 of the Internal Revenue Code will not be determinative of the status of the electing individual, partnership, corporation or other entity for unincorporated business tax purposes.

(2) Election under Section 761 of the Internal Revenue Code. Where an exclusion of a partnership or an unincorporated enterprise from application of the provisions of subchapter K of subtitle A of the Internal Revenue Code has resulted from an election made under section 761 of the Internal Revenue Code, there shall, upon request, be furnished to the Commissioner of Finance such information as the Commissioner of Finance may require regarding the names, addresses and proportionate interests in the partnership of the member partners, the nature and amount of income and deductions of the partnership and details of its business or financial operations or activities.

(3) Election under Section 1361 of the Internal Revenue Code. For taxable years ending prior to January 1, 1969, an election made by an unincorporated business enterprise owned by an individual or partnership (as defined herein) under Section 1361 of the 1954 Internal Revenue Code to be taxed as a domestic corporation for Federal income tax purposes will not in any way affect the liability of such unincorporated business enterprise provided for in Chapter 5 of Title 11 of the New York City Administrative Code unless, by reason of such election, the enterprise becomes subject to tax under Chapter 6 of Title 11 of the New York City Administrative Code, in which case its activities will not constitute the carrying on of an unincorporated business as defined in 19 RCNY § 28-02(a)(1).

(4) Election under Section 1362 of the Internal Revenue Code. An election by a small business corporation under Section 1362 of the Internal Revenue Code, to be an S corporation (or for taxable years beginning prior to January 1, 1983 the comparable election under former Section 1372 of the Internal Revenue Code), does not alter the corporate status for other than Federal income tax purposes and does not make the electing corporation or its shareholders subject to the provisions of Chapter 5 of Title 11 of the New York City Administrative Code.

(e) Services as employee, officer, director or fiduciary.

(1) General. Where an individual is

(i) an employee, or

(ii) an officer or director of a corporation, society, association or a political entity such as the United States, a State, a municipality or other political subdivision of a State, or

(iii) a fiduciary, such as an executor, administrator, trustee, liquidator, referee, or assignee, The performance of services as such employee, officer, director or fiduciary will not be deemed to be the carrying on of an unincorporated business by such individual unless the services so performed constitute part of a business regularly carried on by such individual. If the fiduciary is engaged in the carrying on of or the liquidation of a taxable trade, business, profession or occupation, see 19 RCNY § 28-02(b)(2).

(2) Employee defined.

(i) The term "employee" as used in this subdivision (e) means an individual performing services for an employer under an employer-employee relationship. Generally, the relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished, but also as to the details and means by which that result is to be accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but as to how it shall be done. He will usually be required to work during stated days and hours and be subject to company-established production standards. Other factors characteristic of employment, but not necessarily required or present in every case, are the providing of equipment and the furnishing of a place to work to the individual who performs the services.

(ii) If an individual is subject to the control or direction of another merely as to the result to be accomplished by the services and not as to the means and methods for accomplishing the result, he usually is an independent contractor or an independent agent rather than an employee. An individual who performs services for only one person or entity may, nevertheless, be an independent contractor or independent agent. Where he, however, performs services for two or more persons or entities, without a clear division of time, such an individual would ordinarily not be an employee but rather an independent contractor or agent with respect to both such persons or entities, since neither person or entity could be said to actually direct or control such individual to the extent necessary in an employer-employee relationship. With respect to certain sales representatives, however, this rule has been modified so that the sole fact of performance of services for two or more persons or entities without a clear division of time, does not, in itself, mean that such individual must be considered a self-employed independent contractor or agent. (See: 19 RCNY § 28-02(i)). Nevertheless, a sales representative will not be considered an employee unless such principals otherwise direct and control such individual to the extent necessary in an employer-employee relationship. Generally, agents, auctioneers, brokers, contractors and other individuals engaged in performing services who are independent and who offer their services to the general public are not employees. Likewise, where an individual makes an investment of capital which is a material income producing factor or maintains an inventory, whether or not title to such inventory is in his own name, such an individual would ordinarily be considered engaged in his own business.

(3) Employer-employee relationship determined. Whether there is sufficient direction and control which results in the relationship of employer and employee will be determined upon an examination of all the pertinent facts and circumstances of each case. The designation and description of the relationship by the parties, whether by contract or otherwise, is not necessarily determinative of the status of the individual for unincorporated business tax purposes. Other factors to be considered in determining if there is a sufficient exercise of direction and control resulting in an employer-employee relationship are whether the individual performing the services maintains his own office, engages his own assistants or hires his own employees, or incurs expenses without reimbursement. For a more detailed discussion of such factors, see 19 RCNY § 28-02(i). Still other factors which may have some bearing are whether or not

(i) personal income taxes or Federal insurance contributions are deducted from compensation to be paid to the individual,

(ii) whether or not the person or entity for whom the services are performed pays unemployment insurance,

(iii) whether or not the individual is a member of an employee pension plan, profit sharing, or other employee fringe benefit plan maintained by the entity for which the services are performed, and

(iv) whether or not the individual is a member of an employee union or association. The fact that the individual has been determined to be an employee or independent contractor by a court or administrative tribunal under any state, local or Federal law, is not determinative of the individual's status for the purposes of this subdivision (e). The weight, if any, to be given to such fact will depend upon the law under which the status was determined and the nature and purpose of such law.

(4) Services which constitute business activity. Personal services rendered by an individual as an employee, officer, director or fiduciary will ordinarily be deemed part of a business regularly carried on by such individual if such services are performed in furtherance of or for the direct benefit of other business activities, professional activities, or occupational activities the conduct of which constitutes an unincorporated business under the provisions of 19 RCNY § 28-02(a)(1). For purposes of the preceding sentence, services as an employee, officer, director or fiduciary performed by an individual will not be deemed to be performed in furtherance of or for the direct benefit of other business, professional or occupational activities of the individual

(i) if the individual does not maintain an office or employ assistants in connection with such services and his services as an employee, officer, director or fiduciary are performed on a full-time basis for one employer or principal and constitute the primary or chief occupational activity of the individual, or

(ii) if the services as an employee, officer, director or fiduciary are contracted for or undertaken and performed entirely independent of any other business, professional or occupational activity engaged in by the individual. Where an individual maintains an office or employs assistants in connection with the performance of services as an employee, officer, director or fiduciary for one or more employers or other principals, the services so performed will be deemed part of a business regularly carried on if the individual regularly performs or offers to perform similar services to the general public on an independent basis. Where the individual rendering personal services as an employee, officer, director or fiduciary is also actively engaged in his own independent business, without a clear division of time, or where the compensation received bears no reasonable relationship to the services performed for such employer or principal, but includes compensation for services performed in the individual's independent business, such services will be deemed to constitute part of an unincorporated business regularly carried on by the individual.

(f) Professions.

(1) General. For all taxable years beginning on or after January 1, 1971, the practice of a profession is deemed to constitute an unincorporated business. For prior periods, the practice of law, medicine, dentistry or architecture, and the practice of any other profession in which capital was not a material income producing factor and in which more than eighty percent of the unincorporated business gross income for the taxable year was derived from personal services actually rendered by the individual or the members of the partnership or other entity, was not deemed an unincorporated business.

(2) Profession defined. For purposes of these regulations, the term "profession" includes any occupation or vocation in which a professed knowledge of some department of science or learning, gained by a prolonged course of specialized instruction and study, is used by its practical application to the affairs of others, either advising, guiding or teaching them, and in serving their interests or welfare in the practice of an art or science founded on it. The word profession implies attainments in professional knowledge, as distinguished from mere skill and the application of knowledge to uses for others as a vocation.

(g) Purchase and sale of property for own account. (Administrative Code § 11-502(c)).

(1) Full self-trading exemption.

(i) Taxable years beginning before July 1, 1994. Notwithstanding the provisions of 19 RCNY § 28-02(a), for taxable years beginning before July 1, 1994, an individual or unincorporated entity, other than a dealer holding property primarily for sale to customers in the ordinary course of his, her, or its trade or business, shall not be deemed engaged in an unincorporated business solely by reason of the purchase and sale of property (real or personal), and, for taxable years beginning after 1976, the purchase, writing or sale of stock option contracts, for his, her, or its own account. Where the purchase and sale of real or personal property is connected with an unincorporated business otherwise regularly carried by the individual or entity, the profits and income from such purchases and sales will ordinarily be includible in the unincorporated business gross income of the individual or entity.

Example: For taxable years beginning before July 1, 1994, a partnership holding a stock exchange seat, which buys and sells securities for its own account and executes orders on the floor of the exchange for other securities brokers for which it receives commissions, must include in its unincorporated business income both its trading profits and its commissions.

(ii) Taxable years beginning after June 30, 1994 and before 1996. Notwithstanding the provisions of 19 RCNY § 28-02(a), for taxable years beginning after June 30, 1994, and before 1996, an individual or unincorporated entity, other than a dealer holding property primarily for sale to customers in the ordinary course of a trade or business, shall not be deemed engaged in an unincorporated business if the individual's or entity's activities consist exclusively of the purchase and sale of property, or the purchase, writing or sale of stock option contracts, for his, her, or its own account or consist exclusively of such activities and the conduct of any other activity or activities not otherwise subject to the tax imposed by Chapter 5 of Title 11 of the Administrative Code. See subparagraph (iv) of this paragraph for the treatment of individuals and entities receiving $25,000 or less of gross receipts from an unincorporated business in addition to the purchase and sale of property.

(iii) "Dealer" defined for taxable years beginning before January 1, 1996. For purposes of subparagraphs (i), (ii) and (iv) of this paragraph for taxable years beginning before January 1, 1996, a dealer in real or personal property is an individual or an unincorporated entity with an established place of business, regularly engaged in the purchase of property and its resale to customers; that is, one who (as a merchant) buys property and sells it to customers with a view to the gains and profits that may be derived therefrom. A builder or real estate developer who regularly subdivides real property and sells it as improved or unimproved lots likewise is considered to be a dealer for such purposes.

(iv) $25,000 test. Notwithstanding anything to the contrary, for taxable years beginning after June 30, 1994, if an individual or unincorporated entity is engaged in the purchase and sale of real or personal property, or the purchase, writing and sale of stock option contracts, other than as a dealer, for his, her, or its own account, and that individual or unincorporated entity also is engaged in one or more unincorporated businesses carried on in whole or in part in the City, such individual or entity will continue to be treated as engaged solely in the purchase and sale of property for the individual's or entity's own account and, therefore, eligible for the full exemption, provided such individual or entity does not receive more than $25,000 of gross receipts during the taxable year (determined without regard to any deductions) from all such unincorporated businesses wholly or partly carried on within the City.

(v) Taxable years beginning after 1995. For taxable years beginning on or after January 1, 1996, an individual or unincorporated entity, other than a dealer as defined in paragraph (2) of this subdivision (g), shall not be considered engaged in an unincorporated business solely by reason of:

(A) the purchase, holding, and sale for his, her, or its own account of property as defined in paragraph (3) of this subdivision (g);

(B) the entry into, assumption, offset, assignment, or other termination of a position in any property as defined in paragraph (3) of this subdivision (g);

(C) the acquisition, holding or disposition, other than in the ordinary course of a trade or business, of interests in unincorporated entities engaged solely in the activities described in subparagraphs (v)(A) through (v)(D) of this paragraph (1); or

(D) any combination of the activities described in subparagraphs (v)(A) through (v)(C) of this paragraph and any other activity not constituting an unincorporated business subject to the tax imposed by Chapter 5 of Title 11 of the Administrative Code.

(vi) Self-trading activities of individuals. An individual, other than a dealer as defined in paragraph (2) of this subdivision (g), engaged in the purchase and sale of real or personal property for his or her own account, including, for taxable years beginning after December 31, 1976, the purchase, sale or writing of stock option contracts, and, for taxable years beginning after December 31, 1995, the activities described in subparagraphs (v)(A) and (v)(B) of this paragraph, will not be deemed to be engaged in an unincorporated business wholly or partly in the City for purposes of this paragraph (1) unless (A) such transactions and activities are connected with a business regularly carried on wholly or partly in the City by the individual himself or herself and (B) for taxable years beginning after June 30, 1994, the individual receives more than $25,000 in gross receipts during the taxable year from such business regularly carried on. See 19 RCNY § 28-02(a)(7)(i) and (g)(1)(iv) of these rules. For purposes of this paragraph (1), such transactions and activities will be considered to be connected with a business regularly carried on wholly or partly in the City if such transactions are effected in the name of the business, are effected using funds held in banks or other financial institutions in the name of the business or if the assets resulting from such transactions are held in the name, or for the account, of the business. Where the purchase and sale of real or personal property or, for taxable years beginning after December 31, 1995, the activities described in subparagraphs (v)(A) and (v)(B) of this paragraph, are connected with an unincorporated business otherwise regularly carried on by the individual, the profits and income from such transactions will be includible in the unincorporated business gross income of the individual.

(2) "Dealer" defined for taxable years beginning on or after January 1, 1996. For purposes of this subdivision (g) for taxable years beginning on or after January 1, 1996, a dealer in real or personal property is an individual or an unincorporated entity that (A) purchases, holds, or disposes of property that is stock in trade of the individual or entity, inventory or is otherwise held for sale to customers in the ordinary course of the individual's or the entity's trade or business, or (B) regularly offers to enter into, assume, offset, assign or otherwise terminate positions in property with customers in the ordinary course of the individual's or entity's trade or business. For taxable years beginning on or after January 1, 1996, an individual or unincorporated entity shall not be treated as a dealer for purposes of Chapter 5 of Title 11 of the Administrative Code based exclusively on the fact that such individual or unincorporated entity owns an interest in an entity that is a dealer, as defined above, and an unincorporated entity shall not be treated as a dealer based exclusively on the fact that an individual or other entity that is a dealer, as defined above, owns an interest in such unincorporated entity. This paragraph is illustrated below:

Example 1: In 1996, Partnership A is a securities dealer in the City. Partnership A also is a limited partner in Partnership B that is engaged directly in the purchase and sale of stocks and securities for its own account in the City. Partnership B is not treated as a dealer based solely on the ownership by Partnership A of an interest in Partnership B.

Example 2: The facts are the same as in Example 1 except that Partnership A is the sole general partner in Partnership B and causes Partnership B to regularly take positions in stocks and securities with respect to which Partnership A is a dealer and Partnership B regularly engages in stock lending transactions with Partnership A. Based on the facts and circumstances, a portion of Partnership B's activities is engaged in wholly or partly to further the dealer activities of Partnership A and, therefore, Partnership B is considered a dealer.

(3) "Property" defined for taxable years beginning on or after January 1, 1996. For taxable years beginning on or after January 1, 1996, and for purposes of paragraphs (2) and (4) of this subdivision g, "property" shall mean:

(i) real and personal property, including but not limited to, property qualifying as investment capital as defined in subdivision (h) of § 11-501 of the Administrative Code of these rules, other stocks, notes, bonds, debentures, or other evidences of indebtedness, interest rate, currency, or equity notional principal contracts and foreign currencies,

(ii) interests in, or derivative financial instruments (including options, forward or futures contracts, short positions, and similar financial instruments) in, any property described in subparagraph (i), and

(iii) any commodity traded on, or subject to the rules of, a board of trade or commodity exchange, provided, however, "property" shall not include:

(iv) debt instruments issued by the taxpayer,

(v) accounts receivable held by the taxpayer as a factor,

(vi) stock in trade, inventory or property otherwise held for sale to customers in the ordinary course of the taxpayer's trade or business,

(vii) debt instruments acquired in exchange for funds loaned, services rendered, or for the sale, rental or other transfer of property by the taxpayer in the ordinary course of the taxpayer's trade or business,

(viii) interests in unincorporated entities, or

(ix) positions in any item described in subparagraphs (i) through (viii) entered into, assumed, offset, assigned or terminated by the taxpayer as a dealer in such positions or item.

(4) Partial exemption for entities for taxable years beginning on or after January 1, 1996.

(i) General. For taxable years beginning on or after January 1, 1996, if an unincorporated entity is primarily engaged in either activities that would qualify the entity for the full self-trading exemption provided in paragraph (1) of this subdivision (g), or holding certain passive investments in other unincorporated entities as described below, or both, the self-trading activities of the taxpayer, and of any unincorporated entity separately eligible for this partial exemption in which the taxpayer holds an interest, will not be considered an unincorporated business carried on by the taxpayer and, therefore, the income, gains, losses and deductions from such self-trading activities will be excluded from the unincorporated business gross income of the taxpayer. Specifically, if an unincorporated entity is primarily engaged in:

(A) activities described in subparagraphs (v)(A) through (v)(D) of paragraph (1) of this subdivision (g);

(B) the acquisition, holding or disposition, other than in the ordinary course of a trade or business, of interests as an investor, as defined in subparagraph (iii) of this paragraph (4), in unincorporated entities carrying on one or more unincorporated businesses in whole or in part in the City; or

(C) any combination of the activities described in subparagraphs (i)(A) and (i)(B) of this paragraph (4); the activities described in subparagraph (i)(A) of this paragraph (4), (i.e., the self-trading activities), carried on either by the taxpayer, or by any unincorporated entity that separately qualifies for the full exemption provided in paragraph (1) of this subdivision (g) or for the partial exemption under this subparagraph in which the taxpayer owns an interest, shall not be considered an unincorporated business carried on by the taxpayer and, therefore, the income, gains, losses, and deductions from those activities will be excluded from the unincorporated business gross income of the taxpayer. The income, gains, losses, and deductions from activities described in subparagraph (i)(B) of this paragraph (4) will not be excluded from the unincorporated business gross income of the taxpayer.

(ii) "Primarily engaged" defined. For purposes of subparagraph (i), a taxpayer that is an unincorporated entity shall be treated as primarily engaged in activities described in subparagraphs (i)(A), (i)(B) and (i)(C) of this paragraph if at least 90 percent of the total value of the taxpayer's assets is represented by assets described in subparagraphs (ii)(A) through (ii)(C) below:

(A) "property" as defined in paragraph (3) of this subdivision (g);

(B) interests in unincorporated entities not engaged in the conduct of any unincorporated business in whole or in part in the City; and

(C) interests held by the taxpayer as an investor, as defined in subparagraph (iii) of this paragraph, in unincorporated entities engaged in the conduct of one or more unincorporated businesses in whole or in part in the City.

(iii) "Investor" defined. For purposes of this paragraph (4), a taxpayer that is an unincorporated entity shall be considered to acquire, hold or dispose of an interest in another unincorporated entity as an investor if:

(A) that other unincorporated entity meets the requirements of subparagraph (i) of this paragraph (i.e., that other unincorporated entity qualifies for the partial self-trading exemption under this paragraph) and the taxpayer does not receive a distributive share of that other unincorporated entity's income, gain, loss, deductions, credits or basis from a business carried on in whole or in part in the City that is materially greater than its distributive share of any other item of income, gain, loss deduction, credit or basis of such unincorporated entity; or

(B) with respect to any other unincorporated entity not meeting the requirements of subparagraph (i) of this paragraph, i.e., not qualifying for the partial self-trading exemption, the taxpayer is not a general partner, is not authorized under the governing instrument to manage or participate in the day-to-day business of such unincorporated entity, and is not managing or participating in the day-to-day business of such unincorporated entity. For purposes of this subparagraph (iii)(B), the fact that the taxpayer is represented on a general oversight body, or is authorized to review or reject periodic budgets or veto major management decisions such as a major refinancing or sale of the unincorporated entity's assets other than in the ordinary course of business and exercises such authority, will not cause the taxpayer to be considered to be participating in day-to-day management. In addition, if a taxpayer is authorized to participate in day-to-day management only upon the occurrence of a particular event, or after the occurrence of such an event only upon the election by the taxpayer to so participate, the taxpayer will be considered to participate in day-to-day management only upon the occurrence of the event and, where applicable, after the taxpayer elects to so participate. Management activities of employees, officers and partners of the taxpayer will be imputed to the taxpayer for purposes of this subparagraph (iii)(B) only if such activities are performed by such persons in their capacity as employees, officers or partners of the taxpayer. For purposes of the preceding sentence, a determination as to whether management activities of an individual employee, officer or partner of the taxpayer, or of an employee, officer, partner or shareholder of a partner of the taxpayer, will be imputed to the taxpayer will be based on the facts and circumstances of each case, including but not limited to, whether the individual receives reasonable compensation for management services from the unincorporated business.

(iv) For purposes of subparagraph (ii) of this paragraph, the value of the assets of the taxpayer will be the average monthly gross value of the taxpayer's assets, unless the Commissioner determines that the use of gross values results in an improper or inaccurate reflection of the primary activities of the taxpayer. In that event, the Commissioner may exercise his or her discretion, in such manner as he or she may determine, to reduce the gross value of the taxpayer's assets by liabilities attributable thereto or to exclude assets so as to properly and accurately reflect the primary activities of the taxpayer. See examples 4 and 5 of subparagraph (vi) of this paragraph. The value of the assets of the taxpayer consisting of real property or marketable securities is the fair market value thereof and the value of assets other than real property or marketable securities is the value shown on the books and records of the taxpayer in accordance with generally accepted accounting principles, provided, however, that such values will be adjusted, if necessary, so as to produce the gross value thereof. In addition, where the use of monthly values is impractical or inappropriate, for example in the case of real property, the Commissioner may permit the use of less frequent valuations, but not less than annual.

(v) For purposes of subparagraph (iii)(A) of this paragraph, a taxpayer will be considered to receive a distributive share of another unincorporated entity's income, gain, loss, deduction, credit or basis that is materially greater than its share of any other item if it appears that the taxpayer has received a special allocation of one or more items of income, gain, loss, deduction, credit, or basis under an arrangement designed to avoid the tax.

(vi) The provisions of this paragraph (4) are illustrated below:

Example 1: In 1996, Partnership A is engaged directly in the purchase and sale of stocks and securities for its own account in the City. Partnership A also is a limited partner in Partnership B, which is engaged in the purchase and sale of securities for its own account in the City. Partnership A also is a non-managing member of Limited Liability Company C (a subchapter K limited liability company as defined in Administrative Code § 11-126), which is a securities dealer in the City. C is subject to tax on all of its income. Partnership B is wholly exempt from tax. Partnership A is not eligible for the full self-trading exemption under paragraph (1); however, Partnership A qualifies as primarily engaged in activities described in subparagraphs (i)(A), (i)(B) or (i)(C) of this paragraph (4). Therefore, A is not taxable on its own self-trading activity or on its share of B's income from self-trading. A is taxable on its share of C's income, gains, losses and deductions, including any income, etc. from C's own self-trading activity. Partnership A is not treated as a dealer solely by reason of its membership in C.

Example 2: The facts are the same as in Example 1 except that C is also a limited partner in Partnership D which is engaged solely in the purchase and sale of securities for its own account in the City. C's interest in Partnership D represents less than 90 percent of C's gross assets. Partnership D is exempt from tax because it is solely trading for its own account. C is taxable on its share of D's self-trading income because C does not qualify as primarily engaged in the activities described in subparagraphs (i)(A), (i)(B) or (i)(C) of this paragraph 4. A is taxable on its share of C's income, gains, losses and deductions, including C's share of D's self-trading income, etc.

Example 3: The facts are the same as in Example 2 except that C's interest in Partnership D represents 95 percent of C's gross assets. C qualifies as primarily engaged in the activities described in subparagraphs (i)(A), (i)(B) or (i)(C) of this paragraph, i.e., C qualifies for the partial self-trading exemption. Therefore, C is not taxable on its share of D's self-trading income, gains, losses and deductions. A is taxable on its share of C's income, gains, losses and deductions, other than C's share of D's self-trading income, etc.

Example 4: In 1996, Partnership A is a general partner in Partnerships B, C and D, each of which engages in an unincorporated business in the City. Partnership A also purchases and sells stocks and securities for its own account. The gross value of A's partnership interests in Partnerships B, C and D is $1,000,000. Partnership A enters into a number of repurchase agreements and reverse repurchase agreements. The gross value of A's securities portfolio excluding the reverse repurchase agreements is $1,000,000. The repurchase agreements represent liabilities on Partnership A's balance sheet of $8,500,000 while the reverse repurchase agreements have a gross value of $8,500,000. Based on the gross value of Partnership A's assets, including the reverse repurchase agreements but excluding the repurchase agreements, it is primarily engaged in activities described in subparagraphs (i)(A), (i)(B) or (i)(C) of this paragraph; however, the Commissioner may exercise his or her discretion to either offset the value of the reverse repurchase agreements by the amount of the repurchase agreements or to exclude the value of the reverse repurchase agreements from the determination as to whether A meets the 90-percent-of-assets requirement of subparagraph (ii) because the use of gross values does not accurately represent the activity of Partnership A in the City.

Example 5: Partnership A manufactures machine parts in the City at a factory building that it owns. The building has a gross value of $30x and is subject to a mortgage of $10x. Partnership A also has inventory worth $2x and a portfolio of stocks and securities worth $1x. Because the building is property as defined in paragraph (3) of subdivision (g) of this section, 90% of A's assets are assets described in subparagraphs (ii)(A) through (ii)(C) of this paragraph (4) ($30x (building) + $1x (stocks and securities).) However, because the building is used principally in A's business, the Commissioner may determine that including the value of the building in the calculation does not accurately reflect A's primary activities and may exercise his or her discretion to exclude the value of the building.

Example 6: Partnership A is a 60% general partner in Partnership B, which is engaged in the operation of a business in the City. Partnership B also owns a portfolio of stocks that it trades for its own account. The value of B's portfolio is $30x. The gross value of B's other assets, none of which is described in subparagraphs (ii)(A) through (ii)(C) of this paragraph (4), is $20x. Therefore the value of B's portfolio assets is only 60% of the value of B's assets and B does not qualify for the partial exemption. Because A is a general partner in B, A does not qualify as an investor with respect to its interest in B and is subject to the UBT on its share of the self-trading income of B. Partnership A also owns a 90% limited partnership interest in Partnership C, which is engaged solely in trading stocks and securities for its own account in the City. The value of A's interest in C is $175x. Partnership A contributes its interest in C to Partnership B to enable Partnership B to qualify for the partial exemption. However, following the contribution, the partnership agreement for Partnership B is amended to allocate to A all of the income, gains, losses and deductions from the interest in Partnership C. After the contribution, the value of B's assets described in subparagraphs (ii)(A) through (ii)(C) of paragraph (4) will be $205 or 91% of B's total assets. As a result, B will qualify for the partial exemption and A would qualify as an investor with respect to Partnership B and would not be taxed on its share of B's self-trading income. However, A's distributive share of the income, etc. from Partnership C is materially greater than its distributive share of all other items of income, etc. of Partnership B. Because A contributed its interest in C to Partnership B solely to permit A to avoid tax on its share of B's self trading income, A is not considered to hold its interest in Partnership B as an investor and, consequently, A does not qualify for the partial self-trading exemption with respect to its distributive share of the self-trading income of B.

(vii) The provisions of this paragraph (4) do not apply to individuals. See 19 RCNY § 28-02(a)(7)(i), which provides that an individual is not considered to be engaged in activities carried on by unincorporated entities in which the individual holds an interest.

(5) The provisions of this subdivision (g) do not apply where an unincorporated entity is taxable as a corporation for Federal income tax purposes. Where such an entity is not taxable under Chapter 6 of Title 11 of the Administrative Code, its status as an unincorporated business under Chapter 5 of Title 11 of the Administrative Code will be determined under other subdivisions of this section without regard to the provisions of this subdivision (g).

(h) Holding, leasing or managing real property. (Administrative Code § 11-502(d)).

(1) General. Notwithstanding the provisions of 19 RCNY § 28-02(a), an owner of real property, a lessee or a fiduciary shall not be deemed engaged in an unincorporated business solely by reason of holding, leasing or managing (including operating) real property for his, her or its own account. This provision does not apply to any individual or other unincorporated entity who or which manages and operates real property as an agent of an owner or lessee of the property or to a dealer holding real property primarily for sale to customers in the ordinary course of a trade or business.

(2) Application of this subdivision.

(i) For taxable years beginning before July 1, 1994, where the holding, leasing or managing of real property relates to property used in or connected with an unincorporated business otherwise regularly carried on by an individual or unincorporated entity, any gains, profits, rents and other income from the property will be includible in the unincorporated business gross income of the individual or entity.

(ii) For taxable years beginning on or after July 1, 1994, if an owner of real property or lessee or fiduciary who is holding, leasing or managing real property, other than as a dealer, is also carrying on an unincorporated business in whole or in part in the City, the holding, leasing or managing of the real property will not be considered an unincorporated business if, and only to the extent that, the real property is held, leased or managed for the purpose of producing rental income or gain on the sale of such property other than in the ordinary course of a trade or business. For purposes of this subparagraph (ii), the operation at such real property of a trade, business, profession or occupation, including, but not limited to, a garage, restaurant, laundry or health club, shall be considered incidental to the holding, leasing or managing of such real property and shall not be considered an unincorporated business, provided such trade, business, profession or occupation is conducted solely for the benefit of, and as an incidental service to, tenants at such real property, and such trade, business, profession or occupation is not open or available to the general public.

(iii) For taxable years beginning on or after January 1, 1996, if an owner, lessee or fiduciary that is holding, owning or leasing or managing real property operates a garage, parking lot or other similar facility at such real property that is open or available to the general public, the provision of parking, garaging or motor vehicle storage services on a monthly or longer term basis at such garage or other facility shall not be considered an unincorporated business carried on by the taxpayer if, and only to the extent that, such services are provided to tenants at such real property as an incidental service to such tenants. See paragraphs (8) and (9) of 19 RCNY § 28-06(d) regarding the exclusion of income and the disallowance of expenses relating to the provision of parking services to tenants. Notwithstanding the foregoing provisions of this subparagraph (iii), if an owner, lessee or fiduciary holding leasing or managing real property who operates a garage or other similar facility at the property that is open to the public, does not satisfy the reporting requirements of 19 RCNY § 28-18(j), the provision of monthly or longer term parking services to tenants at the property will be considered the conduct of an unincorporated business subject to tax and will not be considered incidental to the holding, leasing or managing of the property.

(iv) For purposes of subparagraphs (ii) and (iii) above, a determination of whether a trade, business, profession or occupation carried on at real property is open to the general public shall be based on all of the facts and circumstances. Among the facts and circumstances indicating that a business is open to or available to the general public is the presence of a sign identifying, or signifying the presence of, such business of sufficient size and location as to be readily visible to the public, unless such sign clearly indicates that such business is private and not open to the public. However, if the business is in fact open to the public, the absence of a sign is not relevant.

Example (1): An individual, not otherwise engaged in an unincorporated business, who owns an apartment house leased unfurnished to 150 tenants and who, in consideration of the payment of rent received from tenants, supplies janitor service, elevator service and such other services as are generally incident to the operation of an apartment house in addition to the usual rights of occupancy, is not deemed to be engaged in an unincorporated business by reason of his activities relating to the ownership and management of the apartment house. On the other hand, the operation of a hotel open to the public for accommodations of short duration is not the holding, leasing or management of real property and would constitute an unincorporated business activity the income from which would be subject to the unincorporated business tax. In taxable years beginning before July 1, 1994, rents from store properties located in the hotel building are includible in the unincorporated business gross income of the individual where such individual is in the business of hotel keeping in such building. However, in taxable years beginning on or after July 1, 1994, while the operation of the hotel will constitute the conduct of an unincorporated business, rents from store properties located in the hotel would not be includible in the unincorporated business gross income from that unincorporated business.

Example (2): In a taxable year beginning before July 1, 1994, an individual is engaged in a manufacturing business carried on in a building owned by him. His business requires the use of one-half of the building, and the unused portion of the building is rented to tenants. The rental income is subject to the unincorporated business income tax since such income results from the use of an asset connected with the taxpayer's business. In taxable years beginning on or after July 1, 1994, the rental income would not be subject to tax; however, the income from the manufacturing business would be taxable and not excluded as part of the rental activity because it is not carried as an incidental service to the tenants in the property even though the manufacturing business is not generally open to or available to the general public. No deduction would be allowed for one-half of the expenses relating to the property and, on a sale of the building, one-half of the gain would be taxable. See 19 RCNY § 28-05(b)(12) and (c)(11) and 19 RCNY § 28-06(d)(8) of these rules.

Example (3): Partnership A owns a rental office building in the City. Partnership A operates a garage adjacent to the building that is intended solely for the use of tenants in the building and not open to the general public. There is a sign, clearly visible from the street reading "Private Garage" at the door to the garage, which is kept open during the day. Tenants are assigned a prearranged number of parking spots at no additional rent. The operation of the garage at the building is not considered an unincorporated business because it is operated as an incidental service to the tenants in the building and is not considered to be open to the public. The result would be the same if the tenants paid additional rent for the parking spaces or if the number of, and amount paid for, parking spaces were separately negotiated with the landlord.

Example (4): The facts are the same as in example 3 except that the sign at the garage door reads "Park," the door is open and inside the garage are posted parking rates for public and tenant parking. The garage is considered to be open to the general public. Certain tenants receive a fixed number of parking spaces for a term coextensive with their lease in the building at no additional rent. Other tenants are not given parking spaces pursuant to their leases but may separately contract for monthly or longer term parking spaces. Tenants who do not receive or contract for monthly or longer term parking spaces may enter the garage and park on an hourly, daily, weekly or monthly basis. Employees of tenants may also individually enter the garage and park on an hourly, daily, weekly or monthly basis. Income from parking services rendered on a monthly or longer term basis received from tenants is excluded from unincorporated business gross income provided the reporting requirements of Administrative Code § 11-502(d) and 19 RCNY § 28-18(j) are met. See 19 RCNY § 28-05(c)(11). Income from parking services rendered on a less than monthly basis rendered to tenants and income from all parking services rendered to tenants' employees and the public on any basis is included in unincorporated business gross income. If garage space is provided to tenants either as part of their lease or under separate long-term contracts, the fact that the tenant permits the spaces to be used by its employees does not render the parking income taxable; however, parking services provided under long-term contracts with persons who are not tenants will be taxable notwithstanding that those persons are employees of tenants.

(i) Sales representative. (Administrative Code § 11-502(e)).

(1) General. Notwithstanding the provisions of 19 RCNY § 28-02(a) through (e), an individual, other than one who maintains an office or employs one or more assistants or otherwise regularly carries on a business, shall not be deemed engaged in an unincorporated business solely by reason of selling goods, wares or merchandise for more than one enterprise. The employment of clerical and secretarial assistance shall not be deemed the employment of assistants. In addition, office space or similar business space utilized solely for the display of merchandise and/or for the maintenance and storage of records normally used in the course of business, shall not be deemed an office for purposes of this section.

(2) Maintenance of an office.

(i) An individual maintains an office within the meaning of this subdivision (i) when, in connection with his selling activities, he occupies, has, uses or operates an office or desk room the expenses of which are borne by the individual without substantial reimbursement by any of his principals. Ordinarily, the use of general space in an individual's home for such limited purposes as receiving mail, preparing reports or performing clerical work relating to the selling activities will not, of itself, constitute the maintaining of an office.

(ii) Although reimbursement for office expenses need not be exactly 100 percent to be substantial, the repayment must be sufficiently large to indicate that such items are being absorbed by the principal. Generally, reimbursement of 80 percent or more of such expenses, will be deemed to be substantial. The receipt by an individual of an expense allowance not bearing a clear relationship to the actual office expenses incurred by the individual or the receipt of a higher rate of commission or an extra commission allowance measured by the amount or volume of business done by the individual will not be deemed to be reimbursement for purposes of this subdivision (i).

(3) Employment of assistants. An individual, who engages assistants in connection with his selling activities, employs one or more assistants for the purpose of this subdivision (i) when

(i) he is the employer of the assistant or assistants in an employer and employee relationship within the meaning of 19 RCNY § 28-02(e), or

(ii) he engages the services of an assistant or assistants on a permanent or regular basis (as distinguished from a temporary or occasional basis) without regard to whether the relationship of employer and employee exists, or

(iii) under any arrangement with a principal, he directly or indirectly pays the compensation of an assistant or assistants employed by the principal. Where an individual is specifically reimbursed by a principal for compensation paid to assistants, he will not be deemed to be employing assistants if the principal has the right to hire or terminate the services of the assistant or to fix the terms of the employment. The receipt by the individual of a flat allowance not bearing a clear relationship to compensation paid to assistants, or the receipt of a higher rate of commission or an extra commission or allowance measured by the amount or volume of business done by the individual, will not be deemed to be reimbursement for the purpose of this section.

(4) Selling activities of broker, independent agent or contractor.

(i) A sales representative, selling goods, wares, merchandise or insurance, other than one who maintains an office or employs one or more assistants or otherwise regularly carries on a business, may not be deemed engaged in an unincorporated business solely by reason of selling for more than one enterprise, but the fact that he is selling for more than one enterprise will nevertheless be considered together with other indicia of self-employment to determine whether the sales representative is engaged in an unincorporated business. Furthermore, a sales representative whose principals do not exercise the direction and control over his activities to the extent necessary in an employer-employee relationship, will be considered an independent contractor and subject to the unincorporated business tax even though he does not maintain an office or employ assistants.

(ii) Where it is determined that an individual is engaged in an unincorporated business by reason of maintaining an office or employing assistants or selling goods, wares, merchandise or insurance as an independent contractor or agent, such determination will apply to other services as a salesman or sales representative performed by the individual as an employee or corporate officer unless such services as an employee or corporate officer do not constitute part of the taxable unincorporated business otherwise engaged in by the individual. The question of whether selling services performed as an employee or corporate officer are part of a business regularly carried on by the individual or are connected with an unincorporated business conducted by the individual shall be determined in accordance with the provisions of 19 RCNY § 28-02(e)(4).

(j) Exempt trusts and organizations. (Administrative Code § 11-502(f)). A trust or other unincorporated organization which by reason of its purposes or activities is exempt from Federal income tax shall not be deemed an unincorporated business. Whether a trust or other unincorporated entity is exempt from Federal income taxes for the purposes of this subdivision (j) shall be determined without regard to whether, pursuant to Section 511 of the Internal Revenue Code, it is subject to Federal income taxes on unrelated business income. This subdivision (j) applies only to those trusts and organizations which are exempt from Federal income taxes solely by reason of the provisions of subchapter F, subtitle A, of the 1954 Internal Revenue Code, pertaining to such organizations as qualified pension, profit-sharing, stock bonus and certain other employee benefit plans, organizations of the class or type commonly known as religious, charitable, scientific or educational organizations, certain business or civic leagues, labor or agricultural organizations, social clubs, fraternal associations and various other nonprofit organizations which operate for and serve a public rather than a private interest. If the provisions of this subdivision (j) do not apply to a trust or an organization, the unincorporated business tax status of such trust or organization shall be determined under the other provisions of these regulations.

§ 28-03 Imposition of Tax.

(a) Rate of tax. (Administrative Code § 11-503(a)). The unincorporated business tax imposed by Chapter 5 of Title 11 of the Administrative Code for each taxable year is imposed at the rate of four percent on the unincorporated business taxable income. (See: 19 RCNY § 28-04).

(b) Credit against tax. (Administrative Code § 11-503(b)).

(1) A credit is allowed against the tax computed under 19 RCNY § 28-03(a) for taxable years beginning after 1986 but before 1996 determined in the following manner:

(i) If the tax computed under such section is $600 or less, the amount of the credit is the entire amount of such tax.

(ii) If the tax computed under such section exceeds $600 but is less than $800, the credit is an amount determined by multiplying the tax by a fraction the numerator of which is $800 less the amount of the tax and the denominator of which is $200.

(iii) If the tax computed under such section is $800 or more, no credit is allowed.

(2) A credit is allowed against the tax computed under 19 RCNY § 28-03(a) for taxable years beginning in 1996 determined in the following manner:

(i) If the tax computed under such section is $800 or less, the amount of the credit is the entire amount of the tax.

(ii) If the tax computed under such section exceeds $800 but is less than $1,000, the credit is an amount determined by multiplying the tax by a fraction the numerator of which is $1,000 less the amount of the tax and the denominator of which is $200.

(iii) If the tax computed under such section is $1,000 or more, no credit is allowed.

(3) A credit is allowed against the tax computed under 19 RCNY § 28-03(a) for taxable years beginning after 1996 determined in the following manner:

(i) If the tax computed under such section is $1,800 or less, the amount of the credit is the entire amount of the tax.

(ii) If the tax computed under such section exceeds $1,800 but is less than $3,200, the credit is an amount determined by multiplying the tax by a fraction the numerator of which is $3,200 less the amount of the tax and the denominator of which is $1,400.

(iii) If the tax computed under such section is $3,200 or more, no credit is allowed.

(1) General. In addition to the credit referred to in 19 RCNY § 28-03(b) above, credits relating to stock transfer taxes, certain sales and compensating use taxes, and certain expenses connected with the relocation of employment opportunities to New York City are also allowed.

(2) Credit relating to the stock transfer tax. The law allows a credit against the tax in an amount equal to 50% of the New York State stock transfer taxes paid by a taxpayer who incurred such taxes as a dealer, registered under Section 15(b) of the Securities Exchange Act of 1934, in "market making transactions" which took place on and after August 1, 1976 and before October 1, 1981. For definitions, limitations, modifications and procedures applicable to this credit, see §§ 11-503(c) and 11-506 of the Administrative Code.

(3) Credits relating to certain sales and compensating use taxes.

(i) Production machinery or equipment; telephone station apparatus. A taxpayer shall be allowed a credit for payment of certain sales and compensating use taxes in the manner hereinafter provided in this paragraph (3). The amount of such credit shall be

(A) the amount of sales and compensating use taxes paid which are imposed by Section 1107 of the State Tax Law during the taxpayer's taxable year with respect to the purchase or use by the taxpayer of machinery or equipment for use or consumption directly and predominantly in the production of tangible personal property, gas, electricity, refrigeration or steam for sale, by manufacturing, processing, generating, assembling, refining, mining or extracting, or telephone central office equipment or station apparatus or comparable telegraph equipment for use directly and predominantly in receiving at destination or initiating and switching telephone or telegraph communication, but not including parts with a useful life of one year or less or tools or supplies used in connection with such machinery, equipment or apparatus, less

(B) the amount of any credit for such sales and compensating use taxes allowed or allowable against the taxes imposed by Chapter 11 of Title 11 of the Administrative Code (Utility Tax), for any periods embraced within the taxable year of the taxpayer under this section. The machinery, equipment and apparatus referred to herein is that which is subject to the New York City sales and use tax but exempt from the New York State sales and use tax. The credit applies only to such sales and use taxes which become legally due on or after, and were paid on or after, July 1, 1977.

(ii) Electricity or electric service. In addition to the credit referred to in paragraph (3)(i) above, a taxpayer shall also be allowed a credit equal to the amount of sales and compensating use taxes imposed by Section 1107 of the State Tax Law during the taxpayer's taxable year which became legally due on or after, and were paid on or after, July 1, 1984, with respect to the purchase or use by the taxpayer of electricity or electric service of whatever nature for use or compensation directly and exclusively in the production of tangible personal property for sale by manufacturing, processing or assembling. The electricity and electric service referred to herein is that which is subject to the New York City sales and use tax but exempt from the New York State sales and use tax. When electricity is purchased for consumption for both purposes qualifying for the credit and not qualifying for the credit, and the use of the electricity is recorded on a single meter, the purchaser must allocate the use of the electricity according to its qualifying or non-qualifying consumption. At such time when variations occur affecting the use of electricity (e.g. the addition of new equipment) a new allocation must be computed. An electrical engineer's survey, showing computations, may be submitted in substantiation of the allocation made for use of electricity for both qualifying and non-qualifying purposes. In lieu of an electrical engineer's survey, computations using guidelines prescribed by the Commissioner of Finance may be submitted.

(iii) The credits allowed under this subdivision for any taxable year shall be deemed to be an overpayment of tax by the taxpayer to be credited or refunded, without interest, in accordance with the provisions of § 11-526 of the Administrative Code.

(iv) (A) The amount of sales and use taxes paid during the tax period for which credit is claimed must be reduced by the amount of any credit or refund of such taxes received during the tax period from either a vendor or the New York State Department of Taxation and Finance.

(B) Where the taxpayer receives a refund or credit of any tax imposed under section 1107 of the State Tax Law for which the taxpayer had claimed a credit under the provisions of this paragraph (3) in a prior taxable year, the amount of such tax refund or credit shall be added to the tax under this section, and such amount shall be subtracted in computing unincorporated business taxable income for the taxable year.

(v) For modifications to unincorporated business gross income resulting from the taxpayer's use of these credits, see 19 RCNY § 28-05(b)(5).

(vi) A taxpayer who has paid, as a result of an audit and determination made by the New York State Department of Taxation and Finance, or the filing of an amended sales and use tax return, a sales and use tax which would give rise to a credit under subparagraphs (i) or (ii) above is entitled to claim the sales and use tax credit for that payment for the year to which the sales or use tax was originally due. No credit will be allowed for interest or penalties paid in connection with the state determination or amended return. (See: 19 RCNY § 28-20(b) relating to reports required when taxpayer's sales and use tax liability is changed or corrected.)

(4) Credits relating to the cost of relocating industrial and commercial employment opportunities.

(i) Credit relating to the annual increase in certain payments to a landlord by a taxpayer relocating industrial and commercial employment opportunities.

(A) Where a taxpayer shall have relocated to the city from a location outside the state, and by such relocation shall have created a minimum of one hundred industrial or commercial employment opportunities, and where such taxpayer shall have entered into a written lease for the relocation premises, the terms of which lease provide for increased additional payments to the landlord which are based solely and directly upon any increase or addition in real estate taxes imposed on the leased premises, the taxpayer, upon approval and certification by the Industrial and Commercial Incentive Board, as hereinafter provided, shall be entitled to a credit against the tax. The amount of such credit shall be an amount equal to the annual increased payments actually made by the taxpayer to the landlord which are solely and directly attributable to an increase or addition to the real estate tax imposed upon the leased premises. Such credit shall be allowed only to the extent that the taxpayer has not otherwise claimed said amount as a deduction against the tax. For modifications to unincorporated business gross income resulting from taxpayer's use of the credit, see: 19 RCNY § 28-05(b)(6). The Industrial and Commercial Incentive Board in approving and certifying to the qualifications of the taxpayer to receive the tax credit provided for herein shall first determine that the applicant has met the requirements under this subparagraph (i), and further, that the granting of the tax credit to the applicant is in the "public interest." In determining that the granting of the tax credit is in the public interest, the board shall make affirmative findings that: the granting of the tax credit to the applicant will not effect an undue hardship on similar taxpayers already located within the City; the existence on this tax incentive has been instrumental in bringing about the relocation of the applicant to the City; and the granting of the tax credit will foster the economic recovery and economic development of the City.

(B) The tax credit, if approved and certified by the Industrial and Commercial Incentive Board, must be utilized annually by the taxpayer for the length of the term of the lease, or, for a period not to exceed ten years from the date of relocation, whichever period is shorter.

(ii) Credit relating to certain expenses involved in the cost of relocating industrial and commercial employment opportunities.

(A) A taxpayer shall be allowed an employment opportunity relocation costs credit against the tax. The amount of such credit shall be a maximum of three hundred dollars for each commercial employment opportunity and a maximum of five hundred dollars for each industrial employment opportunity relocated to the City from an area outside the state. Such credit shall be allowed to a taxpayer who relocates a minimum of ten employment opportunities. The relocation costs for which the credit may be claimed are those incurred on or after September 26, 1977 in connection with employment opportunities relocated to the City on or after that date. Such credit shall be allowed only to the extent that the taxpayer has not claimed a deduction for allowable employment opportunity relocation costs. For modifications to unincorporated business gross income resulting from taxpayer's use of the credit, see: 19 RCNY § 28-05(b)(7).

(B) The credit allowed hereunder may be taken by the taxpayer in whole or in part in the year in which the employment opportunity is relocated by such taxpayer or in either of the two years succeeding such event.

(iii) The credits allowed under this paragraph for any taxable year shall be deemed to be an overpayment of tax by the taxpayer to be credited or refunded, without interest, in accordance with the provisions of § 11-526 of the Administrative Code.

(iv) Definitions: When used in this paragraph:

Commercial employee. "Commercial employee" means one engaged in the buying, selling or otherwise providing of goods or services other than on a retail basis.

Employment opportunity. "Employment opportunity" means the creation of a full time position of gainful employment for an industrial or commercial employee and the actual hiring of such employee for the said position.

Employment opportunity relocation costs. "Employment opportunity relocation costs" means the costs incurred by the taxpayer in moving furniture, files, papers and office equipment into the city from a location outside the state; the costs incurred by the taxpayer in the moving from a location outside the state; the costs of installation of telephones and other communications equipment required as a result of the relocation to the city from a location outside the state; the cost incurred in the purchase of office furniture and fixtures required as a result of the relocation to the city from a location outside the state; and the cost of renovation of the premises to be occupied as a result of the relocation, provided, however, that such renovation costs shall be allowable only to the extent that they do not exceed seventy-five cents per square foot of the total area utilized by the taxpayer in the occupied premises.

Full time position. "Full time position" means the hiring of an industrial or commercial employee in a position of gainful employment where the number of hours worked by such employee is not less than thirty hours during any given week.

Industrial and Commercial Incentive Board. "Industrial and Commercial Incentive Board" means the Board created pursuant to Part 3 of Subchapter 2 of Chapter 2 of the Administrative Code.

Industrial employee. "Industrial employee" means one engaged in the manufacture or assembling of tangible goods or the processing of raw materials.

Retail. "Retail" means the selling or otherwise disposing or furnishing of tangible goods or services directly to the ultimate user or consumer.

(d) Unincorporated business tax paid credit. Note: In this subdivision (d) for simplicity and clarity, the term "partner" is used to refer to any individual or entity owning an interest in an unincorporated business, and the term "partnership" is used to refer to any such unincorporated business.

(1) General. The additional exemption available to an unincorporated business pursuant to Administrative Code § 11-510(2) is repealed for taxable years of the unincorporated business beginning after June 30, 1994. For taxable years beginning on or after July 1, 1994, if an individual or unincorporated entity is a partner in a partnership carrying on an unincorporated business in the City of New York and is required to include all or a portion of the income of the partnership in the partner's own unincorporated business gross income, or receives a guaranteed payment from the partnership includible in the partner's own unincorporated business gross income, the partner is allowed a credit against the partner's own unincorporated business tax liability for the partner's share of the unincorporated business tax paid by the partnership, subject to certain limitations (the "UBT Paid Credit"). The UBT Paid Credit is not allowed to a partner owning an interest in a partnership for any unincorporated business tax paid by the partnership with respect to any taxable year of the partnership beginning before July 1, 1994. For taxable years of a partner beginning after 1995, the UBT Paid Credit allowed to a partner may exceed the amount of UBT Paid Credit that the partner may take in that year. In that event, the excess may be carried forward for up to seven years subject to certain limitations. However, for taxable years of a partner beginning on or after July 1, 1994 but before 1996, the amount of UBT Paid Credit allowed to the partner for a taxable year is the same as the amount of UBT Paid Credit that the partner may take against the partner's unincorporated business tax liability that year and no carryover is available. A corporation subject to the general corporation tax or the banking corporation tax that is a partner in a partnership carrying on an unincorporated business in the City is allowed a comparable credit against those taxes. See Administrative Code §§ 11-604(18) and 11-643.8 and 19 RCNY § 11-50.

(2) Calculation of the UBT Paid Credit.

(i) General. The partner's UBT Paid Credit allowed with respect to a specific partnership is the lesser of the amounts calculated in subparagraphs (ii)(A) ("Measure 1") and (ii)(B) ("Measure 2") of this paragraph (2), subject to the limitation in subparagraph (ii)(C) of this paragraph (2). Measure 1 is based on the partner's share of the unincorporated business tax liability of the partnership for its taxable year ending within or with the partner's taxable year. Measure 2 is based on the incremental effect on the unincorporated business tax liability of the partner attributable to partnership items entering into the calculation of the partner's unincorporated business tax liability. If a taxpayer is a partner in more than one partnership, Measures 1 and 2 must be determined and compared separately with respect to each partnership. Subparagraph (ii)(C) limits the total amount of the UBT Paid Credit that a partner may take in a taxable year to the partner's unincorporated business tax liability for that year. Unlike Measures 1 and 2, in the case of a partner that is a partner in more than one partnership, this measure is not applied separately to each partnership but rather to the sum of all of the UBT Paid Credits calculated with respect to all partnerships in which the partner is a partner.

(ii) Measures of the UBT Paid Credit and limitations.

(A) Measure 1. Partner's share of the partnership's unincorporated business tax liability plus certain credits. Measure 1 is the product of the amount determined in subparagraph (ii)(A)(a) and the partner's distributive share percentage determined in subparagraph (ii)(A)(b) below:

(a) Partnership's unincorporated business tax liability plus certain credits. The amount determined in this subparagraph (ii)(A)(a) is the sum of:

(1) the unincorporated business tax imposed on, and paid by, the partnership for its taxable year ending within or with the taxable year of the partner, and

(2) (i) for taxable years of the partner beginning on or after July 1, 1994, and before 1996, the amount of any UBT Paid Credit taken by the partnership for its taxable year ending within or with the taxable year of the partner, or

(ii) for taxable years of the partner beginning after 1995, the sum of all credits taken by the partnership under § 11-503 of the Administrative Code, other than subdivision (b) of that section, for its taxable year ending within or with the taxable year of the partner, but only to the extent that those credits do not reduce the partnership's unincorporated business tax below zero. The amount determined under this subparagraph (ii)(A)(a)(2)(ii) does not include the amount of any credit refundable to the partnership.

(b) Partner's distributive share percentage.

(i) The partner's distributive share percentage is the sum of the partner's distributive shares of income, gain, loss and deductions of the partnership and any guaranteed payment received from the partnership (the partner's "net distributive share") divided by the sum of the net distributive shares of all partners of the partnership for whom such amounts are greater than zero. If the partner's net distributive share is less than zero, it is deemed to be zero and the partner is not allowed a UBT Paid Credit for the taxable year with respect to that partnership. See example 1 of paragraph (8) of this subdivision.

(ii) For purposes of this calculation, the net distributive shares should be based upon items of income, gain, loss and deductions and guaranteed payments as calculated by the partnership for purposes of computing its unincorporated business taxable income.

(iii) For purposes of this calculation, the net distributive share of each corporate partner is determined separately regardless of whether that partner files its general corporation tax return as a member of a combined group with one or more other corporations. See example 2 of paragraph (8) of this subdivision.

(iv) If a partner owns more than one type of interest in a partnership e.g., a general and a limited partnership interest, the partner's distributive shares and guaranteed payments with respect to all such interests are combined in determining the partner's net distributive share.

(B) Measure 2. Incremental tax effect of distributive share and guaranteed payments. Measure 2 is the excess of the amount determined in subparagraph (ii)(B)(a) over the amount determined in subparagraph (ii)(B)(b) below, modified as provided in subparagraph (ii)(B)(c) below.

(a) Partner's tax liability. The amount determined in this subparagraph (ii)(B)(a) is the tax liability of the partner determined under this 19 RCNY § 28-03 without allowance of any of the credits allowed under § 11-503 of the Administrative Code.

(b) Partner's tax liability without distributive share. The amount determined in this subparagraph (ii)(B)(b) is the tax liability of the partner determined under this 19 RCNY § 28-03, excluding any partnership items entering into the calculation of the partner's unincorporated business taxable income such as the partner's distributive share of the partnership's income, gain, loss and deductions, any guarantee payments from the partnership, and excluding partnership allocation factors, if taken into account in calculating the partner's allocation to the City (See 19 RCNY § 28-07(j)(2)(i)(C)(a)) and determined without allowance of any of the credits allowed under § 11-503 of the Administrative Code.

(c) Partner's modified tax liability. For taxable years of the partner beginning after 1995, the amounts computed in subparagraphs (ii)(B)(a) and (ii)(B)(b) above are computed with the following modifications:

(1) the amounts are computed without taking into account any deduction for a net operating loss carried to the taxable year of the partner.

(2) if, prior to taking into account any distributive share or guaranteed payments from the partnership or any net operating loss deduction, the unincorporated business taxable income of the partner is less than zero, the partner's unincorporated business taxable income is deemed to be zero.

(3) if the partner's net total distributive share of income, gain, loss and deductions of, and guaranteed payments from, any unincorporated business, other than the partnership with respect to which the amount of credit is being calculated, is less than zero, such net total distributive share is deemed to be zero.

(C) Credit limited to partner's unincorporated business tax. For taxable years of the partner beginning before 1996, the sum of the UBT Paid Credits that a partner is allowed and may take against its tax liability in any given taxable year under this subdivision (d) with respect to all unincorporated businesses in which the partner is a partner shall not exceed the tax on the partner's unincorporated business taxable income determined under this 19 RCNY § 28-03 without allowance of any of the credits allowed under § 11-503 of the Administrative Code. For taxable years of the partner beginning after 1995, the sum of the UBT Paid Credits that a partner may take for the taxable year under this subdivision (d) with respect to all unincorporated businesses in which the partner is a partner shall not exceed the tax on the partner's unincorporated business taxable income determined under this 19 RCNY § 28-03, reduced by the credit allowed under subdivision (b) of § 11-503 of the Administrative Code, but without the allowance of any of the other credits allowed under such § 11-503.

(3) Carryover of UBT Paid Credit after 1995.

(i) For taxable years beginning after 1995, if the amount of UBT Paid Credit or Credits allowed to a partner with respect to one or more partnerships as determined under paragraph (2) of this subdivision (d) exceeds the amount of credit or credits that may be taken as determined under subparagraph (ii)(C) of paragraph (2) of this subdivision (d), the partner may carry the excess forward to each of the seven immediately succeeding taxable years of the partner subject to certain limitations as provided in subparagraph (3)(ii) infra. In applying the provisions of the preceding sentence, for each taxable year of a partner, the UBT Paid Credit or Credits determined under paragraph (2) of this subdivision (d) for the current taxable year shall be taken before taking any credit carryforward pursuant to this paragraph (3), and the amount of any credit carryforward available under this paragraph (3) attributable to the earliest taxable year shall be taken before a credit carry forward attributable to a subsequent taxable year.

(ii) Notwithstanding anything to the contrary in subparagraph (i) of this paragraph, supra, in the case of a partner that is a partnership, no credit carryforward shall be allowed to any taxable year pursuant to this paragraph (3) unless one or more of the partners therein during the taxable year to which the credit would be carried also owned at least an 80 percent interest in the unincorporated business gross income and unincorporated business deductions of the partnership during the taxable year of the partnership in which the credit was originally allowed. The carryforward allowable pursuant to this subparagraph (ii) shall not exceed the portion of the amount of the credit carryforward determined under subparagraph (i) of this paragraph determined by multiplying such credit carryforward by the sum of the proportionate interests in the unincorporated business gross income and unincorporated business deductions of the partnership for the year to which the credit is to be carried belonging to such partners. The amount by which the credit carryforward determined under subparagraph (i) of this paragraph exceeds the amount determined pursuant to the preceding sentence cannot be carried forward to any other taxable year.

(iii) Credits from multiple partnerships. If, in a taxable year, a partner is allowed a UBT Paid Credit with respect to more than one partnership and the total amount of UBT Paid Credits allowed exceeds the amount that may be taken under subparagraph (ii)(C) of paragraph (2) of this subdivision (d), the amount of the UBT Paid Credit with respect to each partnership that may be taken is an amount that bears the same ratio to the total UBT Paid Credit allowed for the current year with respect to that partnership as the total amount of UBT Paid Credits that may be taken in the current year under subparagraph (ii)(C) of paragraph (2) of this subdivision bears to the total UBT Paid Credit allowed for the current year with respect to all partnerships. The remainder of the UBT Paid Credit allowed with respect to that partnership is available as a carryover.

(4) Multiple tiers of partnerships. A partner may only take a credit with respect to distributive shares from partnerships in which it is a direct owner, i.e., the partner is identified as a partner in the partnership agreement and on Schedule K-1 of IRS Form 1065 filed by the partnership.

Example: Partnership C is a partner in Partnership B, which, in turn, is a partner in Partnership A. Partnership C calculates its UBT Paid Credit only with respect to Partnership B and is not entitled to a UBT Paid Credit with respect to Partnership A. Note: Because the calculation of the UBT Paid Credit allowed for Partnership C with respect to Partnership B reflects credits claimed by Partnership B, including its UBT Paid Credit with respect to Partnership A (see subparagraph (d)(2)(ii)(a), supra), Partnership C will get the benefit of Partnership B's UBT Paid Credit with respect to Partnership A, subject to the limitations applicable in determining C's UBT Paid Credit allowed. (See example 7 infra.)

(5) The UBT Paid Credit allowed under this provision shall not be allowed to a partner in a partnership with respect to any unincorporated business tax paid by the partnership for any taxable year beginning before July 1, 1994.

(6) The UBT Paid Credit shall be taken after the credit allowed by subdivision (b) of § 11-503 of the Administrative Code is taken, but before any other credit allowed by such section is taken.

(7) Reporting requirements for partnerships. In order for a partner to calculate the UBT Paid Credit with respect to a distributive share or guaranteed payment from a specific partnership, certain information is necessary from the partnership. To facilitate this calculation, each partnership having partners that are subject to the taxes imposed under Chapter 5 or Subchapter 2 or Part 4 of Subchapter 3 of Chapter 6 of Title 11 of the Administrative Code of the City of New York should complete a schedule on a form specified by the Commissioner of Finance in which the following information is provided:

(i) the names and taxpayer identification numbers of all partners in the partnership;

(ii) the net distributive share, as defined in subparagraph (2)(ii)(A)(b) of this subdivision (d), for each partner, provided, however, that if a partner's net distributive share is less than zero, it should be treated and reported as zero for purposes of this subparagraph (ii) and subparagraph (iii), infra;

(iii) the total of all net distributive shares of all partners; and

(iv) the distributive share percentage as defined in subparagraph (2)(ii)(A)(b) of this subdivision (d) calculated for each partner by dividing the amount in subparagraph (ii) above by the amount in subparagraph (iii) supra.

(8) The provisions of paragraphs (1) through (7) of this subdivision (d) are illustrated by the following examples. The facts of the examples have been simplified and do not reflect the deduction allowed by Administrative Code § 11-509(a) or the exemption allowed by Administrative Code § 11-510(a)(1). The effect of other credits allowed under § 11-503 of the Administrative Code is not reflected except as specifically noted. All of the examples below involve entities having business allocation percentages of 100 percent and no investment income. For examples of the calculation of the credit with respect to entities that allocate business or investment income outside the City, see subdivision (j) of 19 RCNY § 28-07.

Example 1: Calculation of distributive share percentage ("DSP"). Partnership ABCD has four partners. Partners A,B,C and D share equally in income of $800x from ABCD. Partner D also has a special allocation of a loss of ($300x) from ABCD.

	I Distributive Share (DS)	II DS – Modified for Calculation of DSP	III Distributive Share Percentage (DSP) (col. II ÷ col. II total)
A	$200x	$200x	33.33%
B	$200x	$200x	33.33%
C	$200x	$200x	33.33%
D	($100x)	$0	0%
Total	$500x	$600x	100%

Example 2: DSP for members of a combined group. Assume the same facts as in example 1, above, except that B, C, and D are corporations that file a combined return for purposes of the general corporation tax as group CG. The membership of B, C, and D in the combined group does not affect the reporting by Partnership ABCD of the distributive share information required by these rules. CG's distributive share percentage is the sum of the distributive share percentages of B, C, and D or 66.67% (33.33% + 33.33% + 0%).

Example 3: Basic credit calculation. AB is a partnership doing business in New York City. AB has two partners, A and B. Partner A is a partnership doing business in New York City with a 100% business allocation percentage. Partner B is an individual who does not independently do business in New York City. AB's unincorporated business taxable income ("UBTI") for calendar year 1995 is $400x. AB pays unincorporated business tax of $16x. AB's Form NYC-204 for 1995 indicates that A's distributive share from AB is $300x and that B's distributive share is $100x. (B is not entitled to a UBT Paid Credit with respect to AB because B does not include any portion of his distributive share from AB in any unincorporated business gross income reported by him. See 19 RCNY § 28-05(a)(1).) A has UBTI of $200x without regard to its distributive share of income, gain, loss or deduction from AB ("Separate UBTI"). A is subject to the unincorporated business tax and is entitled to a UBT Paid Credit with respect to tax paid by AB. A's UBT Paid Credit is determined as follows:

	Separate UBTI	DS	DSP	Total UBTI	TAX w/o credit
AB	NA	NA	NA	$400x	$16x
A	$200x	$300x	75%	$500x	$20x
B	NA	$100x	25%	NA	NA

Measure 1: A's distributive share percentage is 75%. ($300x/$400x.) Measure 1 is $12x determined by multiplying AB's tax of $16x by A's distributive share percentage (75%).

Measure 2: A's total UBTI is $500x, on which the tax would be $20x before any UBT Paid Credit. The tax on A's separate UBTI of $200x would be $8x. Thus the incremental tax effect on A's total UBTI of A's distributive share from AB is $12x ($20x - $8x = $12x). Therefore, A's UBT Paid Credit is $12x. Example 4: Treatment of partner's losses and carryover of credit. The facts are the same as in example 3 except that for A's taxable year beginning January 1, 1995. A also has an operating loss of ($100x) without regard to its distributive share from AB. For the taxable year beginning January 1, 1996, the facts are the same as for 1995. For the taxable year beginning January 1, 1997, AB's UBTI is $400x. A's distributive share from AB is $300x. A's separate UBTI is $50x. A's UBT Paid Credits for 1995, 1996, and 1997 are calculated as follows:

1995

	Separate UBTI	DS	DSP	Total UBTI	UBT Liability w/o credit
AB	NA	NA	NA	$400x	$16x
A	($100x)	$300x	75%	$200x	$8x

Measure 1: A's distributive share percentage of AB's tax liability is the same as in Example 3 above, $12x (75% × $16x).

Measure 2: A's total UBTI is $200x, on which the tax liability would be $8x. A's separate UBTI is a loss of ($100x) resulting in no tax. The incremental tax effect on A's total UBTI of A's distributive share from AB is $8x ($8x - 0 = $8x). Therefore, A's UBT Paid Credit allowed for 1995 is $8x. No part of the unused credit may be carried forward from years beginning before January 1, 1996.

1996

	Separate UBTI	DS	DSP	Total UBTI	UBT Liability w/o credit
AB	NA	NA	NA	$400x	$16x
A	($100x)	$300x	75%	$200x	$8x

Measure 1: For 1996, Measure 1 for Partner A is the same as for 1995, $12x.

Measure 2: A's total UBTI is $200x, on which the tax liability would be $8x. However, for taxable years beginning after 1995 for purposes of this calculation, A's separate UBTI as modified is treated as $0 rather than ($100x). There would be no tax liability on its separate UBTI as modified. A's total UBTI as modified is treated as $300x (separate modified UBTI of $0 + $300x of A's distributive share). A's tax liability on this amount would be $12x. Thus, the incremental tax effect of the inclusion in A's total modified UBTI of its distributive share from AB is $12x ($12x - 0).

A is allowed a credit of $12x. However, because A's actual tax liability for 1996 would be $8x before any UBT Paid Credit, A can only take a credit of $8x in 1996. The remaining credit allowed of $4x is eligible to be carried over by A to the next seven taxable years.

1997

	Separate UBTI	DS	DSP	Total UBTI	UBT Liability w/o credit
AB	$400x	NA	NA	$400x	$16x
A	$50x	$300x	75%	$350x	$14x

Measure 1: For 1997, Measure 1 for Partner A is the same as for 1995, $12x.

Measure 2: A's total UBTI is $350x, on which the tax liability would be $14x. A's separate UBTI would be $50x on which the tax would be $2x. Thus, the incremental tax effect on A's total UBTI of its distributive share from AB is $12x ($14x - $2x).

Therefore, A is allowed a credit of $12x in 1997. Assuming that there were no changes in the ownership of A in 1997, A may also carry over to 1997 the excess credit allowed in 1996 of $4x that it could not take. Therefore, the total credit available to A in 1997 is $16x. However, because A's tax liability in 1997 is $14x, the total credit that A may take in 1997 is $14x. A must first take its $12x credit from 1997, thereby reducing its tax liability to $2x. A may then take $2x of its credit from 1996 to reduce its liability to $0. The remaining credit of $2x from 1996 is eligible to be carried over by A to the next six taxable years.

Example 5: The facts are the same as in example 4 except that on January 1, 1997, one of the two 50% partners in A sells his interest in A to a third party. Because the partners in A in 1997 only owned 50% of A in 1996, A is not entitled to use any portion of the $4x credit carryover from 1996 in 1997. See subdivision (d)(3)(ii) of this § 28-03.

Example 6: Partners in multiple partnerships.

AB and BC are partnerships doing business in New York City. B is a partner in both AB and BC. B is a partnership doing business in New York City with a 100% business allocation percentage. For each of its taxable years 1995 and 1996, B's separate UBTI is a loss of ($400x). For each of the taxable years 1995 and 1996, AB's UBTI is $400x. AB pays tax of $16x on that income each year. AB's unincorporated business tax return for each of those years indicates that B's distributive share from AB is $300x and that B's distributive share percentage is 75%. For each of the taxable years 1995 and 1996, BC's UBTI is $1000x. BC pays tax of $40x on that income each year. BC's unincorporated business tax return for each of those years indicates that B's distributive share from BC is $500x and that B's distributive share percentage is 50%. B is subject to the unincorporated business tax and is entitled to a UBT Paid Credit for 1995 and 1996 related to its distributive shares from AB and BC determined as follows:

1995

	Separate UBTI	DS from AB	DS from BC	Total UBTI	UBT Liability w/o credit
AB	NA	NA	NA	$400x	$16x
AC	NA	NA	NA	$1000x	$40x
B	($400x)	$300x	$500x	$400x	$16x

B's credit with respect to AB:

Measure 1: B's distributive share percentage of AB's tax is $12x, determined by multiplying AB's tax of $16x by B's distributive share percentage, 75%

Measure 2: B's tax liability on its total UBTI is $16x before any UBT Paid Credit. B's tax liability on its UBTI of $100x without its distributive share from AB ($400x - $300x), would be $4x. The incremental tax effect on B's total UBTI of its distributive share from AB is $12x ($16x - $4x).

Therefore, B's UBT Paid Credit allowed with respect to AB is $12x.

B's credit with respect to BC:

Measure 1: B's distributive share percentage of BC's tax liability is $20x, determined by multiplying BC's tax liability of $40x by B's distributive share percentage of 50%.

Measure 2: B's tax liability on its total UBTI of $400x would be $16x. Without its distributive share from BC, B would have a loss of ($100x) on which there would be no tax. The incremental tax effect on B's total UBTI of its distributive share from BC is $16x ($16x - 0).

Thus, B's UBT Paid Credit allowed with respect to BC is $16x.

Total Credit for 1995: B's total UBT Paid Credit with respect to AB and BC is $28x. However, because B's tax liability on its total UBTI without the credit would be only $16x, the total UBT Paid Credit allowed to B in 1995 is limited to $16x. There is no carryover of the remaining $12x credit to any subsequent year.

1996

	Separate UBTI	DS – DSP AB	DS – DSP BC	Total UBTI	UBT Liability w/o credit
AB	NA	NA	NA	$400x	$16x
BC	NA	NA	NA	$1000x	$40x
B	($400x)	$300x - 75%	$500x - 50%	$400x	$16x

B's credit with respect to AB:

Measure 1: For 1996, Measure 1 for B is the same as for 1995, $12x.

Measure 2: B's total UBTI is $400x, on which the tax liability would be $16x. For purposes of calculating Measure 2 in 1996, B's operating loss of ($400x) is treated as zero so that its total modified UBTI is treated as $800x, on which the tax would be $32x. Without its distributive share of $300x from AB, B's modified UBTI would be $500x on which the tax would be $20x. The incremental tax effect on B's modified UBTI of B's distributive share from AB is $12x ($32x - $20x).

Therefore, B's UBT Paid Credit allowed with respect to AB is $12x.

Calculation of B's credit with respect to BC:

Measure 1: For 1996, Measure 1 for B is the same as for 1995, $20x.

Measure 2: B's total UBTI is $400x, on which the tax would be $16x. For purposes of calculating Measure 2 in 1996, B's operating loss of ($400x) treated as zero so that its total modified UBTI is treated as $800x, on which the tax would be $32x. Without its distributive share of $500x from BC, B's UBTI would be $300x, on which the tax would be $12x. Thus, the incremental tax effect of B's distributive share from BC is $20x ($32x - $12x).

Thus, B's UBT Paid Credit allowed with respect to BC is $20x.

Total Credits for 1996:

B's total UBT Paid Credit allowed with respect to AB and BC is $32x ($12x + $20x). However, because B's tax liability without the credits would be only $16x, the credit that B can take in the taxable year 1996 is limited to $16x, B's tax liability. The $16x of credits taken in 1996 is deemed to be composed of $6x of the UBT Paid Credit allowed with respect to AB ($16x × $12x/$32x) and $10x of the UBT Paid Credit allowed with respect to BC ($16x × $20x/$32x). See subparagraph (3)(iii) of this subdivision (d). B can carry the $16x excess of the amount of credit allowed over the amount that may be taken to the succeeding seven years. The credit carryover is deemed to be composed of $6x of the UBT Paid Credit allowed with respect to AB and $10x of the UBT Paid Credit allowed with respect to BC.

Example 7: Multiple tiers of partnerships and flow through of credits.

Partnership C is a partner in Partnership B. B is a partner in partnership A. For each of the years 1995, 1996, 1997 and 1998, A's UBTI is $1000x, and A's tax liability is $40x, before a credit of $10x allowed to A pursuant to 11-503(i) (the REAP credit). The following chart summarizes the information relevant to A for the four taxable years.

A	1995	1996	1997	1998
UBTI	$1000x	$1000x	$1000x	$1000x
Tax after REAP credit	$30x	$30x	$30x	$30x

For each year, B's distributive share from A is $400x. Its distributive share percentage with respect to A is 40%. In 1995 and 1996 B has separate UBTI of $200x. In 1997 B has separate UBTI loss of ($300x). In 1998 B has separate UBTI of $600x. The following chart summarizes the information relevant to B for the four taxable years:

B	1995	1996	1997	1998
Separate UBTI	$200x	$200x	($300x)	$600x
DSP in A	40%	40%	40%	40%
DS from A	$400x	$400x	$400x	$400x
Total UBTI	$600x	$600x	$100x	$1000x
Tax w/o UBT Paid Credit	$24x	$24x	$4x	$40x

For each year, C's distributive share percentage in B is 50% and C has separate UBTI of $400x. The following chart summarizes the information relevant to C for the four taxable years:

C	1995	1996	1997	1998
Separate UBTI	$400x	$400x	$400x	$400x
DSP in B	50%	50%	50%	50%
DS from B	$300x	$300x	$50x	$500x
Total UBTI	$700x	$700x	$450x	$900x
Tax w/o UBT Paid Credit	$28x	$28x	$18x	$36x

Calculation of the Credit for 1995:

B's Credit:

Measure 1: B's distributive share percentage of the sum of A's tax and applicable credits is $12x (B's distributive share percentage of 40% multiplied by A's tax liability after the REAP credit ($30x)). (Note: A's REAP credit is not added to A's tax liability in 1995 for purposes of this calculation. The effect of this is that B does not get the benefit of A's REAP credit in 1995. In 1996 and later years, B will get the benefit of A's REAP credit.)

Measure 2: B's tax liability on its total UBTI of $600x would be $24x. The tax on B's separate UBTI of $200x would be $8x.

Thus, the incremental tax effect on B's total UBTI of its distributive share of $400x from A is $16x ($24x - $8x).

Therefore, B's UBT Paid Credit allowed is $12x. B's tax liability after the credit is $12x.

C's Credit:

Measure 1: C's distributive share percentage of the sum of B's tax and UBT Paid Credit is $12x (C's distributive share percentage of 50% multiplied by the sum of B's tax liability ($12x) and B's UBT Paid Credit with respect to A ($12x).

Measure 2: C's tax liability on its total UBTI of $700x would be $28x. The tax on C's separate UBTI of $400x would be $16x.

Thus, the incremental tax effect on C's total UBTI of its distributive share of $300x from B is $12x ($28x - $16x).

Therefore, C's UBT Paid Credit allowed with respect to B is $12x.

Calculation of the Credit for 1996:

B's Credit:

Measure 1: B's distributive share percentage of the sum of A's tax and applicable credits is $16x (B's distributive share percentage of 40% multiplied by the sum of A's tax liability and A's REAP credit ($40x)). (Note: the REAP credit is added here to A's tax liability for purposes of calculating B's credit. The effect of this is that A's REAP credit will flow through to B.)

Measure 2: B's tax liability on its total UBTI of $600x would be $24x. The tax on B's separate UBTI of $200x would be $8x.

Thus, the incremental tax effect on B's total UBTI of its distributive share of $400x from A is $16x ($24x - $8x).

Therefore, B's UBT Paid Credit allowed is $16x. B's tax liability after the credit is $8x.

C's Credit:

Measure 1: C's distributive share percentage of the sum of B's tax and applicable credits is $12x (C's distributive share percentage of 50% multiplied by the sum of B's tax liability ($8x) and B's UBT Paid Credit with respect to A ($16x).)

Measure 2: C's tax liability on its total UBTI of $700x would be $28x. The tax on C's separate UBTI of $400x would be $16x.

Thus, the incremental tax effect on C's total UBTI of its distributive share of $300x from B is $12x ($28x - $16x).

Therefore, C's UBT Paid Credit allowed with respect to B is $12x.

Calculation of the Credit for 1997:

B's Credit:

Measure 1: B's distributive share percentage of the sum of A's tax and applicable credits is $16x (B's distributive share percentage of 40% multiplied by A's tax liability plus A's REAP credit ($40x)).

Measure 2: B's separate loss is ignored and B's separate UBTI is treated as $0 on which there would be no tax. B's tax liability on its total modified UBTI of $400x would be $16x.

Thus, the incremental tax effect on B's total modified UBTI of its distributive share of $400x from A is $16x ($16x - $0x).

Therefore, B's UBT Paid Credit allowed for 1997 is $16x. However, because B's pre-credit tax liability is only $4x, B may only take a UBT Paid Credit of $4x in 1997. B may carry forward $12x, the excess of the $16x credit allowed over the $4x credit taken, to the next seven years subject to the applicable limitations.

C's Credit:

Measure 1: C's distributive share percentage of the sum of B's tax and applicable credits is $2x (C's distributive share percentage of 50% multiplied by B's tax liability ($0x) plus B's UBT Paid Credit taken ($4x)). (Note: for purposes of calculating C's UBT Paid Credit, only the credit taken by B is included, not the total credit allowed. See the discussion of C's credit for 1998 below in this example.)

Measure 2: C's tax liability on its total UBTI of $450x would be $18x. The tax on C's separate UBTI of $400x would be $16x.

Thus, the incremental tax effect on C's total UBTI of its distributive share of $50x from B is $2x ($18x - $16x).

Therefore, C's UBT Paid Credit allowed with respect to B for 1997 is $2x.

Calculation of the Credit for 1998:

B's Credit:

Measure 2: B's tax liability on its total UBTI of $1000x would be $40x. The tax on B's separate UBTI of $600x would be $24x.

Thus, the incremental tax effect on B's total UBTI of its distributive share of $400x from A is $16x ($40x - $24x).

Therefore, B's UBT Paid Credit allowed for 1998 is $16x. It may also carry over to 1998 the excess credit allowed in 1997 of $12x that it could not take. Therefore, the total credit that is available to B in 1998 and that B may take is $28x. B's tax liability after the credit is $12x.

C's Credit:

Measure 1: C's distributive share percentage of the sum of B's tax and applicable credits is $20x (C's distributive share percentage of 50% multiplied by B's tax liability ($12x) plus B's UBT Paid Credit taken ($28x)). The credit taken includes the amount of $12x allowed to B in 1997 but carried forward and taken by B in 1998.

Measure 2: C's tax liability on its total UBTI of $900x would be $36x. The tax on C's separate UBTI of $400x would be $16x.

Thus, the incremental tax effect on C's total UBTI of its distributive share of $500x from B is $20x ($36x - $16x).

Therefore, C's UBT Paid Credit allowed with respect to B for 1998 is $20x.

§ 28-04 Unincorporated Business Taxable Income.

(a) Unincorporated business entire net income (Administrative Code § 11-501(g)). For taxable years beginning on or after July 1, 1994, the unincorporated business entire net income of a taxpayer means its unincorporated business gross income, as computed under 19 RCNY § 28-05, over the unincorporated business deductions allowable under Administrative Code § 11-507 and 19 RCNY § 28-06.

(b) Unincorporated business taxable income (Administrative Code § 11-505). For taxable years beginning before July 1, 1994, the unincorporated business taxable income of a taxpayer for unincorporated business tax purposes means the excess of the unincorporated business gross income, as computed under 19 RCNY § 28-05, over the unincorporated business deductions allowable under 19 RCNY § 28-06, allocated to New York City in accordance with 19 RCNY § 28-07, minus the deductions allowable, without allocation, under 19 RCNY § 28-08, for reasonable compensation for personal services of the proprietor or the partners actively engaged in the unincorporated business and minus the unincorporated business exemptions permitted under 19 RCNY § 28-09. For taxable years beginning on or after July 1, 1994, the unincorporated business taxable income of a taxpayer for unincorporated business tax purposes means its unincorporated business entire net income, allocated to the City, less the amount of:

(1) its deductions allowable, without allocation, under 19 RCNY § 28-08 and;

(2) its unincorporated business exemption permitted under 19 RCNY § 28-09(a).

§ 28-05 Unincorporated Business Gross Income.

(a) (1) General. (Administrative Code § 11-506(a)). Subject to the modifications prescribed below in 19 RCNY § 28-05(b) and (c), the unincorporated business gross income of an unincorporated business engaged in or being liquidated by an individual or unincorporated entity means the sum of the items of income and gain (of whatever kind and in whatever form paid) that are includible in the gross income of the individual or unincorporated entity for Federal income tax purposes for the taxable year and that are derived from the carrying on or liquidation of the business or from any source whatever connected therewith, including, without limitation, income and gain

(A) from any property of the individual or unincorporated entity, or a member thereof, employed in the business,

(B) from liquidation of the business or disposition of the assets thereof,

(C) from collection or other disposition of installment obligations of the business without regard to when such obligations were acquired, or

(D) in the case of an unincorporated entity, from the sale or other disposition of an interest in another unincorporated entity if and to the extent such income or gain is attributable to a trade, business, profession or occupation carried on in whole or in part in the City by such other unincorporated entity. An individual member of a partnership who also carries on his or her own separate and independent unincorporated business is not required or permitted to include his distributive share of partnership income or his or her gain or loss on the sale or other disposition of his or her interest in the partnership in computing his or her separate unincorporated business gross income.

Example: Doctor A is a member of a medical partnership which provides medical services to members of a group health plan. In addition, Doctor A carries on his own separate and independent medical practice. Doctor A may not include his distributive share of partnership income in his computation of his own unincorporated business gross income. (Furthermore, the medical partnership may not claim the statutory additional exemption described in 19 RCNY § 28-09(b) for the amount distributed to Doctor A and Doctor A is not entitled to a credit against his unincorporated business tax liability for any unincorporated business tax paid by the medical partnership for its taxable years beginning on or after July 1, 1994. See 19 RCNY § 28-09(b)(1) and 19 RCNY § 28-03(d).

(2) For taxable years beginning on or after January 1, 1996, the character of a partner's distributive share of gross income, gains, losses and deductions of an unincorporated entity shall be determined as if such gross income, gains, losses and deductions were realized directly by such partner to the extent permitted for federal income tax purposes regardless of how the interest in the unincorporated entity was acquired and regardless of whether the distributive share is proportionate to the partner's capital interest in the unincorporated entity, provided, however, this paragraph (2) shall not apply to payments to a partner treated as occurring between the unincorporated entity and one who is not a partner under Internal Revenue Code § 707, and provided, further, this paragraph (2) shall not affect the determination of whether gross income, gains, losses, or deductions of an unincorporated entity are subject to the tax imposed under Chapter 5 of Title 11 of the Administrative Code. This paragraph (2) is illustrated by the following:

Example: Partnership X is the sole general partner in Partnership A. X contributed one percent of the capital of Partnership A. X is responsible for the day to day management of the business of Partnership A, which is the purchase and sale of stocks and securities for the account of Partnership A. X is paid a fee each year of $100,000 qualifying as a guaranteed payment under Internal Revenue Code § 707. In addition, X is entitled to receive 20 percent of the income, gains, losses, and deductions of Partnership A. X's entire distributive share of the income, gains, losses, and deductions of Partnership A retains its character in X's hands, i.e., as dividends, interest and gains and losses from stocks and securities. X's $100,000 fee is compensation for services rendered and X's performance of those services may be considered an unincorporated business under the provisions of 19 RCNY § 28-02 without regard to this paragraph (2).

(b) Modifications increasing federal gross income. (Administrative Code § 11-506(b)). The Federal gross income of the unincorporated business determined under 19 RCNY § 28-05(a) shall be increased by the following items, to the extent such items are attributable to the business:

(1) Interest income on obligations of any State of the United States, other than New York State, or of a political subdivision of any such other State, unless created by an agreement or compact to which the State of New York is a party;

(2) Interest or dividend income on obligations or securities of any authority, commission, or instrumentality of the United States, which the laws of the United States exempt from Federal income tax, but not from State or local income taxes;

(3) The amount determined under 19 RCNY § 28-08(b) in respect of certain property sold or otherwise disposed of during the year, which was subject to an election exercised by the taxpayer with regard to a special deduction for depreciation or for an expenditure for property used for research or development purposes in accordance with said section;

(4) For taxable years commencing on or after August 1, 1977, the entire amount allowable as an exclusion or deduction for stock transfer taxes imposed by Article 12 of the State Tax Law in determining Federal gross income, but only to the extent that such taxes are incurred and paid in market making transactions as defined in § 11-503(c) of the Administrative Code;

(5) The amount allowed as an exclusion or deduction for sales and use taxes imposed by § 1107 of the State Tax Law in determining Federal gross income, but only such portion of such exclusion or deduction which is not in excess of the amount of credits allowed under 19 RCNY § 28-03(c)(3);

(6) The amount allowed as an exclusion or deduction for rent in determining Federal gross income but only such portion of such exclusion or deduction which is not in excess of the amount of credit allowed under 19 RCNY § 28-03(c)(4);

(7) The amount allowed as an exclusion or deduction for relocation expenses in determining Federal gross income, but only such portion of such exclusion or deduction which is not in excess of the amount of the credit allowed under 19 RCNY § 28-03(c)(4);

(8) For taxable years beginning after December 31, 1981, any amount which would properly be includible in federal gross income had the taxpayer not made the election permitted pursuant to § 168(f)(8) of the Internal Revenue Code as it was in effect for safe harbor lease agreements entered into prior to January 1, 1984, except with respect to property which is a qualified mass commuting vehicle described in § 163(f)(8)(D) of the Internal Revenue Code;

(9) Upon the disposition of recovery property to which 19 RCNY § 28-06(n) applies, the amount, if any, by which the aggregate of the deductions for depreciation attributable to such property allowable pursuant to such 19 RCNY § 28-06(n) exceeds the aggregate accelerated cost recovery system deduction attributable to such property, described in 19 RCNY § 28-06(m);

(10) Notwithstanding any other provision of these rules to the contrary, for taxable years beginning on or after January 1, 1996, the amount allowed as an exclusion or deduction in determining federal gross income or any loss, including but not limited to, losses from notional principal contracts, losses, other than losses realized by the taxpayer as a dealer as defined in 19 RCNY § 28-02(g)(2), from the holding, sale or disposition, assumption, offset or termination of a position in, property, as defined in 19 RCNY § 28-02(g)(3), or other substantially similar losses from ordinary and routine trading or investment activity to the extent determined by the Commissioner of Finance, realized in connection with activities described in 19 RCNY § 28-02(g)(1)(v) if, and to the extent that, such activities are not deemed an unincorporated business carried on by the taxpayer pursuant to the provisions of 19 RCNY § 28-02(g);

(11) Notwithstanding any other provision of these rules to the contrary, for taxable years beginning on or after January 1, 1996, in the case of a taxpayer that is an unincorporated entity eligible for the partial self-trading exemption described in 19 RCNY § 28-02(g)(4), the amount allowed as an exclusion or deduction in determining federal gross income or any loss realized from the sale or other disposition of an interest in another unincorporated entity if, and to the extent that, such loss is attributable to activities of such other unincorporated entity not deemed an unincorporated business carried on by the taxpayer pursuant to the provisions of 19 RCNY § 28-02(g);

(12) Notwithstanding any other provision of these rules to the contrary, for taxable years beginning on or after July 1, 1994, the amount allowed as an exclusion or deduction in determining federal gross income or any loss realized from the holding, leasing or managing of real property if, and to the extent that, such holding, leasing or managing of real property is not deemed an unincorporated business carried on by the taxpayer pursuant to the provisions of 19 RCNY § 28-02(h)(2)(ii); and

(13) Notwithstanding any other provision of these rules to the contrary, for taxable years beginning on or after January 1, 1996, the amount allowed as an exclusion or deduction in determining federal gross income or any loss realized from the provision by an owner, lessee or fiduciary holding, leasing or managing real property of the service of parking, garaging or storing of motor vehicles on a monthly or longer term basis to tenants at such real property if, and to the extent that, the provision of such services to such tenants is not deemed an unincorporated business carried on by the taxpayer pursuant to the provisions of 19 RCNY § 28-02(h)(2)(iii).

(c) Modifications reducing federal gross income. (Administrative Code § 11-506(c)). The Federal gross income of the unincorporated business determined under 19 RCNY § 28-05(a) shall be reduced by the following items, to the extent such items are attributable to the business:

(1) Interest income on obligations of the United States and its possessions, to the extent includible in gross income for Federal income tax purposes;

(2) Interest or dividend income on obligations or securities of any authority, commission or instrumentality of the United States, to the extent includible in gross income for Federal income tax purposes, but exempt from State or local income taxes under the laws of the United States;

(3) Interest or dividend income on obligations or securities, to the extent exempt from income tax under the laws of the City or State of New York authorizing the issuance of such obligations or securities, but includible in gross income for Federal income tax purposes;

(4) The amount of any refund or credit for overpayment of income taxes imposed by the City or State of New York or any other taxing jurisdiction, to the extent properly included in gross income for Federal income tax purposes. This modification does not apply to interest paid or allowed on any refund or credit for overpayment of income taxes includible in gross income for Federal income tax purposes;

(5) With respect to gain derived from the sale or other disposition of any property acquired prior to January 1, 1966, except property described in subsections 1 and 4 of § 1221 of the Internal Revenue Code, the difference between:

(i) the amount of gain included in Federal gross income with respect to each such property, and

(ii) the amount of gain (if smaller than the amount described in (i)) that would be included in Federal gross income with respect to each such property if the Federal adjusted basis of such property on the date of the sale or other disposition had been equal to its fair market value on January 1, 1966, or the date of its sale or other disposition prior to January 1, 1966, plus or minus all adjustments to basis made with respect to such property for Federal income tax purposes for periods on and after January 1, 1966; provided, however, that the total modification under this paragraph shall not exceed the taxpayer's net gain from the sale or other disposition of all such property.

(6) For taxable years beginning after December 31, 1981, any amount properly includible in federal gross income solely as a result of an election made pursuant to § 168(f)(8) of the Internal Revenue Code as it was in effect for safe harbor lease agreements entered into prior to January 1, 1984, except with respect to property which is a qualified mass commuting vehicle described in § 168(f)(8)(d) of the Internal Revenue Code;

(7) Upon the disposition of recovery property to which 19 RCNY § 28-06(n) applies, the amount, if any, by which the aggregate accelerated cost recovery system deduction attributable to such property, described in 19 RCNY § 28-06(m), exceeds the aggregate of the deductions for depreciation attributable to such property allowable pursuant to such 19 RCNY § 28-06(n);

(8) For taxable years beginning on or after July 1, 1994, 50 percent of the amount of dividends (to the extent includible in gross income for federal income tax purposes and not subtracted under paragraph (2) or (3) of this subdivision (c)), other than

(i) the amounts described in subparagraph 13 or 15 of paragraph (b) of Administrative Code § 11-602(8), and

(ii) dividends from stock described in paragraph (b) or (c) of Administrative Code § 11-602(3), provided, however, no portion of a dividend from stock with respect to which a dividend deduction would be disallowed by § 246(c) of the Internal Revenue Code if the unincorporated business were subject to federal income tax as a corporation shall be subtracted under this paragraph (8). For purposes of subparagraphs (i) and (ii) of this paragraph (8), references in Administrative Code § 11-602 to "acquiring person" or "acquiring corporation" are deemed to refer to the unincorporated business;

(9) Notwithstanding any other provision of these rules to the contrary, for taxable years beginning on or after January 1, 1996, the amount of any income or gain (to the extent includible in gross income for federal income tax purposes), including but not limited to, dividends, interest, payments with respect to securities loans, income from notional principal contracts, income and gains, other than as a dealer, from the holding, sale or disposition, assumption, offset or termination of a position in, property as defined in 19 RCNY § 28-02(g)(3), or other substantially similar income from ordinary and routine trading or investment activity to the extent determined by the Commissioner of Finance, realized in connection with activities described in 19 RCNY § 28-02(g)(1)(v) if, and to the extent that, such activities are not deemed an unincorporated business carried on by the taxpayer pursuant to the provisions of 19 RCNY § 28-02(g);

(10) Notwithstanding any other provision of these rules to the contrary, for taxable years beginning on or after January 1, 1996, in the case of a taxpayer that is an unincorporated entity eligible for the partial self-trading exemption described in 19 RCNY § 28-02(g)(4), the amount of any income or gain (to the extent includible in gross income for federal income tax purposes) realized from the sale or other disposition of an interest in another unincorporated entity if, and to the extent that, such income or gain is attributable to activities of such other unincorporated entity not deemed an unincorporated business carried on by the taxpayer pursuant to the provisions of 19 RCNY § 28-02(g);

(11) Notwithstanding any other provision of these rules to the contrary, for taxable years beginning on or after July 1, 1994, the amount of any income or gain (to the extent includible in gross income for federal income tax purposes) realized from the holding, leasing or managing of real property if, and to the extent that, such holding, leasing or managing of real property is not deemed an unincorporated business carried on by the taxpayer pursuant to the provisions of 19 RCNY § 28-02(h)(ii); and

(12) Notwithstanding any other provision of these rules to the contrary, for taxable years beginning on or after January 1, 1996, the amount of any income or gain (to the extent includible in gross income for federal income tax purposes) realized by an owner, lessee or fiduciary holding, leasing or managing real property from providing parking, garaging or motor vehicle storage services on a monthly or longer term basis to tenants at such real property if, and to the extent that, the provision of such services to such tenants is not deemed an unincorporated business carried on by the taxpayer pursuant to the provisions of 19 RCNY § 28-02(h)(iii).

(d) For purposes of subdivisions (b)(10) and (c)(9) of this section, ordinary and routine trading or investment activity will include entering into an agreement to participate in a transaction described in subparagraphs (v)(A) through (v)(D) of 19 RCNY § 28-02(g)(1). Consequently, for taxable years beginning on or after January 1, 1996, losses incurred in connection with, or as a result of, entering into such an agreement must be added back to federal gross income in determining unincorporated business gross income, and income and gains realized in connection with, or as a result of, entering into such an agreement, such as commitment fees or breakup fees, must be excluded from federal gross income in determining unincorporated business gross income to the extent that any such transaction is not considered to be pursuant to an unincorporated business carried on by the taxpayer pursuant to 19 RCNY § 28-02(g).

§ 28-06 Unincorporated Business Deductions.

(a) General. (Administrative Code § 11-507). Except as otherwise provided in this section, the unincorporated business deductions of an unincorporated business engaged in or being liquidated by an individual or unincorporated entity mean the items of loss and deduction of the individual or unincorporated entity which are allowable for Federal income tax purposes for the taxable year and which are directly connected with or incurred in the conduct or the liquidation of the business, including losses and deductions connected with any property of the individual or unincorporated entity employed in the business. The deductions of the unincorporated business for Federal income tax purposes determined under this section shall be subject to the modifications and limitations hereinafter set forth.

(b) Charitable contributions. (Administrative Code § 11-507(1)).

(1) General. A deduction shall be allowed for charitable contributions of the unincorporated business to the extent that such contributions would be deductible for Federal income tax purposes if made by a corporation. The amount of this deduction, however, shall not be greater than five percent of the amount by which the unincorporated gross income of the unincorporated business exceeds the sum of

(i) the unincorporated business deductions computed without the benefit of any deduction of charitable contributions, and

(ii) the deduction allowed under 19 RCNY § 28-08(b) where the election permitted by such Section has been exercised with respect to the claiming of a special depreciation deduction or a research or development expenditure deduction for certain qualified property. Personal charitable contributions, that is, contributions not made by the unincorporated business itself, are not deductible for unincorporated business tax purposes even if they are of the type which would be deductible for Federal income tax purposes if made by a corporation. To be deductible for unincorporated business tax purposes, the charitable contribution must be directly connected with, or incurred in, the conduct of the unincorporated business, an entity separate and distinct from the owners or operators of the business.

(2) Applicable rules. For purposes of applying the foregoing, the following rules shall apply:

(i) Charitable contributions defined. The term "charitable contributions" means a contribution or gift of the type which is allowable to a corporation under § 170 of the Internal Revenue Code and the applicable regulations thereunder.

(ii) Limitations. For purposes of determining whether the charitable contributions of an unincorporated business are in excess of five percent of the amount by which the unincorporated business gross income exceeds the unincorporated business deductions, the unincorporated business deductions shall be determined without regard to

(A) any amount allowable under this subdivision (b),

(B) any deduction for services of the proprietor or active partners allowable under 19 RCNY § 28-08(a),

(C) any deduction allowed under 19 RCNY § 28-08(b) (pertaining to special depreciation and research and development expenditures), and

(D) any net operating loss carryback (as distinguished from a carry over) to the taxable year allowed under 19 RCNY § 28-06(c).

(iii) Charitable contributions carryover. Except as otherwise provided in subparagraph (2)(iv) below, any contributions made by an unincorporated business in a taxable year (hereinafter in this subparagraph (iii) referred to as the contribution year), in excess of the amount deductible in such contribution year under the prescribed five percent limitation are deductible, in accordance with the provisions of the Internal Revenue Code each of the five succeeding taxable years in order of time, but only to the extent of the lesser of the following amounts:

(A) the excess of the maximum amount deductible for such succeeding taxable year under the prescribed five percent limitation, over the sum of the contributions made in that year, plus the aggregate of the excess contributions which were made in taxable years before the contribution year and which are deductible under this subparagraph (iii) in such succeeding taxable year; or

(B) in the case of the first taxable year succeeding the contribution year, the amount of the excess contributions, and in the case of the second, third, fourth, or fifth taxable year succeeding the contribution year, the portion of the excess contributions not deductible under this subparagraph for any taxable year intervening between the contribution year and such succeeding taxable year.

Example: A partnership which is engaged in carrying on an unincorporated business wholly within New York City and which reports its income on a calendar year basis, makes charitable contributions amounting to $3,000 in each of the years 1968 through 1977. Its taxable net income for limitation purposes was $40,000 for 1968 and also for each of the years 1970 through 1976. Its taxable net income for limitation purposes in 1969 and 1977 was $100,000. The maximum amount of deductible contributions which may be permitted is, accordingly, $2,000 for each of the calendar years 1968 and 1970 through 1976 (five percent of $40,000) and $5,000 for the years 1969 and 1977 (five percent of $100,000). For the year 1968 the amount allowed as a deduction is $2,000, the maximum amount allowable for such year. The excess contribution of $1,000 ($3,000 actually contributed in 1968, less $2,000 the maximum allowable amount) is allowable as a carryover. For the year 1969 the amount allowed as a deduction is $4,000 ($3,000 actually contributed in 1969 plus $1,000 carryover from the year 1968), since the amount of $4,000 allowed as a deduction is less than $5,000 maximum amount which is permitted as a deduction for the year 1969. For each of the years 1970 through 1976 the amount allowed as a deduction is $2,000, resulting in a carryover of $1,000 for each of such years. For the year 1977 the amount allowed as a deduction is $5,000, which is the maximum amount allowable as a deduction for such year. This amount includes $3,000 actually contributed in 1977, plus the $1,000 contribution carryover for the year 1972, plus the $1,000 contribution carryover for the year 1973. The carryover for the years 1970 and 1971 are no longer permitted as deductions since more than five succeeding taxable years have elapsed since such years. Since the maximum amount which may be taken as a deduction in 1977 is $5,000, there remain outstanding carryovers for the years 1974, 1975 and 1976 in amounts of $1,000 for each year.

(iv) Special rule for unincorporated business having net operating loss carryover. In determining the extent to which a charitable contributions carryover under subparagraph (iii) above may be permitted, the amount by which

(A) the charitable contributions made by the unincorporated business in a taxable year to which this subdivision applies exceeds

(B) the maximum amount deductible in such year under the limitation prescribed by subparagraph (ii) above shall be reduced to the extent that such excess decreases the unincorporated business taxable income (as computed for purposes of 19 RCNY § 28-06(c) pertaining to net operating loss carryover and carryback computations) and increases a net operating loss carryover under 19 RCNY § 28-06(c) to a succeeding taxable year.

Example: An unincorporated business which began operations on January 1, 1971 sustained a net operating loss of $25,000 for the calendar year 1971. In 1972, the excess of the unincorporated business gross income over the unincorporated business deductions (without reference to a deduction for contributions or any net operating loss carryover) was $25,000. The contributions made by the business in 1972 amounted to $1,250. By reason of the carryover of the 1971 net operating loss of $25,000 to 1972, and because of the five percent limitation applicable to the deduction for contributions, no deduction for contributions is allowable for the year 1972. The $1,250 of contributions made in that year accordingly represents an "excess of contributions" within the meaning of subparagraph (iii) of this paragraph (2). This excess, however, is subject to a reduction of $1,250 because it has both (a) decreased the amount of the "applicable income" (under 19 RCNY § 28-06(c)) for 1972 ($25,000 minus $1,250 of contributions or $23,750) and (b) increased the net operating loss carryover available to 1973 (1971 loss of $25,000 minus the 1972 "applicable income" of $23,750 instead of minus the $25,000 of taxable 1972 income). The amount of the reduction of the excess of contributions based on the foregoing is $1,250 because that is the amount of both the decrease and increase computed above. $1,250 of the 1971 net operating loss remains as a carryover to 1973.

(v) Election by unincorporated business on an accrual method. An unincorporated business reporting its unincorporated business taxable income on an accrual method may elect to have a charitable contribution considered as paid during the taxable year provided payment is actually made on or before the 15th day of the third month following the close of the taxable year and if the contribution was pledged or made under a commitment made in writing by the unincorporated business during the taxable year. An election under this subparagraph (v) must be made at the time the return for the taxable year is filed. The election shall be made by including the contribution in the deduction claimed for contributions for the taxable year and by filing with the return a written declaration signed by the proprietor or an active partner showing

(A) the name and address of the recipient of the contribution or gift,

(B) the date the contribution was pledged and the amount of the pledge, and

(1) General. In lieu of any other deductions for net operating losses allowable under the Internal Revenue Code, a deduction shall (except as otherwise provided in paragraph (3) of this subdivision pertaining to partnerships) be allowed for net operating losses incurred by the unincorporated business in an amount computed in the same manner as the net operating loss deduction which would be allowable for the taxable year for Federal income tax purposes if the unincorporated business were an individual taxpayer (but determined solely by reference to the unincorporated business gross income and unincorporated business deductions, allocated to New York City, of the unincorporated business). Allowable deductions under this subdivision (c) shall not include any net operating loss sustained during any taxable year beginning prior to January 1, 1966.

(2) Applicable rules. For purposes of applying the foregoing, the following rules shall apply:

(i) Net operating loss deduction defined. The net operating loss deduction allowable for a taxable year under this subdivision (c) shall be an amount equal to the aggregate of

(A) the net operating loss carrybacks to such year, plus

(B) the net operating loss carryovers to such year, as determined under subparagraph (ii) below.

(ii) Amount of carryback or carryover.

(A) A net operating loss sustained for any taxable year beginning on or after January 1, 1966 shall be (a) a net operating loss carryback to each of the three taxable years preceding the taxable year of such loss, and (b) a net operating loss carryover to each of the five taxable years following the taxable year of such loss. A net operating loss for any taxable year ending after December 31, 1975, shall be a net operating loss carryover to each of the fifteen taxable years following the taxable year of such loss.

(B) The entire amount of the net operating loss sustained in any taxable year beginning on or after January 1, 1966 (referred to herein as the "loss year") may be carried back three years. The loss is first carried to the earliest of the three taxable years. If it is not entirely used to offset income in that year, it is carried to the second taxable year preceding the loss year, and any remaining amount is carried to the taxable year immediately preceding the loss year. Any unused amount of loss then remaining may be carried forward for as many as fifteen taxable years following the loss year (five for loss years prior to January 1, 1976). If the unincorporated business taxable income for the three years preceding the loss year is smaller than the entire loss, the remaining loss is carried forward first to the taxable year immediately following the loss year, then to the second taxable year following the loss year, and so on for fifteen years (five for loss years prior to January 1, 1976), or until the loss is used up. For purposes of the preceding sentence, the unincorporated business taxable income shall be computed without regard to: (a) any deduction permitted under 19 RCNY § 28-08(a) for compensation for services of the proprietor or active partners, (b) any deduction allowed under 19 RCNY § 28-08(b), (c) the unincorporated business exemptions allowable under 19 RCNY § 28-09, and (d) the net operating loss for the loss year or for any subsequent taxable year. The taxable income so computed shall not be considered to be less than zero for any year. Any taxpayer entitled to a carryback period under this subdivision (c) may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year ending after December 31, 1975. Such election shall be made by the due date (including extensions of time) for filing the taxpayer's return for the taxable year of the net operating loss for which the election is to be in effect. Such election, once made for any taxable year, shall be irrevocable for that taxable year.

(iii) Net operating loss defined. The term net operating loss as used in this subdivision (c) means (for any taxable year beginning on or after January 1, 1966) the excess of the unincorporated business deductions (other than the deductions specified in 19 RCNY § 28-08(a) and (b)) of the unincorporated business over the unincorporated business gross income computed under 19 RCNY § 28-05 allocated to New York City in accordance with the provisions of 19 RCNY § 28-07, subject to the following modifications and exceptions:

(A) No net operating loss deduction shall be allowed.

(B) No deduction shall be allowed under 19 RCNY § 28-09 relating to unincorporated business exemptions.

Example 1: The computation of a net operating loss under subparagraph (iii) above the net operating loss deductions and carrybacks and carryovers under subparagraphs (i) and (ii) above are illustrated below: The unincorporated business tax returns of an unincorporated business conducted by an individual wholly within New York City show the following:

	1970	1971	1972	1973 (Loss Year)
U.B. gross income	$50,000	$50,000	$62,000	$25,000
U.B. deductions	$35,000	$40,000	$62,000	$60,000
Balance (for the purpose of this section, called applicable income or loss)	$15,000	$10,000	$ -0-	($35,000)
Compensation for services of proprietor	$3,000	$2,000	$ -0-	$ -0-
Balance	$12,000	$8,000	$ -0-	($35,000)
Statutory exemption	$5,000	$5,000	$5,000	$5,000
Taxable income or (loss)	$7,000	$3,000	($5,000)	($40,000)

The net operating loss for the year 1973 is $35,000, the applicable loss for such year, since no allowance may be made for either a deduction for compensation for services of a proprietor or active partner under 19 RCNY § 28-08 or for the $5,000 exemption allowable under 19 RCNY § 28-09. The 1973 operating loss is carried back to 1970, and, since this is the only carryback possible to that year, it represents the "net operating loss deduction" for that year. Since the taxable income reported on the return filed for 1970, against which the net operating loss deduction can be applied, is $7,000, less than the available net operating loss deduction, allowance of this deduction on a timely application for refund will result in a refund of the entire amount of unincorporated business income tax paid for that year. The carryback to 1971 is the carryback to 1970 arrived at above ($35,000), less the applicable income for 1970 ($15,000), which applicable income was computed without regard to the 19 RCNY § 28-08 deduction for compensation for services of a proprietor or active partners, or the $5,000 exemption allowable under 19 RCNY § 28-09. This balance of $20,000 ($35,000 - $15,000) is the carry back to the year 1971 and the net operating loss deduction for that year. Since this exceeds the taxable income for such year, the filing of a timely application for refund will result in a refund of the entire amount of unincorporated business income tax paid for that year. The carryback to 1972 is the 1971 carryback ($20,000) less the applicable income for 1971 ($10,000). The balance of $10,000 ($20,000 – $10,000) is the carryback to 1972, but cannot be applied since there was no income in that year. This amount of $10,000 is therefore available as a net operating loss carryover to 1974. This amount is the carryback to 1972 ($10,000) less the applicable income for 1972 ($0), resulting in a subtraction of "zero dollars" from the $10,000 carryback to the year 1972. The balance remaining, $10,000 ($10,000 - 0), is therefore, the carryover to 1974. The net operating loss deduction in any year is equal to the sum of all carrybacks and carryforwards from subsequent or prior years to such year. Since only one net operating loss, i.e., for the year 1973, is involved, there is only one carryback or carryforward (from 1973) to each of the years herein. Accordingly, such carryback or carryforward represents the net operating loss deduction for each of such years.

The following example illustrates the application of more than one net operating loss:

Example 2: Assume the facts in the foregoing example and assume further that there was applicable income (without regard to 19 RCNY § 28-08 or 19 RCNY § 28-09 deductions or exemptions) of $2,000 for the years 1974 and 1976, $7,500 for the year 1977, and a net operating loss of $5,000 (without regard to deductions or exemptions) for the year 1975. As found in Example 1, the 1973 carryover to 1974 is $10,000. The 1973 carryover to 1975 is $8,000 ($10,000, carryover to 1974 minus $2,000, applicable 1974 income). The 1973 carryover to 1976 is also $8,000 ($8,000 carryover to 1975 minus $0, there being a loss in 1975 and the applicable income to which the net operating loss is applied cannot be less than "zero"). The 1973 carryover to 1977 is accordingly $6,000 ($8,000 - $2,000). The 1975 net operating loss of $5,000 is a carryback to 1972 in that amount. Because of the lack of income in the years 1972 and 1973, the 1975 carrybacks to 1973 and 1974 are also $5,000 each. The 1975 carryover to 1976 is also $5,000 ($5,000 carryback to 1974 minus $0, since the 1973 carryover to 1974 of $10,000 exceeded the applicable income for 1974 of $2,000). Similarly, the 1975 carryover to 1977 is $5,000 ($5,000 carryover to 1976 minus $0, since the 1973 carryover to 1976 of $8,000 exceeded the applicable income for 1976 of $2,000). The carryover from 1975 to 1978 is $3,500 ($5,000 carryover to 1977 less the $1,500 of applicable income which remained after the 1973 carryover of $6,000 was applied against the $7,500 of 1977 applicable income). The net operating loss eduction for 1972 would then be $15,000 ($10,000 carryback from 1973 plus $5,000 carryback from 1975). Similarly, by adding the 1973 and 1975 carryback. or carryovers, the net operating loss deductions for 1974, 1976 and 1977 would be $15,000, $13,000 and $11,000, respectively.

(iv) Entity entitled to deduction. A net operating loss deduction under this subdivision (c) may be allowed only to the individual or unincorporated entity who or which actually was engaged in the carrying on or the liquidation of the unincorporated business activity from which the loss was sustained or incurred. Thus, an individual who purchases a going unincorporated business from another individual will not be allowed a net operating loss deduction for any net operating loss (or any portion of a net operating loss) sustained by the vendor or transferor and the vendor or transferor will not be allowed any deduction under this subdivision based on a net operating loss sustained by the purchaser or transferee of the business. See paragraph (3) of this subdivision (c) for net operating loss deduction rules for partnerships where partner interest differ for the loss year and deduction year. However, where no material change in beneficial interest of the beneficiaries results, a change in the identity of the trustee, administrator, executor or other fiduciary of an estate or trust which is subject to the unincorporated business tax will not be deemed to result in the formation of a new or different unincorporated business tax entity for purposes of this subdivision (c).

(v) Effect of allocation. Where the unincorporated business was carried on both within and without New York City during the loss year, the net operating loss with respect to which a deduction is permitted under this subdivision shall be the amount or portion of the loss computed under subparagraph (iii) of this paragraph (2) which is allocable to New York City in accordance with the provisions of 19 RCNY § 28-07. If the business was carried on both within and without New York City during a taxable year to which a net operating loss may be carried under subparagraph (ii) of this paragraph (2), the net operating loss deduction allowable for such year shall be treated as a deduction not subject to allocation in computing the unincorporated business taxable income under 19 RCNY § 28-04. Such deduction shall, however, be taken into account, to the extent applicable, in determining the amount of

(A) any deduction for compensation for services of the proprietor or active partners under 19 RCNY § 28-08,

(B) any additional exemption allowable under 19 RCNY § 28-09, and

(C) any allocable deduction for charitable contributions in any case where the net operating loss deduction represents a carryover to the taxable year (as distinguished from a carryback) for which such net operating loss deduction is to be allowed.

Example 1: Partnership A & B, which is engaged in the carrying on of an unincorporated business both within and without New York City, sustained a net loss of $10,000 for the year 1976. Assuming that no modifications under subparagraph (iii) of this paragraph (2) are required and assuming that 80 percent of the loss is attributable to New York City sources in accordance with 19 RCNY § 28-07, the "net operating loss" for 1976 (the loss year) is $8,000 (80 percent of $10,000). Assuming further that the partnership began business on January 1, 1975 and that 75 percent of its 1975 unincorporated business taxable income (as shown below) was allocable to New York City under 19 RCNY § 28-07, the net operating loss deduction and the other adjustments required with respect to the 1975 return will be as follows:

1975 partnership unincorporated business income tax original return.

Net income from business (before deductions for contributions and service of partners)	$25,000.00
Deduction for contributions (total contributions $2,000 – limited to 5% of $25,000)	$1,250.00
Balance	$23,750.00
Allocated to New York City (75%)	$17,812.50
Deductions for partners' services (20%)	$3,562.50
Net income from business	$14,250.00
Specific exemption	$5,000.00
Unincorporated business taxable income	$9,250.00

Recomputation to allow net operating loss deduction for 1975.

Net income of business allocated to New York City per return (before deduction for partners' services)	$17,812.50
Net operating loss deduction allowed (80% of $10,000)	$8,000.00
Balance	$9,812.50
Deduction for partners' services (20%)	$1,962.50
Net income from business	$7,850.00
Specific exemption	$5,000.00
Unincorporated business taxable income-revised	$2,850.00

In connection with the foregoing recomputation for 1975 the following points are to be noted:

(A) The net operating loss (computed by reference to the unincorporated business income and deductions allocated to New York City for the loss year) which is a carryback of $8,000 to 1975 is applied in full against the income of the business allocated to New York City in the unincorporated business income tax return for the taxable year of deduction and the amount of such net operating loss deduction is not included in or affected by the allocation percentage for the taxable year for which the deduction is allowed.

(B) The allowance of the deduction for the services of the partners has been recomputed and the new limitation based on the reduced income has been applied.

(C) The deduction for charitable contributions has not been recomputed even though the income base for limitation purposes has been reduced by the allowance of the net operating loss deduction, since a net operating loss carryback does not require a recomputation of a contributions deduction which is based on or limited to a percentage of a redefined taxable income.

Example 2: If, in Example 1 above, the partnership had not engaged in business prior to 1976, the loss year, and if the partnership income, deductions and allocation percentage were the same for 1977 as those used for 1975 in Example 1, the $8,000 net operating loss would be a carryover to 1977 and the allowable net operating loss deduction would be reflected in the 1977 liability in the following manner:

Net income from business (before net operating loss deduction, contributions and partners' service allowance)	$25,000
Net operating loss	$8,000
Balance (before contributions deduction)	$17,000
Contributions ($2,000 – limited to 5% of $17,000)	$850
Balance (after contributions deduction)	$16,150
Deduction for partners' services	$3,230
Net income	$12,920

Allocation Schedule

Balance (after contributions deduction)	$16,150.00
Add back net operating loss deduction	$8,000.00
Allocation base	$24,150.00
Amount allocated to New York City (75% of base)	$18,112.50
Net operating loss deduction	$8,000.00
Balance	$10,112.50
Deduction for partners' services	$2,022.50
Balance	$8,090.00
Specific exemption	$5,000.00
Unincorporated business taxable income	$3,090.00

The computation in this example differs from Example 1 in that the deduction for contributions in Example 2 is computed by reference to an income base which reflects allowance of the net operating loss deduction for limitation purposes. The contributions deduction is determined in this way because the provision of 19 RCNY § 28-06(b) which eliminates the recomputation of contributions based on a net operating loss carryback does not apply where the situation involves the allowance of a deduction based on a net operating loss carryover. This difference requires some variation in the application of the New York City allocation percentage for the year of deduction in order to arrive at the revised income base for limitation purposes applicable respectively to deductions for contributions and services of the partners.

(vi) Tax law applicable to computation. In determining the amount of any net operating loss carryback or carryover to any taxable year, the necessary computations involving any other taxable year shall be made under the law applicable to such other taxable year.

(vii) Methods of claiming net operating loss deduction.

(A) Where the amount of a net operating loss deduction for a taxable year can be ascertained at the time the unincorporated business tax return for the taxable year is due, the deduction shall be claimed in the return and there shall be filed with the return a concise statement setting forth the amount of the deduction and all material and pertinent facts relative thereto including a detailed schedule showing the computation of the amount deducted.

(B) Where a taxpayer is entitled to a net operating loss deduction for a taxable year and the amount thereof (or a portion of such amount) cannot be ascertained at the time the unincorporated business tax return for the taxable year is due, the return shall be filed without regard to the unascertainable amount of the deduction. If the amount of such deduction (or portion thereof) is subsequently established, the taxpayer may, within the applicable period of limitations, file a claim for refund based on such deductions.

(C) Notwithstanding any other provision of law (including § 11-527(a) and § 11-514 of the Administrative Code), a claim for refund under this subparagraph (vii) may be filed with the Commissioner of Finance at any time within three years from the time the return was due for the taxable year in which a net operating loss is sustained plus the period of any extension of time to file the tax return due for the loss year.

(viii) Periods of less than 12 months. A fractional part of a year which is a taxable year under 19 RCNY § 28-17 is a taxable year for all purposes of this subdivision (c) pertaining to net operating loss deductions.

(ix) In computing a net operating loss for a taxable year beginning in 1981, no accelerated cost recovery system deduction shall be allowed with respect to recovery property under § 168 of the Internal Revenue Code. In lieu of such deduction, a taxpayer shall be allowed for such recovery property the depreciation deduction allowable under § 167 of the Internal Revenue Code as such section was in full force and effect on December 31, 1980.

(3) Partnership net operating loss. In the case of a partnership, no net operating loss carryback or carryover to any taxable year shall be allowed unless one or more of the partners during each such taxable year for which a deduction is claimed (deduction year) were persons having a proportionate interest, or interests, during the loss year, amounting in the aggregate to at least 80 percent of all such interests in the unincorporated business gross income and deductions of the partnership which sustained the loss for which a carryback or carryover is claimed. Where a partnership qualifies for a net operating loss deduction under the preceding sentence the carryback or carryover allowable on account of such loss shall be limited to a percentage of the net operating loss deduction otherwise allowable. Such percentage shall be determined by dividing,

(i) the sum of the proportionate interests in the unincorporated business gross income and deductions of the partnership for the deduction year attributable to persons who were partners in both the year of the deduction and the loss year, by

(ii) 100. This percentage shall be applied against the lesser of

(A) the carryover or carryback allowable for the taxable year or

(B) the unincorporated business taxable income for the taxable year as computed in paragraph (2)(ii) of this subdivision (c). The amount by which the carryback or carryover otherwise allowable exceeds the amount allowable pursuant to the foregoing limitation shall not be a carryback or carryover to any other taxable year. The rules for determining the amount of a net operating loss, the deductibility thereof as a carryover and/or carryback and the related provisions of this subdivision (c) are applicable to net operating losses of partnerships to the extent they are not inconsistent with the provisions of this paragraph (3).

Example: Y Co. partnership operated by individuals A, B, C, E and G sustained a net operating loss of $90,000 in 1976. The first partnership return filed in the name of Y Co. to cover business activities of any of the individual partners was for the year 1974. The partners in Y Co. for the years 1974, 1975, 1976, and 1977 and their percentages of interest in the partnership income and deductions were as follows:

Name of Partner	1974	1975	1976	1977
*A	15%	X	15%	25%
*B	20%	35%	15%	20%
*C	15%	20%	15%	20%
*D	40%	35%	X	X
*E	10%	5%	35%	10%
*F	X	5%	X	25%
*G	X	X	20%	X
	100%	100%	100%	100%

* Denotes partner was member in firm in both "loss year" and "deduction year."

The pertinent items of income and deduction were as follows:

	1974	1975	1976	1977
Applicable income	$81,250	$56,250	($90,000)	$68,750
Partners' service allowance	$16,250	$11,250	-0-	$13,750
Net income	$65,000	$45,000	($90,000)	$55,000
Exemption	$5,000	$5,000	-0-	$5,000
Taxable income	$60,000	$40,000	($90,000)	$50,000

On the foregoing information, the unincorporated business net operating loss deductions would be follows: The 1976 loss of $90,000 is available as a carryback to 1974 because the interests of A, B, C and E and (who were partners in both the 1974 and 1976 entities) constituted 80 percent of the total ownership for 1976.

1974 Computation

New operating loss as computed for 1976 Limitation on loss for 1974-Sum of proportionate interests of A, B, C and E per partnership returns in the 1974 deduction year is 60 percent.	$90,000
Loss recognized for deduction purposes 60 percent of $81,250 (the lesser of the amount of carryback or taxable income for 1974 as computed under paragraph (2)(ii) of this subdivision (c) =	$48,750

1975 Computation

No carryback allowable because the partners for 1975 who also held interests in the 1976 entity owned only 65 percent of the total in 1976. In other words, the 80 percent common ownership test was not satisfied.

1977 Computation

This entity qualifies for a carryover because the interests of A, B, C and E in the 1976 (loss year) partnership amounted to 80 percent of the total interests for the 1977 deduction year. The calculation of the 1977 carryover will be:

Net operating loss per 1976 return		$90,000
Amount of loss absorbed by 1974 carryback	$81,250
Amount absorbed by 1975 computation	0
Total prior allowance		$81,250
Loss to be taken into account for 1977		$8,750
Limited to 75 percent, representing the sum of the interests of A, B, C and E in 1977 =		$6,562.50

(d) Nondeductible items. (Administrative Code § 11-507(3), (4), (5), (6) and (7)).

(1) Proprietor's services or use of capital.

(i) General.

(A) No deduction shall be allowed, except as provided in 19 RCNY § 28-08, for amounts paid or incurred to a proprietor or partner for services or for use of capital.

(B) In addition to all other amounts otherwise included, amounts paid or incurred to a proprietor or partner for services or for use of capital shall include any amount paid to any person if, and to the extent that, the payment was consideration for services or capital provided by a proprietor or partner.

Example a: A sole proprietor who does his own bookkeeping, billing and other administrative services may not deduct the cost of his time and skill in providing such services.

Example b: Salaries, commissions, consultant fees or professional fees paid to a general or limited partner for personal services rendered by the partner, either as an employee or an independent contractor of the unincorporated business, may not be deducted by the partnership.

Example c: Fixed annual payments made to retired partners under the terms of the partnership agreement, although deductible as "guaranteed payments" for Federal income tax purposes, may not be deducted.

Example d: Interest paid to a general or limited partner for monies contributed or loaned to the partnership may not be deducted by the partnership.

Example e: A sole proprietor may not claim a rental expense deduction for the use of real or personal property owned by him.

Example f: Partner A of Partnership ABC performs services for the partnership for which she is entitled to receive $500,000. As part of a divorce settlement, Partner A instructs the partnership to pay this amount directly to her ex-spouse. The $500,000 amount is considered to have been paid to Partner A for services and is not deductible.

(ii) Services.

(A) Amounts paid or incurred to an individual partner of the unincorporated business for services provided the unincorporated business by such an individual shall not be allowed as a deduction under paragraph (1)(i) above. The fact that the individual is providing such services not in his capacity as a partner within provisions of § 707 of the Federal Internal Revenue Code will not change the result.

(B) Amounts paid or incurred to a corporate partner for services provided the unincorporated business by the corporate partner's officers shall not be allowed as a deduction under paragraph (1)(i) above. For purposes of this paragraph, corporate officers include the chairman, president, vice-president, secretary, assistant secretary, treasurer, assistant treasurer, comptroller or any other individual charged with performing executive duties of the corporation. Payments made or incurred by the unincorporated business for services performed by an individual who is both an officer and an employee of the corporate partner may not be deducted by the unincorporated business.

(C) Amounts paid or incurred to a partnership which is a member partner in an unincorporated business for services provided the unincorporated business by a partner of the member partnership shall not be allowed as a deduction under paragraph (1)(i) above. The fact that the partner is providing such services not in his capacity as a partner within the provisions of § 707 of the Federal Internal Revenue Code will not change the result.

(D) For purpose of paragraph (1)(i) of this subdivision (d), payments to partners for services do not include amounts paid or incurred by an unincorporated business to a partner of such business which reasonably represent the value of services provided the unincorporated business by the employees of such partner, and which, if not for the provisions of paragraph (1)(i) of this subdivision (d), would constitute allowable business deductions under 19 RCNY § 28-06(a). The amounts paid or incurred for such employee services must be actually disbursed by the unincorporated business and included in that partner's gross income for Federal income tax purposes.

Example: Partnership AB, Corporation C and the individual Mr. D form a joint venture called the ABCD Construction Company to construct a building in Staten Island. Each member of the Company contributes an equal amount of capital to the venture. In addition, Mr. A, a partner in Partnership AB will serve as engineering supervisor for the construction. Ms. E, the president of Corporation C, will serve as work site supervisor. Mr. D, an attorney, will handle all the legal affairs of the Company. The office staff of partnership AB will provide all the office services needed by the Company. The in-house accounting staff of Corporation C will handle all of the Company's accounting matters. Payments made by the Company for the services of Mr. A, Ms. E and Mr. D are not allowed as deductions in the calculation of the Company's unincorporated business taxable in come. Payments made by the Company for the office and accounting services provided by the members of the joint venture will be allowed as deductions if such payments are included in the respective member's gross income for Federal income tax purposes.

(iii) Capital.

(A) Amounts paid or incurred by an unincorporated business to a partner or owner of such business for the use of monies, notes, bank deposits, shares of stock, bonds, and other securities given, loaned, advanced, pledged or otherwise made available by a partner or member of the unincorporated business to the business or on behalf of the business shall not be allowed as a deduction to the unincorporated business in the calculation of its unincorporated business taxable income.

(B) For purposes of paragraph (1)(i) of this subdivision (d) amounts paid or incurred to a partner for use of capital do not include amounts paid or incurred by an unincorporated business to a partner of such business which reasonably represent the value of the use of real or personal property (other than the property described in subparagraph (i)(A) above) of such partner by the unincorporated business and which, if not for the provisions of paragraph (1)(i) of this subdivision (d), would constitute allowable business deductions under 19 RCNY § 28-06(a). The amounts paid or incurred for such use of property must be actually disbursed by the unincorporated business and included in that partner's gross income for Federal income tax purposes. The ownership of the property must be clearly retained by the partner or member.

Example a: F and G form a partnership to engage in the construction business. F contributes $100,000 in cash to the partnership. G contributes machinery worth $100,000 to the partnership. No deduction shall be allowed to the partnership for payments made to G for use of the machinery nor to F for the use of the cash. G has not retained title to the machinery and, therefore, payments to G are not-deductible partnership distributions.

Example b: Partnership AB maintains an office in a building owned by B, a partner in AB. The partnership pays B a reasonable rental for the use of the office space. Such rental payments will be allowed as a deduction to the partnership.

Example c: X and Y form a partnership to engage in the construction business. Each contributes $100,000 in cash to the partnership. In addition, X agrees to loan the partnership $100,000. The partnership will pay X the prevailing market rate for this loan. Y agrees to lease to the partnership $100,000 worth of equipment. Under the lease, the partnership will pay Y the prevailing market rate for its leasing of the equipment. Although X will include in its gross income for Federal income tax purposes the interest income it receives on its loan to the partnership, the partnership may not deduct from its unincorporated business gross income the interest payments made to X. If Y includes in its gross income for Federal income tax purposes the rental income it receives on its leasing of the equipment to the partnership, the partnership may deduct from its unincorporated business gross income the rental payments made to Y for the equipment.

(iv) Partner. For purposes of this paragraph (1) and subdivision (a) of 19 RCNY § 28-08, a person will be considered a partner in an entity for any tax year for which that person meets the requirements of clause (A), (B), (C) or (D) below. Any person who does not meet the requirements of at least one of such clauses will not be considered to be a partner in the entity.

(A) The entity files a Federal Form 1065, Schedule K-1, with respect to that person.

(B) The person is a party to the governing document of the entity (e.g., the partnership agreement);

(D) or the person has an interest in the capital or assets of the entity.

(2) Income taxes. No deductions shall be allowed for any income taxes imposed by the City or State of New York or any other taxing jurisdiction.

(3) Certain interest, amortizable bond premiums and expense. No deductions shall be allowed for

(i) interest on indebtedness incurred or continued to purchase or carry obligations or securities, the interest on which is exempt from tax under Chapter 5 of Title 11 of the Administrative Code,

(ii) expenses paid or incurred for the production or collection of such tax-exempt income or for the management, conservation or maintenance of property held for the production of such tax exempt income, or

(iii) the amortizable bond premium on any bond, the interest income on which is so exempt. For rules regarding attribution and allocation of interest income and expenses see 19 RCNY § 28-06(h).

(4) Certain capital loss items. No deduction shall be allowed in respect of the excess of net long-term capital gain over net short-term capital loss, as these terms are defined in § 1222 of the Internal Revenue Code of 1954, but capital losses incurred in the unincorporated business shall be treated as ordinary losses and shall be allowed in full. No distinction shall be made for unincorporated business income tax purposes between long-term and short-term capital gains and losses incurred in the unincorporated business. All gains and losses, whether pertaining to capital assets or otherwise are reportable at 100%, except where otherwise provided in these regulations. In addition, no consideration shall be given to any net capital loss carryover permitted under any section or provision of the Internal Revenue Code for Federal income tax purposes.

(5) Certain special depreciation and research and development expenditures. Where an election has been made under 19 RCNY § 28-08(b), no deduction shall be allowed for expenditures with reference to the property to which such election relates, or for depreciation of such property except as permitted by said section.

(6) Notwithstanding any other provision of these rules to the contrary, for taxable years beginning on or after January 1, 1996, no deduction shall be allowed for any expenses directly or indirectly attributable to activities described in 19 RCNY § 28-02(g)(1)(v) if, and to the extent that, such activities are not deemed an unincorporated business carried on by the taxpayer pursuant to the provisions of 19 RCNY § 28-02(g).

(7) Notwithstanding any other provision of these rules to the contrary, for taxable years beginning on or after January 1, 1996, in the case of a taxpayer that is an unincorporated entity eligible for the partial self trading exemption described in 19 RCNY § 28-02(g)(4), no deduction shall be allowed for any losses or expenses directly or indirectly attributable to the sale or other disposition of an interest in another unincorporated entity if, and to the extent that, the activities of such other unincorporated entity are not deemed an unincorporated business carried on by the taxpayer pursuant to the provisions of 19 RCNY § 28-02(g).

(8) Notwithstanding any other provision of these rules to the contrary, for taxable years beginning on or after July 1, 1994, no deduction shall be allowed for interest, depreciation or any other expense directly or indirectly attributable to the holding, leasing or managing of real property if, and to the extent that, such holding, leasing or managing of real property is not deemed an unincorporated business carried on by the taxpayer pursuant to the provisions of 19 RCNY § 28-02(h)(2)(ii).

(9) Notwithstanding any other provision of these rules to the contrary, for taxable years beginning on or after January 1, 1996, no deduction shall be allowed for interest, depreciation or any other expense of an owner, lessee or fiduciary holding, leasing or managing real property that are directly or indirectly attributable to parking, garaging or motor vehicle storage services provided on a monthly or longer term basis to tenants at such real property if, and to the extent that, the provision of such services to such tenants is not deemed an unincorporated business carried on by the taxpayer pursuant to the provisions of 19 RCNY § 28-02(h)(2)(iii).

(e) [Reserved.]

(f) [Reserved.]

(g) [Reserved.]

(h) Deductions for certain other interest, amortizable bond premiums and expenses. (Administrative Code § 11-507(8)).

(1) A deduction shall be allowed (to the extent not allowable for federal income tax purposes) for:

(i) interest on indebtedness incurred or continued to purchase or carry obligations or securities, the interest on which is subject to tax under Chapter 5 of Title 11 of the Administrative Code, but exempt from federal income tax,

(ii) ordinary and necessary expenses paid or incurred for the production or collection of such taxable income or for the management, conservation or maintenance of property held for the production of such taxable income, and

(iii) the amortizable bond premium for the taxable year on any bond, the interest on which is subject to tax under Chapter 5 of Title 11 of the Administrative Code, but exempt from federal income tax.

(2) Expenses (including interest expense) otherwise allowable which are directly attributable to any class of income (either taxable or exempt for New York City purposes) shall be allocated to the class to which they relate, and if an item is attributable to both taxable and exempt income, a reasonable portion thereof, determined in the light of all facts and circumstances, shall be allocated to each class. This paragraph does not apply to any item for which a deduction for unincorporated business tax purposes is allowable by reason of the fact that such item is allowable for Federal income tax purposes.

(3) For taxable years beginning on or after July 1, 1994, notwithstanding the provisions of paragraph (2), deductions allowable for federal income tax purposes that are directly or indirectly attributable to investment income or investment capital as defined in Administrative Code § 11-501 subdivisions (h) and (i) must be subtracted from income, gains and losses from investment capital in determining investment income.

(i) Modification for certain expenditures for industrial waste treatment facilities and air pollution control facilities. (Administrative Code 11-507(9)).

(1) General.

(i) An unincorporated business may, under conditions prescribed by this subdivision (i), elect to subtract from its unincorporated business gross income any expenditures paid or incurred during the taxable year for the construction, reconstruction, erection or improvement of industrial waste treatment facilities. For purposes of this paragraph such facilities consist only of qualifying property as defined in paragraph (2) of this subdivision (i), which is used for the treatment, neutralization or stabilization of industrial waste (as the term "industrial waste" is defined in § 17-0105 of the State Environmental Conservation Law) from a point immediately preceding the point of such treatment, neutralization or stabilization, to the point of disposal, including the necessary pumping and transmitting facilities, but excluding such facilities installed for the primary purpose of salvaging materials which are usable in the manufacturing process or are marketable.

(ii) An unincorporated business may, under conditions prescribed by this subdivision (i), elect to subtract from its unincorporated business gross income any expenditures paid or incurred during the taxable year for the construction, reconstruction, erection or improvement of air pollution control facilities. For purposes of this subparagraph such facilities consist only of qualifying property as defined in paragraph (2) of this subdivision (i), which remove, reduce or render less noxious air contaminants emitted from an air contamination source (as the terms "air contaminant" and "air contamination source" are defined in § 19-0107 of the State Environmental Conservation Law) from a point immediately preceding the point of such removal, reduction, or rendering to the point of discharge of air, meeting emission standards as established by the State Department of Environmental Conservation, but excluding such facilities installed for the primary purpose of salvaging materials which are usable in the manufacturing process or are marketable and excluding those facilities which rely for their efficacy on dilution, dispersion or assimilation of air contaminants in the ambient air after emission.

(iii) An election made with respect to a specific item of property or expenditure is binding for all subsequent tax years unless the Commissioner of Finance consents to a change with respect thereto upon such terms and conditions as he may fix. An election with respect to qualifying property of a partnership must be made by the partnership. An election with respect to qualifying property of an estate or trust shall be made by the fiduciary.

(2) Qualifying property. The term "qualifying property" means tangible property which

(i) is depreciable pursuant to § 167 of the Internal Revenue Code, and

(ii) has a situs in New York City, and

(iii) is used in the taxpayer's trade or business, and

(iv) is property, the construction, erection, reconstruction or improvement of which was initiated on or after January 1, 1966. In the case of industrial waste treatment facilities the deduction is allowed only for expenditures paid or incurred prior to January 1, 1972.

(3) Conditions for allowance. The optional deduction permitted by this subdivision (i) shall be allowed only

(i) on the condition that the facilities have been certified by the State Commissioner of Environmental Conservation or his designated representative, pursuant to §§ 17-0707 or 19-0309 of the State Environmental Conservation Law, as complying with the provisions of the State Public Health Law, the State Sanitary Code, the State Environmental Conservation Law and regulations, permits or orders promulgated pursuant thereto, and

(ii) on condition that for the taxable year and all succeeding taxable years, no deduction for such expenditures or for depreciation or amortization of the same property allowed for Federal income tax purposes shall be allowed under Chapter 5 of Title 11 of the Administrative Code, except to the extent that the basis of the property may be attributable to factors other than such expenditures, or in case a deduction is allowable pursuant to this subdivision (i) for only a part of such expenditures, on condition that any deduction allowed for Federal income tax purposes for such expenditures or for depreciation or amortization of the same property be proportionately reduced in computing unincorporated business deductions for the taxable year and all succeeding taxable years, and

(iii) on condition that no election under 19 RCNY § 28-08(b) (pertaining to special depreciation and research and development expenditures) has been exercised in respect of the property for which the deduction under this subdivision (i) is claimed.

(4) Reporting change in use of facilities. If expenditures in respect of an industrial waste treatment facility or an air pollution facility have been allowed as a deduction as provided in this subdivision (i) and if within 10 years from the end of the taxable year in which such deduction was allowed such property or any part thereof is used for the primary purpose of salvaging materials which are usable in the manufacturing process or are marketable, the taxpayer shall report such change of use in its return for the first taxable year during which it occurs, and the Commissioner of Finance may compute the tax for the year or years for which such deduction was allowed (and for any carryback or carryover year) and may assess any additional tax resulting from such recomputation within the time fixed by § 11-523(c)(8) of the Administrative Code.

(5) Reporting failure to obtain a permanent certificate of compliance. If a deduction is allowed as provided in this subdivision (i) for expenditures paid or incurred during any taxable year on the basis of a temporary certificate of compliance issued pursuant to the State Environmental Conservation Law, and if the taxpayer fails to obtain a permanent certificate of compliance upon completion of the facilities with respect to which such temporary certificate was issued, the taxpayer shall report such failure in its return for the taxable year during which such facilities are completed, and the Commissioner of Finance may recompute the tax for the year or years for which such deduction was allowed (and for any carryback or carryover year), and may assess any additional tax resulting from such recomputation within the time fixed by § 11-523(c)(8) of the Administrative Code.

(6) Trade or business. For purposes of this subdivision (i), qualifying property is used in the trade or business only when it is utilized in the actual course of the regular business operations of the taxpayer. The holding of property for investment purposes does not constitute the use of property in a trade or business within the meaning of this subdivision (i).

(7) Limitation on amount of deduction. The deduction allowed pursuant to this subdivision in respect of an item of property shall not exceed the cost or other basis of the property for Federal income tax purposes. When property subject to an election under this subdivision (i) is to be used as an industrial waste treatment facility only in part, the allowable deduction shall be limited to a proportionate part of the expenditures relating thereto.

(8) Sale or other disposition. In any taxable year when property subject to an election under this subdivision (i) is sold or otherwise disposed of, any modification made pursuant to this subdivision (i) with respect to such property shall be disregarded in computing gain or loss and the gain or loss on the sale or other disposition shall be the full gain or loss reportable by the business for Federal income tax purposes for such taxable year without regard to any provisions of the Internal Revenue Code characterizing the amount as ordinary income or loss or as a capital gain or loss.

(9) Rule for making election. An election to claim the optional deduction under this subdivision (i) shall be made by filing with the unincorporated business income tax return in which the deduction is claimed a statement evidencing such election and containing

(i) complete details of the qualifying property involved,

(ii) the computation of the deduction claimed, and

(iii) the related Federal deductions allowed in respect of such property. The return should also be accompanied by the State Department of Environmental Conservation certificate of compliance required by paragraph (3) of this subdivision (i).

(j) Modification of depletion allowance in the case of mines, oil and gas wells and other natural deposits. (Administrative Code § 11-507(10)).

(1) In the cases of mines, oil and gas wells and other natural deposits, no deduction of any allowance for percentage depletion pursuant to § 613 or § 613A of the Internal Revenue Code of 1954, as amended, shall be allowed for taxable years beginning on or after January 1, 1972. However, an allowance for depletion with respect to such property shall be deductible in the amount which would be allowable under § 611 of such Code if such deduction were computed without reference to § 613 or § 613A of such Code.

(2) With respect to the computation of depletion pursuant to this section the basis for such computation for taxable years beginning in 1972 shall be the Federal basis. For subsequent taxable years, the basis of such computation shall be reduced only by the deduction for the allowance for depletion deductible pursuant to this section.

(3) In any taxable year when any such property is sold or otherwise disposed of, with respect to which a deduction has been allowed pursuant to this subdivision (i), the gain or loss thereon entering into the computation of Federal taxable income shall be disregarded in computing unincorporated business taxable income. There shall be added to or subtracted from Federal gross income, so modified, the gain or loss upon such sale or other disposition. In computing such gain or loss, the basis of the property sold or disposed of shall be adjusted to reflect the deduction allowed with respect to such property pursuant to this subdivision (i).

(k) Deduction for certain wages and salaries. (Administrative Code § 11-507(11)). For all taxable years beginning after December 31, 1976, a deduction shall be allowed for that portion of wages and salaries not allowed as a business expense deduction for Federal income tax purposes under § 280C of the Internal Revenue Code (relating to Federal jobs credit).

(l) Safe harbor deductions.

(1) Allowed. (Administrative Code, § 11-507(12)). For taxable years beginning after December 31, 1981, a deduction shall be allowed for any amount which the taxpayer could have excluded from unincorporated business gross income had it not made the election provided for in § 168(f)(8) of the Internal Revenue Code as it was in effect for safe harbor lease agreements entered into prior to January 1, 1984, except with respect to property which is a qualified mass commuting vehicle described in § 168(f)(8)(D) of the Internal Revenue Code as it was then in effect.

(2) Disallowed. (Administrative Code § 11-507(13)). For taxable years beginning after December 31, 1981, no deduction shall be allowed for any amount deductible for Federal income tax purposes solely as a result of an election made pursuant to § 168(f)(8) of the Internal Revenue Code as it was in effect for safe harbor lease agreement entered into prior to January 1, 1984, except with respect to property which is a qualified mass commuting vehicle described in § 168(f)(8)(D) of the Internal Revenue Code.

(m) Accelerated cost recovery system deductions. (Administrative Code § 11-507(14)). For taxable years beginning after December 31, 1981, except with respect to recovery property subject to the provisions of § 280-F of the Internal Revenue Code, and recovery property placed in service in New York in taxable years beginning after December 31, 1984, and before 1994, no deduction shall be allowed for the amount allowable as the accelerated cost recovery system deduction pursuant to § 168 of the Internal Revenue Code. Note that for years prior to 1994, the disallowance of accelerated cost recovery deductions for property placed in service outside New York has been held to be unconstitutional.

(n) Recovery property depreciation. (Administrative Code § 11-507(15)). For taxable years beginning after December 31, 1981, except with respect to recovery property subject to the provisions of § 280-F of the Internal Revenue Code, and recovery property placed in service in New York in taxable years beginning after December 31, 1984, and before 1994, and provided a deduction has not been disallowed by 19 RCNY § 28-06(1)(2), a taxpayer shall be allowed with respect to recovery property the amount allowable as the depreciation deduction pursuant to § 167 of the Internal Revenue Code as such section would have applied to property placed in service on December 31, 1980. Note that for years prior to 1994, the disallowance of accelerated cost recovery deductions for property placed in service outside New York has been held to be unconstitutional.

§ 28-07 Allocation to New York City.

(a) General. (Administrative Code § 11-508(a)). If an unincorporated business is carried on both within and without New York City, for taxable years beginning before July 1, 1994 there shall be allocated to the City a fair and equitable portion of the excess of its unincorporated business gross income as determined under 19 RCNY § 28-05 over its unincorporated business deductions subject to allocation as determined under 19 RCNY § 28-06, and, for taxable years beginning after June 30, 1994, there shall be allocated to the City a fair and equitable portion of the taxpayer's business income. If, for taxable years beginning before July 1, 1996, the unincorporated business has no regular place of business outside the City, all of such amounts shall be allocated to the City. The deductions under 19 RCNY § 28-08 and the unincorporated business exemptions allowable under 19 RCNY § 28-09 are not subject to allocation.

(b) Regular place of business.

(1) A regular place of business is any bona fide office, factory, warehouse or other place which is systematically and regularly used by the unincorporated business entity in carrying on its business. Where, as a regular course of business, property of an unincorporated business is stored by it in a public warehouse until it is shipped to customers, such warehouse is considered a regular place of business, and where, as a regular course of business, raw material or partially finished goods are delivered to an independent contractor to be converted, finished or improved, and the finished goods remain in the possession of the independent contractor until shipped to customers, the plant of such independent contractor is considered a regular place of business of the unincorporated business entity. However, a taxpayer does not have a regular place of business outside the City solely by consigning goods to an independent factor outside the City for sale at the consignee's discretion.

(2) If, for taxable years beginning before July 1, 1996, the unincorporated business has no regular place of business outside New York City, all of the excess of its unincorporated business gross income over its allocable unincorporated business deductions shall be allocated to the City. An unincorporated business does not have a regular place of business outside the City merely because sales may be made to, or services performed for or on behalf of, persons or corporations located without the City, or because such sales or services are made by or performed by an independent factor, agent or contractor having a regular place of business without New York City.

Example 1: An accountant whose only office is in New York City cannot allocate his income for unincorporated business tax purposes because some of his services are performed at his clients' places of business outside the City. Similarly, the accountant's residence outside the City will not be considered a regular place of business for allocation purposes, even though the accountant has for his own convenience set aside some space in his home to maintain business records, prepare reports or perform incidental business activities.

Example 2: A broker, all of whose income is derived from commissions on orders executed on the floor of the New York Stock Exchange, may not allocate any part of that income outside the City, despite the fact that he maintains his business records and performs other incidental business activities at his home outside the City.

Example 3: A freelance journalist whose only office is in the City, may not allocate his income for unincorporated business tax purposes, despite the fact that part of his working time is spent traveling to gather material for his articles.

(3) The foregoing provisions of this subdivision (b) are not exclusive in determining whether an unincorporated business has a regular place of business outside New York City or in determining whether the business is carried on both within and without New York City. Where any question on these points exists, consideration should be given to all of the facts pertaining to the conduct and operation of the business, including

(i) the nature of the business,

(ii) the type and location of each place of business used in the activity,

(iii) the nature of the activity engaged in at each place of business, and

(iv) the regularity, continuity and permanency of the activity at each location.

(1) Except as otherwise provided in paragraph (3) of subdivision (d) of this 19 RCNY § 28-07, the portion of the excess of the unincorporated business gross income over the deductions allocable to New York City may be determined from the books of the business if the methods used in keeping such books are approved by the Commissioner of Finance as fairly and equitably reflecting the income from the City.

(2) The fact that the taxpayer has failed to file a return or filed an incorrect return, or that on such return items of income were understated, or items of deduction were overstated, or items of income were not properly allocated, does not preclude the use of such allocation method.

(3) Except as otherwise provided in paragraph (3) of subdivision (d) of this 19 RCNY § 28-07, where upon audit of the books and records of the taxpayer, the sources of the unincorporated business gross income within and without New York City, and the sources of the deductions, are ascertainable from such books and records, the proper tax due, or determined to be due, shall be arrived at by allocating items of income and deduction to the source of such items within and without the City. Thus, for example, for taxable years beginning before July 1, 1996, income from sales of tangible personal property is allocable to the office from which the sales arose (see: 19 RCNY § 28-07(d)). Items of expense (except for items of expense under 19 RCNY § 28-08 for which no allocation is allowed) will, like items of income, also be allocated in accordance with the place of business to which such expenses are attributable. Thus, payroll and office expenses are attributable to the office to which the employee was assigned or where the expenses were incurred. Certain indirect items, however, which are not attributable to any one office or place of business will be apportioned among the various offices. For example, legal and auditing expenses, which are attributable to the unincorporated business entity in its entirety, will be apportioned among the various places of business in accordance with the gross income allocable to each such place of business.

(d) Allocation by formula. (Administrative Code § 11-508(c)).

(1) Computation. If the Commissioner of Finance determines that the methods used in keeping the books of the unincorporated business do not fairly and equitably reflect the taxpayer's income from the City for taxable years beginning before July 1, 1994, the portion of the excess of the unincorporated business gross income (computed under 19 RCNY § 28-05) over the unincorporated business deductions (allowable under 19 RCNY § 28-06) and for taxable years beginning after June 30, 1994, the portion of the taxpayer's business income defined in Administrative Code § 11-501(1)(k), allocable to the City is determined by multiplying such amount by a business allocation percentage determined by adding the following percentages and dividing the total by the number of percentages, unless the taxpayer elects to use a double-weighted gross income percentage as provided in paragraph (2) of this subdivision (d), in which event the taxpayer's business allocation percentage is determined as provided in paragraph (2) of this subdivision (d):

(i) Property percentage. The percentage computed by dividing

(A) the average of the values, at the beginning and end of the taxable year, of real and tangible personal property connected with the unincorporated business and located within New York City, by

(B) the average of the values, at the beginning and end of the taxable year, of real and tangible personal property connected with the unincorporated business and located both within and without New York City. For this purpose, real property shall include real property rented to the unincorporated business (See: 19 RCNY § 28-07(f)).

(ii) Payroll percentage. The percentage computed by dividing

(A) the total wages, salaries and other personal service compensation paid or incurred during the taxable year to employees in connection with the unincorporated business carried on within New York City, by

(B) the total of all wages, salaries and other personal service compensation paid or incurred during the taxable year to employees in connection with the unincorporated business carried on both within and without New York City.

(C) For purposes of this subparagraph (ii), employees within New York City include all employees regularly connected with or working out of an office or place of business of the taxpayer within New York City, irrespective of where the services of such employees were performed. However, if the taxpayer establishes to the satisfaction of the Commissioner of Finance that, because of the fact that a substantial part of its payroll was paid to employees attached to a New York City office who performed a substantial part of their services outside New York City, the computation of the payroll factor according to the general rule stated above would not produce an equitable result, the Commissioner of Finance may, in his or her discretion, permit the payroll factor to be computed on the basis of the amount of compensation paid for services actually rendered within and without the City. Moreover, wherever it appears that, because a substantial part of the taxpayer's payroll was paid to employees attached to offices outside the City who performed a substantial part of their services within the City, the computation of the payroll factor according to the general rule would not properly reflect the amount of the taxpayer's business done within New York City by its employees, the Commissioner of Finance may require the payroll factor to be computed on the basis of the amount of compensation paid for services performed within and without the City. In any case, where the payroll factor is permitted or required to be computed on the basis of the amount of compensation paid for services performed within and without the City, the amount treated as compensation for services performed within the City will be deemed to be: (a) in the case of an employee whose compensation depended directly on the volume of business secured by him or her, such as a salesman on a commission basis, the amount received by him by her for the business attributable to his or her efforts within New York City; (b) in the case of an employee whose compensation depended on other results achieved, the proportion of the total compensation which the value of his or her services within New York City bears to the value of all his or her services; and (c) in the case of an employee compensated on a time basis, the proportion of the total amount received by him or her which the working time employed within New York City bears to the total working time.

(iii) Gross income percentage.

(A) The percentage computed by dividing

(1) the gross sales or charges for services performed by or through an agency located within New York City, by

(2) the total of all gross sales or charges for services performed within and without New York City. The sales or charges to be allocated to New York City shall include all sales negotiated or consummated, and charges for services performed, by an employee, agent, agency or independent contractor chiefly situated at, connected by contract or otherwise with, or sent out from, offices of the unincorporated business, or other agencies, situated within New York City. For taxable years beginning on or after July 1, 1996, the foregoing sentence shall not apply to the allocation of gross income from sales of tangible personal property. For taxable years beginning on or after July 1, 1996, sales of tangible personal property to be allocated to New York City shall include only sales where shipment is made to points within New York City.

(B) For taxable years beginning on or after January 1, 1996, in the case of a taxpayer engaged in publishing newspapers or periodicals, the sales or charges for services arising from sales of subscriptions to, and advertising contained in, such newspapers and periodicals will be allocated to New York City to the extent such newspapers or periodicals are delivered to points within the City.

(C) For taxable years beginning on or after January 1, 1996, in the case of a taxpayer engaged in broadcasting radio or television programs, whether through the public airwaves, by cable, direct or indirect satellite transmission or other means of transmission, the sales and charges for services arising from the sale of subscriptions to such programs or from the broadcasting of such programs and of commercial messages in connection therewith, will be allocated to New York City according to the ratio of the number of listeners or viewers within the City to the total number of such listeners or viewers within and outside the City.

(2) Double-weighted gross income percentage for manufacturing businesses.

(i) For taxable years beginning on or after July 1, 1996, a taxpayer that is a manufacturing business as defined below may elect to determine its business allocation percentage by adding together the percentages determined under subparagraphs (i), (ii), and (iii) of paragraph (1) of this subdivision (d) and adding to that sum an additional percentage equal to the percentage determined in subparagraph (iii) of paragraph (1) and dividing the total by the number of percentages. See paragraph (5) of this subdivision (d) for the determination of the business allocation percentage where one or more factors is missing.

(ii) Manufacturing business. For purposes of this paragraph, a "manufacturing business" is defined as an unincorporated business engaged primarily in the manufacturing and sale of tangible personal property.

(A) Manufacturing.

(1) Manufacturing means the process, including assembly, of working raw materials into wares suitable for use or that, by the use of machinery, tools, appliances or other similar equipment, gives new shapes, new qualities or new combinations to matter that has already been subjected to some artificial process.

(2) To qualify as manufacturing, a process, including assembly, must result in a significant change in the raw materials or component parts such that the end product of the process is substantially different in nature or form from the raw materials or component parts.

(3) Manufacturing includes finishing partially finished goods only if the partially finished goods are not usable for their intended purpose in their unfinished state and does not include the mere packaging or labeling of goods.

(4) Manufacturing includes printing in circumstances under which the taxpayer receives any combination of graphic or textual content from a customer, the taxpayer produces a tangible representation of that content, whether in print or other tangible form, through a series of processes using raw materials owned by the taxpayer and the taxpayer delivers that tangible product to the customer or one or more designees of the customer. Manufacturing also includes printing in circumstances under which the taxpayer uses any combination of graphic or textual content prepared by its own employees to produce a tangible representation of the content in print or other tangible form using raw materials owned by the taxpayer and the taxpayer delivers that tangible product to its customers or subscribers.

(5) Manufacturing does not include furnishing information services subject to the tax imposed by § 1105(c)(1) of the tax law regardless of whether the information is provided in tangible form.

(6) Manufacturing includes the design and development of pre-written computer software as defined in § 1101(b)(14) of the tax law to the extent that such pre-written computer software constitutes tangible personal property under § 1101(b)(6) of the tax law.

(7) A taxpayer that performs services for a customer, including manufacturing services, on property or raw materials belonging to the customer will not be considered a manufacturing business.

(8) A business that engages in pre-production activities, but not in the creation of the final product, will be considered to be engaged in manufacturing only if the pre-production activities are extensive and constitute an integral part of the manufacturing process.

(B) To qualify as a manufacturing business, a taxpayer must be engaged in both the manufacture of tangible personal property and the sale of such property that it manufactures. Therefore, a taxpayer that manufactures tangible personal property but does not engage in the sale of such tangible personal property will not be considered a manufacturing business. Similarly, a taxpayer that sells tangible personal property but does not engage in the manufacture of tangible personal property will not be considered a manufacturing business. For purposes of this paragraph, the lease of tangible personal property will be considered a sale of tangible personal property.

(C) For purposes of this paragraph, an unincorporated business engaged in the manufacture and sale of tangible personal property shall be considered to be primarily engaged in manufacturing if more than 50 percent of its gross receipts for the taxable year are derived from the sale of tangible personal property manufactured by the taxpayer. If an unincorporated entity is engaged in more than one unincorporated business, all such businesses shall be treated as a single business for purposes of determining whether more than 50 percent of the gross receipts for the taxable year of that business are from manufacturing. See 19 RCNY § 28-02(a)(4)(ii).

(1) For purposes of this subparagraph (ii)(C), gross receipts include only amounts treated as gross income for purposes of subparagraph (iii) of paragraph (1) of this subdivision earned in the ordinary course of the taxpayer's trade or business.

(2) For purposes of this subparagraph (ii)(C), gross receipts derived from the sale of tangible personal property shall mean the sale price of such tangible personal property valued in money, whether received in money or otherwise, without any deduction for expenses or early payment discounts, and including;

(i) any amount for which credit is allowed to the purchaser,

(ii) any charges to the purchaser for shipping or delivery regardless of whether such charges are separately stated in the written contract, if any, or on the bill rendered to such purchaser and regardless of whether such shipping or delivery is provided by the taxpayer or a third party, and

(iii) any charges for services provided by the taxpayer relating to the sale of the tangible personal property provided that such services are subordinate to the sale of the tangible property and provided that such charges are not separately stated in a written contract or bill.

(iii) An election to use the double-weighted gross income percentage must be made on a timely-filed original return (including extensions) for the taxable year. A separate election must be made for each taxable year. The election is irrevocable and cannot be made on an amended return except with the permission of the Commissioner of Finance upon such terms and as the Commissioner may specify where the Commissioner concludes that such permission should be granted in the interests of fairness and equity due to changes in circumstances resulting from an audit adjustment. If a taxpayer fails to make an election to use the double-weighted gross income percentage, its business allocation percentage, where applicable, must be determined under the provisions of paragraph (1) of this subdivision (d).

(iv) The provisions of this paragraph are illustrated by the following examples:

Example 1: Partnership X is engaged in printing pamphlets, brochures, catalogues and business reports. Under an agreement with customer A, X receives graphic material and text from customer A that X uses to produce print plates, which are used to print multiple copies of a catalogue. X uses its own raw materials, including paper and ink, and its own equipment to produce the plates and the catalogue. X employees advise A with regard to the layout and typeface of the catalogue. In the course of performing the contract, X delivers a master print to A for its review and final approval. In addition, under the agreement with A, X prepares an electronic version of the catalogue for incorporation into a Web page maintained by A. X mails the print version of the catalogue to A's customers and delivers the electronic version of the catalogue to A on a disk. X receives $500X under the agreement with no breakdown of the price among the various services and products provided. Under an agreement with customer B, Partnership X receives the text of an annual financial statement required to be filed electronically with the SEC by B. B also requires print copies of the statement. X prints the report in hard copy, using its own ink and equipment but using paper belonging to the customer, delivers the hard copies to B and transmits the statement electronically to the SEC. X receives $200X under the agreement with B with no breakdown of the price among the various services and products provided. X's activities under the agreement with A are considered the manufacture and sale of tangible personal property. (Note: if X delivers the electronic version of the catalogue to A by means of the Internet the result would not change. The $500X received by X under the contract with A would be considered receipts from the manufacture and sale of tangible personal property provided that the provision of the electronic version is subordinate to the sale of the print version of the catalogue.) No part of X's activities under the agreement with B are considered the manufacture and sale of tangible personal property because under the agreement with B, X is merely performing services on property owned by B. (Note: if X used its own paper for the print copies, X's activities under the agreement with B would be considered the manufacture and sale of tangible personal property.) Of X's total business receipts of $700X, $500X are from the manufacture and sale of tangible personal property. Therefore, X is considered to be a manufacturing business.

Example 2: Partnership X is engaged in compiling, printing and distributing a daily newspaper using material received from news services, its own reporters and editorial staff, its own paper and ink and printing equipment and its own technicians. Partnership X is considered engaged in manufacturing. Partnership X receives $100X in receipts from the sale of newspapers and $400X in receipts from the sale of advertising. Because less than 50 percent of partnership X's receipts are from the manufacture and sale of tangible personal property, X is not considered a manufacturing business.

Example 3: Partnership A is engaged in film processing whereby it receives undeveloped film from its customers and, using its own chemicals, paper and equipment, develops the film and makes print or slide copies for customers. Partnership A is engaged in manufacturing. If instead of using its own materials and equipment, Partnership A contracts with Corporation B to develop the film and make prints, Partnership A is not engaged in manufacturing.

Example 4: Partnership Y contracts with A, an unrelated entity, to produce a line of art supplies, crayons, paper, markers, glue, etc. from raw materials purchased by Y. The finished goods are delivered to Y. Y packages two or more of those products together with paper purchased from another unrelated supplier into kits that Y sells to toy and art supply retailers. A's receipts under the contract with Y are not receipts from the manufacture and sale of tangible personal property because Y provides and owns the raw materials. Y's receipts from the sale of the kits are not receipts from the manufacture and sale of tangible personal property because Y does not manufacture the component parts itself and the packaged kits do not differ substantially in nature or form from the various component parts.

Example 5: Partnership W washes, cuts, cooks, freezes and packages vegetables for wholesale and retail sale to customers. Partnership W is considered to be engaged in manufacturing.

Example 6: Partnership M collects, sorts, shreds and compresses scrap metal into blocks that are convenient for handling, storage and shipping and sells the scrap metal blocks to companies that manufacture finished goods from them. Partnership M is considered to be engaged in manufacturing because the scrap metal sold differs substantially in nature from the components collected by M, which were not suitable for convenient handling, storage, shipping and sale in their original form.

Example 7: Partnership C purchases fabric, cuts and sews clothing for sale to a wholesale distributor, Partnership E. Partnership C is engaged in the manufacture and sale of tangible personal property. Partnership E packages and labels the clothing for resale to its retail outlet customers. Partnership E is not considered to be engaged in manufacturing. If Partnership C cuts and sews fabric provided by Partnership D where Partnership D retains title to the fabric and D sells the finished clothing, neither Partnership C nor Partnership D would be considered to be engaged in the manufacture and sale of tangible personal property. Partnership C is providing manufacturing services and Partnership D is not conducting the manufacturing activities itself.

Example 8: Partnership T purchases finished articles of clothing and using its own equipment and raw materials, imprints or embroiders its logo on each article. Partnership T sells the clothing under its own label. Partnership T is not considered engaged in manufacturing. While the presence of the logo on the clothing may increase its marketability, it does not substantially alter the nature or form of the clothing itself and the clothing is useable as such without the logo.

Example 9: Partnership P purchases fabric from a mill and, using its own equipment, dyes, and other materials, puts a pattern on the fabric through a variety of processes and sells the fabric to clothing manufacturers. Partnership P is considered to be engaged in the manufacture and sale of tangible personal property because it substantially alters the nature of the material.

Example 10: Partnership CS is exclusively engaged in the bottling and sale of soft drinks. CS maintains a factory where it mixes syrup then combines the syrup with carbonated water, places the mixture in bottles, labels the bottles and places them in cartons, then sells the cartons to retailers and wholesalers. CS is a manufacturing business.

Example 11: Partnership X is engaged in the design, development and sale of computer software. X's employees use computers, programming languages and a library of "pre-written" functions and routines to develop software for use by financial institutions to manage accounts. X sells the same software to several customers although the software is enhanced or modified to meet the specific needs of each customer. Some customers receive the software on a disk, others receive it electronically over the Internet. More than 50% of X's gross receipts derive from both types of sales. The software is taxable as "pre-written computer software" under § 1101(b)(14) of the tax law. Sales of the software are treated as sales of tangible personal property for purposes of § 1101 of the tax law and, therefore, for purposes of subparagraph (ii)(C) of this paragraph. X is a manufacturing business.

Example 12: Partnership X publishes and sells a magazine. X maintains a large staff of reporters, writers, editors, photographers, photo-editors, and graphic artists. This staff produces and assembles stories and photographs for the magazine using a variety of equipment including computers, photographic equipment, printers, scanners and file servers. Each week the staff culls through and edits a large number of stories and photographs and selects a number for inclusion in the magazine. The staff explores various layouts for the components of the magazine. As part of the process the layouts are examined in print form. The staff then finally produces a completed prototype of the magazine in electronic form. The prototype is delivered electronically to an unrelated printer who prints the magazine following Partnership X's detailed specifications, using raw materials including paper and ink supplied by Partnership X. The printer receives a fee for printing the magazine. The magazine is distributed by the printer to X's customers.

Partnership X's extensive preprinting activities leading to the production of the final product are considered an integral part of the manufacturing process. As a result X is considered to be engaged in the manufacture and sale of tangible personal property. If more than 50% of Partnership X's receipts are from the subscription and newsstand sales of the magazine, X will be considered a manufacturing business.

Example (14): Partnership X produces and sells apparel. X maintains a large staff including designers, graphic artists, pattern makers, computer operators, cutters, sewers and drapers. X's staff develops original ideas for garments, produces illustrations with the aid of computer systems, and selects certain of these ideas to be converted into finished samples. The creation of the samples involves selection of fabrics, cutting, sewing, testing of fabric quality and color and fitting the prototype garments. X then uses the computer systems to make style patterns, which it transfers electronically along with detailed instructions to third-party contractors to whom it also specifies or furnishes the fabrics and other raw materials used to produce the garments. The contractors, whose operations are overseen by X's employees, assemble the garments using the patterns and materials supplied by X. X then sells the garments to its wholesale customers. X's extensive pre-production activities are considered an integral part of the manufacturing process. As a result X is considered to be engaged in the manufacture and sale of tangible personal property. If more than 50% of Partnership X's receipts are from the sale of garments produced as described above, X will be considered a manufacturing business.

(3) Formula allocation required. For taxable years beginning on or after January 1, 1996, in the case of a taxpayer that is substantially engaged in the business of publishing newspapers or periodicals, substantially engaged in the business of broadcasting radio or television programs, or substantially engaged in any combination of such businesses and such taxpayer is also engaged in any other unincorporated business, 19 RCNY § 28-07(c) shall not apply and the portion of the taxpayer's unincorporated business taxable income from all such businesses shall be determined using the allocation formula provided in this subdivision (d) unless the Commissioner of Finance determines that the income of the taxpayer from all unincorporated businesses carried on in whole or in part in the City is not fairly and equitably reflected, in which event the provisions of subdivision (e) shall apply. For purposes of this paragraph (3), a taxpayer shall be deemed to be substantially engaged in the business of publishing newspapers or periodicals or broadcasting radio or television programs, or any combination of such businesses, if more than ten percent of the taxpayer's gross receipts from all businesses are attributable to publishing newspapers or periodicals or broadcasting radio or television programs.

(4) Examples.

Example (i): Individual A is a manufacturer whose plant is located in Connecticut. The bulk of his sales are made in New York City through a rented sales office in New York City from which traveling salesmen cover the states of New York, New Jersey and Pennsylvania. For the purpose of expediting deliveries to customers, a warehouse is owned and maintained in New York City. In addition, independent consultants are employed in furtherance of the manufacturer's business. The following illustrates the application of the "allocation formula" for 1995: For the allocation of sales of tangible personal property for taxable years beginning on or after July 1, 1996, see 19 RCNY § 28-07(d)(1)(iii)(A)(2) and (d)(2).

A Description of items used as factors	B Total factors within and without New York City	C New York City Factors	D Percent Column C is of Column B
1. Value of the real and tangible personal property of the business (average of values at beginning and end of year)	$500,000	$35,000	7%
2. Wages, salaries and other personal service compensation paid during the year	$400,000	$140,000	35%
3. Gross sales or charges for services during the year	$1,200,000	$972,000	81%
4. Total of percentages in Column D			123%
5. Average of percentages (divide total percentages, item 4, by 3)			41%

The figures in Column B are the totals for the business both within and without New York City. The figures in Column C represent the following:

(A) Item 1. The average value of the real and tangible personal property within New York City. The real property entered here includes the owned warehouse and the value of the rented sales office in New York City. Tangible personal property consists of machinery, tools, implements and other equipment and goods, wares and merchandise.

(B) Item 2. Compensation paid to employees for services in connection with business carried on within New York City consists of the compensation of the New York City sales office and warehouse force and the salesmen traveling out of the New York City sales office. Fees paid for work done for the business by independent contractors located within and without the City cannot be included in the payroll factor. Only wages and other compensation paid to employees may be included.

(C) Item 3. Gross sales or charges for services performed by or through an agency located within New York City. The sales or charges to be allocated to New York City include all sales negotiated or consummated and charges for services performed by an employee, agent, agency or independent contractor chiefly situated at, connected with by contract or otherwise, or sent out from offices of the unincorporated business or other agencies situated within the City. In this example, all sales made by the New York City sales office and the salesmen sent from that office, no matter in what State they may make the sales, are allocated to New York City.

Example (ii): The facts are the same as in example (i) except that the figures represent the results for 1997 and Item 3 represents solely receipts from sales of tangible personal property manufactured by the taxpayer and the amount of such receipts for sales shipped to points within the City (item 3 column C) is $600,000. The figure in column D of item 3 is therefore 50 percent. If the taxpayer elects to use the double-weighted gross income percentage as provided in paragraph (2) of this subdivision (d), items 4 and 5 would be determined as follows:

4. Total of percentages in Column D adding Item 3 twice	142%
5. Average of percentages (divide total percentages, Item 4, by 4)	35.5%

Example (iii): Partnership A is substantially engaged in providing cable television service both inside and outside the City. All of Partnership A's gross receipts are attributable to its cable television service business. Therefore Partnership A is required to use formula allocation unless the Commissioner determines that the formula in paragraph (3) of this subdivision does not fairly and equitably reflect the business income in the City. Partnership A receives income from sales of advertising on its programs as well as income from subscriptions. Subscription prices are not uniform throughout Partnership A's service area; some subscribers pay a higher price than others do. Partnership A can identify the source of the subscription receipts directly by the location of the subscriber. In this case, the Commissioner may determine that the use of audience data for allocating subscription receipts does not fairly and equitably reflect Partnership A's subscription receipts from the City and, under subdivision (e) of this section, may require subscription receipts to be sourced according to subscriber location while advertising receipts must be sourced according to audience data.

(5) Missing factors.

(i) The allocation percentage is computed by adding together the percentages of the taxpayer's real and tangible personal property, payroll and gross income within New York City during the period covered by the return, and dividing the total of such percentages by three unless the taxpayer is a manufacturing business and elects to use a double weighted gross income percentage for a taxable year beginning on or after July 1, 1996, in which event the total of such percentages is divided by four. However, if one of the factors, for example, the payroll factor is missing, the other percentages are added and the sum is divided by the number of percentages, and if two of the factors are missing, the remaining factor percentage is the allocation percentage. (A factor is not missing merely because its numerator is zero, but it is missing if both its numerator and its denominator are zero.)

Example: A taxpayer has no employees either within or without the City. The payroll factor being missing, the allocation percentage may be computed by adding the percentage derived from the allocation of gross income and property, and dividing the total by two.

(ii) In the event that any of the percentages to be determined under subparagraphs (i), (iii) or (iii) of paragraph (1) of this subdivision (d) cannot be determined because the taxpayer has either no property, no payroll or no gross income from sales or services within or without the City, then the computation to be made under subdivision (i) of § 11-508 of the Administrative Code (applicable to taxable years beginning in 2009 and thereafter but before 2018) shall be made by taking the sum of the products that are determined under such subdivision (i) for the factors that are present, and dividing that sum by the sum of the weight factors that apply to each of the present factors in the calculation made under such subdivision (i). This amount is then rounded to four decimal places. (An allocation factor is not missing merely because its numerator is zero, but it is missing if both its numerator and its denominator are zero).

(iii) Weight factor defined. For purposes of subparagraph (ii) of this paragraph, "weight factor" is the percentage used in the allocation computation in subdivision (i) of § 11-508 of the Administrative Code, by which the percentage derived from paragraph (1) of this subdivision is multiplied in such allocation computation. For example, in subparagraph (A) of paragraph (1) of subdivision (i) of § 11-508 of the Administrative Code, the weight factor is 30%; in subparagraph (A) of paragraph (9) of subdivision (i) of § 11-508 of the Administrative Code, the weight factor is 1/2%.

(iv) Example: For the tax year 2009, a taxpayer has no employees either within or without the City. The property factor percentage determined under (d)(1)(i) of this section is 10%, and the gross income factor percentage determined under (d)(1)(iii) of this section is 25%. As the payroll factor is missing, the allocation percentage may be computed by taking the sum of

(A) the product of 30% and 10%, and

(B) the product of 40% and 25%,

which is .03 + .1 = .13,

then dividing that sum by the sum of the weight factors for property and gross income, which are .30 and .40, respectively:

.13
.40 +.30

.13
.70

= .18571, rounded to four decimal places = .1857

(6) Short period.

(i) A taxpayer which is subject to tax for a period less than its taxable period for Federal income tax purposes computes its allocation percentage only for the period it is subject to tax in New York City.

(ii) The short period allocation percentage is determined by a three factor formula consisting of:

(A) real and tangible personal property for the period for which it is subject to tax in New York City; however, the taxpayer may compute its property values by placing them on an annual basis and by prorating these values for the period for which it is subject to tax in New York City;

(B) gross income for the period for which it is subject to tax in New York City; and

(iii) The short period allocation percentage must be applied to the excess of the unincorporated business gross income over the unincorporated business deductions which has been prorated to represent gross income and deductions for the period for which the taxpayer is subject to tax in New York City. The prorated excess of income over deductions is computed as follows:

(A) divide the excess of income over deductions before allocation by the number of months covered by the taxpayer's Federal return,

(B) multiply the figure determined in subparagraph (iii)(A) of this paragraph by the number of months for which the taxpayer is subject to tax in New York City.

Example: A partnership became subject to tax in New York City on July 2, 1982. The taxpayer reports on a fiscal year ending November 30th. The short period allocation percentage, computed as described in subparagraph (ii) of this paragraph (4), is 20%. It had an excess of gross income over deductions of $24,000 for the 12 month period covered by the Federal return. The taxpayer's allocated income is $2,000, computed as follows:

$24,000 ÷ 12 (months) = $2,000
$2,000 × 5 (months) = $10,000
$10,000 × 20% = $2,000

(iv) A taxpayer must submit complete details with its return showing how it computed each factor of the allocation percentage for the period it is subject to tax in New York City if less than one full year. If, in the opinion of the Commissioner of Finance, the prorated gross income and deductions for the period for which the taxpayer is subject to tax in New York City does not property reflect such gross income and deductions for such period, the Commissioner may determine the amounts of gross income and deductions properly attributable to such period.

(e) Other allocation methods. (Administrative Code § 11-508(d)).

(1) General. If the allocation methods permitted or prescribed by 19 RCNY § 28-07 (c) and (d) do not allocate a fair and equitable portion of the income to New York City the methods of paragraphs (2), (3) or (4) of this subdivision (E) shall be used where applicable, or any other alternative method may be adopted by the Commissioner of Finance, either on his own initiative or on request of a taxpayer.

(2) Direct allocation where three-factor formula is not applicable. Although the methods used in keeping the books of the business do not fairly and equitably reflect the income from New York City, allocation by formula provided for in 19 RCNY § 28-07(d) shall not be made where such allocation by formula does not also fairly and equitably reflect the income from the City. In such case, the Commissioner of Finance may specifically allocate items of income and expense to the various places of business to which such items of income and expense are attributable in accordance with the provisions of 19 RCNY § 28-07(c), as if the methods used in keeping such books were approved by the Commissioner of Finance as fairly and equitably reflecting income from New York City. Generally, this will apply where, unlike the example set forth in 19 RCNY § 28-07(d) with respect to allocation by formula, the business within and without New York City is not a unitary business for which the formula was designed.

(3) Allocation for taxpayers with a regular place of business without the City and no regular place of business within the City. If an unincorporated business has a regular place of business without the City and no regular place of business within the City and the income and expenses of an unincorporated business attributable to sales made or services performed within the City are not fairly and equitably allocated under the allocation methods of 19 RCNY § 28-07(c) and (d), the Commissioner of Finance or the taxpayer may allocate under an alternate method. Such alternate method of allocation shall consist of multiplying the excess of the unincorporated business gross income over unincorporated business deductions by a fraction. The numerator of such fraction shall be the gross receipts received by the unincorporated business from all its clients or customers located within the City. The denominator of such fraction shall be the total gross receipts received by the unincorporated business from all its clients or customers.

(4) Request by taxpayer for alternative method or allocation. A taxpayer entitled under this section to allocate the excess of its unincorporated business gross income over unincorporated business deductions may not employ a method other than one described in 19 RCNY § 28-07(c), (d) or paragraph (3) of this subdivision (e) without the prior consent of the Commissioner of Finance. A taxpayer wishing to use an alternate method of allocation may make such a request at the time of the filing of the return to which it relates. The taxpayer must file its return and compute and pay its tax in accordance with the allocation methods described in 19 RCNY § 28-07(c), (d) or paragraph (3) of this subdivision (e). A request to vary the allocation method must be attached in a rider to the return. This request shall contain a detailed tax computation using the proposed alternative allocation method. In addition to the tax computation, the alternative allocation method must be fully explained in the rider. This explanation must provide full information regarding the nature and scope of the business activities carried on within and without New York City and provide complete details of how the method proposed by the taxpayer allocates income on a more equitable basis than the method of 19 RCNY § 28-07(c), (d) or paragraph (3) above.

Example:A lump sum payment is received by the taxpayer for services performed within and without the City. The taxpayer may request to have the amount attributable to services performed within the City determined on the basis of relative values of, or amounts of time spent in performance of, such services within and without the City, or by some other reasonable method.

(f) Special rules for real estate. (Administrative Code § 11-508(e)).

(1) Income and deductions from rental of real property of the unincorporated business and gain or loss from the sale, exchange or other disposition thereof are not subject to allocation under any of the provisions of these rules but are considered as entirely derived from or connected with the State, other than this State, in which the real property is located, or if such property is located within this State, the political subdivision in which the property is located. Where a building or a parcel of real property is held partly for occupancy and use by the unincorporated business and partly for the production of rental income, the value thereof should be apportioned on a fair and equitable basis and only the portion of such value attributable to occupancy and use by the unincorporated business should be included in the property percentage of the allocation formula under 19 RCNY § 28-07(d). Nothing in this subdivision (f) of this 19 RCNY § 28-07 is to be construed to treat income, gain, loss or deductions from real property as derived from an unincorporated business carried on in whole or in part in New York City in contradiction of the provisions of 19 RCNY § 28-02(h) for taxable years beginning on or after July 1, 1994.

(2) (i) For the purpose of computing the property percentage of the allocation formula under 19 RCNY § 28-07(d), real property connected with the unincorporated business includes real property rented to the unincorporated business. The average value of such rented real property, therefore, must be considered in the computation of the property percentage. In order to avoid unnecessary hardship on taxpayers and for ease of administration, the fair market value of real property both within and without New York City which is rented to the taxpayer is determined by multiplying the gross rents payable during the taxable year by eight.

(ii) "Gross rent," as used in this subdivision (f) is the actual sum of money or other consideration payable directly or indirectly by the taxpayer, or for his or its benefit, for the use or possession of the property. It includes:

(A) Any amount payable for the use or possession of real property, or any part thereof, whether designated as a fixed sum of money or as a percentage of sales, profits or otherwise.

Example 1: A taxpayer, pursuant to the terms of a lease, pays the lessor $1,000 per month and at the end of the year pays the lessor one percent of its gross sales of $400,000. Its gross rent is $16,000.

(B) Any amount payable as additional rent or in lieu of rent, such as interest, taxes, water and sewer charges, insurance, repairs or any other amount required to be paid by the terms of a lease or other arrangement.

Example 2: A taxpayer, pursuant to the terms of lease, pays the lessor $24,000 per annum and also pays real estate taxes in the amount of $4,000 and interest on a mortgage in the amount of $2,000. Its gross rent is $30,000.

(C) A proportionate part of the cost of any improvement to real property made by or on behalf of the taxpayer which reverts to the owner or lessor upon termination of a lease or other arrangement. The period over which the cost shall be apportioned shall be based on the unexpired term of the lease, commencing with the date the improvement is completed or the life of the improvement, if its life expectancy is less than the unexpired term of the lease. Where a building is erected on leased land by or on behalf of the taxpayer, the value of the land is determined by multiplying the gross rent of the land by eight. The value of the building is determined in the same manner as if owned by the taxpayer. The proportionate part of the cost of an improvement (other than a building on leased land) is generally equal to the amount of amortization allowed in computing unincorporated business taxable income, whether the lease does or does not contain an option of renewal.

Example 3: A taxpayer entered into a 21-year lease of certain premises at a rental of $20,000 per annum, and, after the expiration of one year, installs a new store front at a cost of $10,000 which reverts to the owner upon expiration of the lease. Its gross rent for the first year is $20,000. However, for subsequent years its gross rent is $20,500 ($20,000 annual rent plus 1/20th of $10,000, the cost of the improvement apportioned on the basis of the unexpired term of the lease). Example 4: The taxpayer leases a parcel of vacant land for 40 years at an annual rent of $5,000 and erects thereon a building which costs $600,000. The value of the land is determined by multiplying the annual rent of $5,000 by eight, and the value of the building is determined in the same manner as if owned by the taxpayer.

(D) Any portion of a payment to a partner for the use of real property.

Example 5: A member partner in a partnership engaged in an unincorporated business who leases land and a factory building to the partnership is, for each year, paid an amount which is the rental value of the property. The amount so paid is treated as an expense of the partnership and multiplied by eight to determine the value to be included in the property percentage.

(iii) Gross rent does not include:

(A) Amounts payable for storage where no designated space under the control of the taxpayer as a tenant is rented for storage purposes.

(B) That portion of any rental payment which, in the discretion of the Commissioner of Finance, is applicable to property subleased by the taxpayer and not used by him or it in the carrying on of the business.

Example 6: A taxpayer leases certain premises, all of which are assumed to be of equal rental value, at a rental of $20,000 per annum, and subleases 50 percent of such premises to one or more subtenants. Since 50 percent of the rent paid by the taxpayer is applicable to the portion of the premises subleased, 50 percent thereof may, in the discretion of the Commissioner of Finance, be excluded in computing the taxpayer's gross rent for purposes of this section.

If the general method outlined herein results in valuations which are inaccurate or which are not fair and equitable, any other method which will fairly and equitably reflect the value of the rented property may be adopted by the Commissioner of Finance, either on his own motion or on request of a taxpayer. A request by a taxpayer for an alternative method may be made at the time of the filing of the return to which it relates by using the proposed method in the return provided the method is fully explained in the return or in a rider thereto. This explanation must contain a computation of the value of the rented real property in accordance with the provisions of this subdivision (f) as well as set forth full information with respect to the property together with the basis for the valuation proposed by the taxpayer. A request for an alternate method of valuation not made at the time of filing a return must also contain the explanation and information listed above. Such basis or such other method, once approved by the Commissioner of Finance, may be used without specific approval for subsequent years until the facts upon which it is based are materially changed.

(g) Allocation of net loss. The provisions of these regulations with respect to the allocation of the excess of the unincorporated business gross income over the allocable unincorporated business deductions shall apply in any case in which the unincorporated business deductions exceed the unincorporated business gross income of a business which is carried on both within and without New York City.

(h) Special rules for security and commodity brokers.

(1) Alternate method of allocation. Security and commodity brokers doing business within and without New York City may elect to allocate the excess of the unincorporated business gross income, as determined under 19 RCNY § 28-05, over the unincorporated business deductions subject to allocation, as determined under 19 RCNY § 28-06, in accordance with the provisions of 19 RCNY § 28-07(d). The election must be made by the due date, including any extensions of the time to file a return. A taxpayer who fails to make a timely election under this subdivision must use the allocation method prescribed by 19 RCNY § 28-07(c). Once the taxpayer uses the method pre scribed by 19 RCNY § 28-07(c), or elects to allocate in accordance with 19 RCNY § 28-07(d), the taxpayer must continue to use the allocation method implemented unless, after application in writing to the Commissioner of Finance, the Commissioner determines that the method of allocation used no longer reflects income which is fairly applicable to the City of New York. If the Commissioner of Finance permits the taxpayer to revoke the method of allocation of income under this section, a copy of such permission for revocation of election must be attached to the return for the first taxable period to which such revocation of election is applicable.

(2) Allocation of commissions. In any method of allocation permitted or required in the case of security and commodity brokers doing business within and without New York City, the commissions derived from the execution of purchase or sales orders for the account of customers shall be allocated on the following basis:

(i) If an ordered is received at the New York City place of business of a broker for execution on an exchange located within New York City, and originates at a bona fide established office of the broker located within New York City, 100 percent of the commission in the case of stocks, bonds and commodities shall be allocated to the City of New York and included in gross income attributable to New York City in the taxable period in which such order is executed.

(ii) If the order is received at the New York City place of business of a broker for execution on an exchange located within New York City, and originates at a bona fide established office of the broker located without New York City, 20 percent of the commission in the case of stocks, bonds and commodities shall be allocated to the City of New York and included in gross income attributable to New York City in the taxable period in which such order is executed.

(iii) If the order originates at the New York City place of business of a broker and is transmitted to a bona fide established office of the broker without the City for execution on an exchanged located without New York City, 80 percent of the commission in the case of stocks, bonds and commodities shall be allocated to the City of New York and included in gross income attributable to New York City in the taxable period in which such order is executed.

(iv) The taxpayer may allocate commission income on the basis of actual experience if he can demonstrate to the satisfaction of the Commissioner of Finance that the allocation pursuant to subparagraphs (ii) and (iii) of this paragraph (h) does not fairly reflect the amount of commission income attributable to New York City.

(v) Commission income from over-the-counter transactions must be allocated in the following manner:

(A) If the order originates at or through a New York City place of business of the taxpayer, 100 percent of the commission income must be allocated to New York City.

(B) If the order originates at or through a bona fide established office of the taxpayer located outside New York City, no portion of the commission income is allocable to New York City.

(3) Allocation of manager's fee. When a security and commodity broker manages an underwriting syndicate, the fees received from such activity must be allocated as follows: The manager's fee must be allocated 100 percent to New York City when the services for which such fees are paid are performed wholly at or through a regular place of business of the taxpayer located within New York City. (See: 19 RCNY § 28-07(b) for the meaning of "regular place of business.") If a portion of the compensation representing management fees is attributable to services performed at or through a regular place of business of the taxpayer located outside New York City, the portion of such compensation for management services shall be allocated based on the actual percentage of New York City direct net costs to total direct net costs. The term "direct net costs" includes costs directly connected with the management activity, such as research, investigation, syndication expense, accounting, legal, market surveys, compensation and underwriting overhead, less any reimbursements received from the issuing corporation.

(4) Allocation of primary spread. Security and commodity brokers participating in an underwriting syndicate must allocate gross income attributable to the primary spread in the following manner:

(i) Retained securities. One hundred percent of the gross income attributable to the primary spread must be allocated to New York City when such income is attributable to the underwritten securities which are retained and sold wholly at or through a regular place of business of the taxpayer located within New York City. If a portion of the securities retained by the taxpayer is sold at or through a regular place of business of the taxpayer located outside New York City, the gross income attributable to the primary spread must be allocated by the percentage which the number of underwritten shares sold at or through a regular place of business of the taxpayer located within New York City bears to the total number of underwritten shares sold by such taxpayer. The terms "primary spread" means the difference between the price paid by the underwriters to the issuers for the securities being marketed and the price received from the subsequent sale of the underwritten securities at the initial public offering price less the manager's fee and selling concession. The term "initial public offering price" means the price agreed upon by the managing underwriter and the issuer at which the securities are to be offered to the public (including any change thereof which is required to be reported to the Federal Securities and Exchange Commission) during the term or length of the agreement among the underwriters.

(ii) Group sales. Gross income attributable to the primary spread, from the sale of securities, purchased or committed to be purchased from an issuer, which are reserved by the managing underwriter and sold on behalf of the account of participating underwriters, including the manager, to persons selected by such manager, must be allocated 100 percent to New York City when the principal office of the managing underwriter is located in New York City. In the case of co-managers, if the principal office of one or more of such co-managers is located within New York City and the principal office of one or more of such co-managers is located outside the City, the gross income attributable to the primary spread, from the group sale of underwritten securities, must be allocated in accordance with the ratio that the number of managing underwriters whose principal office is located in New York City bears to the total number of managing underwriters.

(iii) Directed or designated sales. Gross income attributable to the primary spread received by a member of the underwriting syndicate, from the sale of securities directly from the managing underwriter to persons who have directed such manager that the sale be made on behalf of the account of such member, must be allocated to New York City when the regular place of business of such member, which is responsible for the sale, is located within New York City.

(5) Allocation of selling concession. Security and commodity brokers participating in an underwriting syndicate must allocate the gross income attributable to the selling concession (secondary fees) in the following manner:

(i) Retained securities. Where a taxpayer is a member of the selling group and participates for a fee in the marketing of the underwritten securities, the gross income representing the selling concession must be allocated 100 percent to New York City where the underwritten securities which have been retained by the taxpayer are sold wholly at or through a regular place of business of the taxpayer located within New York City. If a portion of the securities is sold at or through a regular place of business of the taxpayer located outside New York City, the gross income representing the selling concession shall be allocated by the percentage which the number of underwritten shares sold at or through a regular place of business of the taxpayer located within New York City bears to the total number of underwritten shares sold by such taxpayer.

(ii) Group sales. Gross income attributable to the selling concession, from the sale of securities, purchased or committed to be purchased from an issuer, which are reserved by the managing underwriter and sold on behalf of the account of the participating underwriters, including the manager, to persons selected by such manager, must be allocated 100 percent to New York City when the principal office of the managing underwriter is located in New York City. In the case of the co-managers, if the principal office of one or more of such co-managers is located within New York City and the principal office of one or more of such co-managers is located outside the City, the gross income attributable to the selling concession, from a group sale of underwritten securities, must be allocated in accordance with the ratio that the number of managing under writers whose principal office is located in New York City bears to the total number of managing underwriters.

(iii) Directed or designated sales. Gross income attributable to the selling concession received by a member of the underwriting syndicate, from the sale of securities directly from the managing underwriter to persons who have directed such manager that the sale be made on behalf of the account of such member, must be allocated to New York City when the regular place of business of such member, which is responsible for the sale, is located within New York City.

(6) Allocation schedule required. A securities and commodity broker allocating gross income pursuant to the provisions of this subdivision (h) must submit a schedule setting forth the basis and computation of each category of gross income within and without New York City.

(i) Allocation of investment income. [Reserved.]

(j) Allocation for entities with a distributive share of income, gain, loss or deduction derived from another unincorporated business.

(1) General. If an unincorporated entity (the "partner") is a partner in another unincorporated entity (the "partnership"), carrying on an unincorporated business wholly or partly in New York City and either the partner or the partnership allocates a portion of its unincorporated business entire net income outside New York City, the partner must allocate its business income, if any, as provided in paragraph (2) of this subdivision, and its investment income, if any, as provided in paragraph (3) of this subdivision. If the partner's distributive shares of the business and investment income of the partnership are not separately stated on the partnership's Internal Revenue Service Form 1065, Schedule K-1, with respect to the partner, the proportion of business and investment income in the partner's distributive share will be deemed to be the same as the proportion of business and investment income in the unincorporated business entire net income of the partnership before allocation. Except as provided in subparagraph (ii) of paragraph (2) of this subdivision (j) (rental real estate), a partner must use the same method to allocate its distributive share of each item of business income, gain, loss or deduction from a given partnership, other than deductions not subject to allocation as provided in 19 RCNY § 28-08.

(2) Allocation of business income.

(i) A) Except as otherwise provided in subparagraph (i)(B) of this paragraph, a partner must allocate to the City the same percentage of its distributive share of each item of a particular partnership's business income, gain, loss and deduction as the partnership allocated to the City for purposes of determining its own business income allocated to the City for the partnership's taxable year ending with or within the partner's taxable year.

(B) Discretionary use of other methods. The Commissioner of Finance in his or her discretion may permit or require a taxpayer partner to use another method to allocate its business income if the Commissioner determines that the method provided in subparagraph (i)(A) of this paragraph (2) does not result in a fair and equitable allocation to the City of the taxpayer partner's income.

(C) Alternative methods that may be permitted or required by the Commissioner of Finance include, but are not limited to, the following:

(a) a formula method whereby the partner calculates a single business allocation percentage that it applies to its own business income and to its distributive shares of business income from partnerships. In computing this business allocation percentage, the partner must include its percentage interest in the property, gross income and payroll within and without the City of the partnerships from which it receives a distributive share. For purposes of this subparagraph, a partner's percentage interest in a partnership's property, gross income and payroll will be deemed to be the same as the partner's percentage interest in the profits, losses and capital of the partnership as reflected on the partnership's Internal Revenue Service Form 1065, Schedule K-1, with respect to the partner for the partnership's taxable year ending within or with the partner's taxable year.

(b) a method whereby the partner's distributive share of income, gain, loss and deduction from a partnership is allocated by the partner's business allocation percentage determined without regard to the business allocation factors or books and records of the partnership. This method may be appropriate where all diligent efforts by the partner to obtain the necessary information from the partnership have failed and the use of this method is not otherwise distortive.

(ii) Notwithstanding anything contained in subparagraph (i) of this paragraph (2) to the contrary, a partner must allocate its distributive share from a partnership of each item of income and deduction attributable to rental real estate and each item of gain or loss from the sale, exchange or other disposition of real estate in accordance with subdivision (f) of this section.

(3) Allocation of investment income.

(i) Except as otherwise provided in subparagraphs (ii) and (iii) of this paragraph, in computing its allocated investment income, the partner must allocate to the City its separate investment income, determined without regard to its distributive shares from partnerships, using an investment allocation percentage determined without regard to its percentage interest in the investment capital of any partnership. The partner must separately allocate to the City the same percentage of its distributive share of investment income of a particular partnership as the partnership allocated to the City for purposes of determining its own investment income allocated to the City for the partnership's taxable year ending with or within the partner's taxable year.

(ii) Discretionary use of other methods. The Commissioner of Finance in his or her discretion may permit or require the taxpayer to use another method to allocate its distributive share of investment income of the partnership if the Commissioner determines that the method provided in subparagraph (i) of this paragraph (3) does not result in a fair and equitable allocation to the City of the taxpayer's income.

(iii) Alternative methods that may be permitted or required by the Commissioner of Finance include, but are not limited to, a method whereby, in computing its investment allocation percentage, the partner includes its percentage interest of the items of investment capital that are used in computing the investment allocation percentages of the partnerships from which it receives distributive shares. In this method, the partner must then allocate the sum of its separate investment income and its distributive shares of investment income from other partnerships by the investment allocation percentage so computed.

(4) Examples. The following examples illustrate methods of allocation of business and investment income for entities that receive distributive shares. Because an entity that receives a distributive share from another entity subject to the UBT will generally be eligible for the UBT Paid Credit, these examples also illustrate the calculation of the credit where the entities allocate a portion of their income outside the City. The facts of the following examples have been simplified and do not reflect the deduction allowed by Administrative Code § 11-509(a) or the exemption allowed by Administrative Code § 11-510(1). The effect of other credits allowed under Administrative Code § 11-503 also is not reflected. For further information about the UBT Paid Credit see 19 RCNY § 28-03(d)s.

Example 1: Allocation of Business Income – Books and Records. AB is a partnership doing business inside and outside New York City. AB has two partners, A and B, both of which are also partnerships doing business inside and outside New York City. A's partnership interest in AB is 60% and B's is 40%. None of the partnerships have any investment income. AB, A and B all allocate on the basis of books and records and A and B allocate their distributive shares from AB pursuant to 19 RCNY § 28-07(j)(2)(i)(A). AB has unallocated unincorporated business entire net income ("UBENI") of $1000x of which $700x is allocable by its books and records to its business location in the City and $300x is allocable to its business location outside the City. A's separate unallocated UBENI is $1000x of which $500x is allocable to its business location in the City and $500x is allocable to its business location outside of the City. B's separate unallocated UBENI is $100x of which $90x is allocable to its business location in the City and $10x is allocable to its business location outside of the City.

A's Allocated Unincorporated Business Taxable Income ("UBTI"):

A's allocated UBTI is $920x, composed of A's separate allocated UBTI of $500x and A's 60% distributive share of AB's allocated UBTI of $700x allocated to the City.

Calculation of A's UBT Paid Credit and Tax Liability:

Measure 1: A's distributive share percentage of AB's UBT is $16.8x (A's distributive share percentage of 60% multiplied by AB's UBT liability of $28x).

Measure 2: A's UBT liability on its allocated UBTI of $920x would be $36.8x. Without its distributive share of $420x from AB, A's allocated UBTI would be $500x on which the tax would be $20x. The incremental tax effect of the distributive share is $16.8x ($36.8x - $20x = $16.8x).

Therefore, A's UBT paid credit is $16.8x, reducing its UBT liability to $20x.

B's Allocated UBTI:

B's allocated UBTI is $370x, composed of B's separate allocated UBTI of $90x and B's 40% distributive share of AB's allocated UBTI of $700x.

Calculation of B's Credit:

Measure 1: B's distributive share percentage of AB's UBT is $11.2x (B's distributive share percentage of 40% multiplied by AB's UBT liability of $28x).

Measure 2: B's UBT liability on its allocated UBTI of $370x would be $14.8x. Without its distributive share of $280x from AB, B's allocated UBTI would be $90x on which the tax would be $3.6x. The incremental tax effect of the distributive share is $11.2x ($14.8x - $3.6x = $11.2x).

Therefore, B's UBT paid credit is $11.2x, reducing its tax liability to $3.6x.

Example 2: Allocation of Business Income – Formula Allocation with a Flow Through of Factors. The facts are the same as in Example 1 except that it has been determined by the Commissioner of Finance that the method used in example 1 is distortive and that the taxpayer must use the method described in 19 RCNY § 28-07(j)(2)(i)(C)(a). (This example is provided to illustrate the calculation of the allocation percentages and applicable UBT paid credit and is not intended to illustrate the circumstances under which the Commissioner will find the use of an allocation method to be distortive.) All three partnerships allocate their income pursuant to 19 RCNY § 28-07(d) (the formula method). AB, A and B are not manufacturing firms eligible to elect to use a double-weighted gross income factor. AB's business allocation percentage is 70% computed as follows:

AB	Total w\in & w/o the City	NYC	% in NYC
Property	$10,000	$7,000	70%
Wages	$1,000	$600	60%
Gross Income	$5,000	$4,000	80%
Total			210%
Average			70%

Without taking into account its distributive share from AB, A has a 50% business allocation percentage computed as follows:

A	Total w\in & w/o the City	NYC	% in NYC
Property	$10,000	$5,000	50%
Wages	$1,000	$600	60%
Gross Income	$5,000	$2,000	40%
Total			150%
Average			50%

Without taking into account its distributive share from AB, B has a 90% business allocation percentage computed as follows:

B	Total w\in & w/o the City	NYC	% in NYC
Property	$10,000	$9,000	90%
Wages	$1,000	$850	85%
Gross Income	$5,000	$4,750	95%
Total			270%
Average			90%

AB's UBENI is $1000x. AB's allocated UBTI is $700x. AB pays UBT of $28x. AB's Form NYC-204 indicates that A's distributive share from AB is $600x and that B's distributive share is $400x. A and B are subject to the UBT and are entitled to UBT Paid Credits based upon their distributive shares from AB. A's separate UBENI is $1000x. B's separate UBENI is $100x.

AB, A and B all allocate business income using formula allocation and compute their business allocation percentage pursuant to 19 RCNY § 28-07(j)(2)(i)(C)(a).

Calculation of A's Allocation Percentage

A	Total w\in & w/o the City	NYC	% in NYC
A's Property	$10,000	$5,000
60% of AB's Property	$6,000	$4,200
Total Property	$16,000	$9,200	57.50%
Wages A	$1,000	$600
60% of AB's Wages	$600	$360
Total Wages	$1,600	$960	60%
A's Gross Income	$5,000	$2,000
60% of AB's G.I.	$3,000	$2,400
Total G.I.	$8,000	$4,400	55%
Total			172.50%
Average			57.50%

A's Allocated UBTI:

A's total unallocated UBENI is $1600x (separate UBENI of $1000x + distributive share of AB's UBENI ($600x)). A's allocated UBTI is $920x (57.5% of $1600x = $920x).

Calculation of A's UBT Paid Credit:

Measure 1: A's distributive share percentage of AB's UBT is $16.8x as in example 1 above.

Measure 2: A's UBT liability on its allocated UBTI of $920x would be $36.8x. Without its distributive share of $600x from AB and without taking into account its share of AB's allocation factors, A's allocated UBTI would be $500x (50% of $1000x) on which the tax would be 20x. The incremental tax effect of the distributive share is $16.8x ($36.8x - $20x = $16.8x).

Therefore, A's UBT paid credit is $16.8x, reducing its UBT liability to $20x.

Calculation of B's Allocation Percentage:

B	Total w\in & w/o the City	NYC	% in NYC
B's Property	$10,000	$9,000
40% of AB's Property	$4,000	$2,800
Total Property	$14,000	$11,800	84.29%
B's Wages	$1,000	$850
40% of AB's Wages	$400	$240
Total Wages	$1,400	$1,090	77.86%
B's Gross Income	$5,000	$4,750
40% of AB's G.I.	$2,000	$1,600
Total G.I.	$7,000	$6,350	90.71%
Total			252.86%
Average			84.29%

B's Allocated UBTI:

B's total unallocated UBENI is $500x (separate UBENI of $100x + distributive share of AB's UBENI ($400x)). B's allocated UBTI is $421 x (84.29% of $500x = $421x).

Calculation of B's UBT Paid Credit:

Measure 1: B's distributive share percentage of AB's UBT is $11.2x, as in example 1 above.

Measure 2: B's UBT liability on its allocated UBTI of $421x would be $16.86x. Without its distributive share of $400x from AB and without taking into account its share of AB's allocation factors, B's allocated UBTI would be $90x (90% of $100x) on which the tax would be $3.6x. The incremental tax effect of the distributive share is $13.26x ($16.86x - $3.6x = $13.26x).

Therefore, B's UBT paid credit is $11.2x reducing its tax liability to $5.66x.

Example 3: Allocation of Business Income – Formula Allocation without a Flow-Through of Factors. All facts are the same as in Example 2 except that pursuant to 19 RCNY § 28-07(j)(2)(i)(B), A and B receive written permission from the Commissioner of Finance to use the method specified in 19 RCNY § 28-07(j)(2)(i)(C)(b) under which they allocate their distributive shares of income, gain, loss and deductions from AB using their own business allocation percentages without regard to the business allocation percentage of AB. (This example is provided to illustrate the calculation of the allocation percentages and applicable UBT paid credit and is not intended to illustrate the circumstances under which the use of an alternative allocation method will be allowed.)

A's Allocated UBTI:

A's total unallocated UBENI is $1600x (separate UBENI of $1000x + distributive share of AB's UBENI ($600x)). A's allocated UBTI is 800x (50% of $1600x = $800x).

Calculation of A's Credit:

Measure 1: A's distributive share percentage of AB's UBT is $16.8x as in example 1 above.

Measure 2: A's UBT liability on its allocated UBTI of $800x, would be $32x. Without its distributive share of $600x from AB, A's allocated UBTI would be $500x (50% of $1000x) on which the tax would be $20x. The incremental tax effect of the distributive share is $12x ($32x - $20x = $12x).

Therefore, A's UBT paid credit is $12x reducing its tax liability to $20x.

B's Allocated UBTI:

B's total unallocated UBENI is $500x (separate UBENI of $100x + distributive share of AB's UBENI ($400x)). B's allocated UBTI is $450x (90% of $500x = $450x).

Calculation of B's Credit:

Measure 1: B's distributive share percentage of AB's UBT is $11.2x as in example 1.

Measure 2: B's UBT liability on its allocated UBTI of $450x would be $18x. Without its distributive share of 400x from AB, B's allocated UBTI would be $90x (90% of $100x) on which the tax would be $3.6x. The incremental tax effect of the distributive share is $14.2x ($18x - $3.6x = $14.2x).

Therefore, B's UBT paid credit is $11.2x reducing its tax liability to $6.8x.

§ 28-08 Deductions Not Subject to Allocation.

(a) Compensation for services of proprietor and acting partners. (Administrative Code, § 11-509(a)).

(1) General. In addition to amounts paid to employees as salaries, wages or other personal service compensation, which are allowable as unincorporated business deductions under 19 RCNY § 28-06, deductions are also allowed for reasonable compensation for personal services of a proprietor and for personal services of each partner actively engaged in the conduct of the unincorporated business, including a corporate partner which, through its officers, actively engages in the business of the partnership. It is not necessary that the amount deducted on account of the services by the proprietor or a partner be credited to the account of or actually withdrawn by such person. The reasonableness of any deduction under this subdivision (a) shall be subject to determination by the Commissioner of Finance. An administrator, executor, trustee, receiver or other fiduciary who, in his fiduciary capacity, carries on the unincorporated business of an estate, trust or entity for which he acts is not a proprietor or partner for purposes of this subdivision (a). Amounts paid to retired partners are not deductible. Deductions allowable for services of a proprietor or a partner described above are not subject to allocation even though the unincorporated business is carried on both within and without New York City.

(2) Limitations on deduction for compensation. Any deduction allowable under paragraph (a)(1) of this subdivision (a) shall not exceed $5,000 for a proprietor or for each active partner and the aggregate of such deductions shall not exceed 20 percent of the unincorporated business taxable income computed without the benefit of this deduction or the unincorporated business exemptions permitted under 19 RCNY § 28-09. Where the business is carried on both within and without New York City, these limitations apply to and are computed with reference to the excess of the allocable unincorporated business gross income over the allocable unincorporated business deductions apportioned to New York City.

Example 1: A, an individual, has unincorporated business taxable income (computed without deductions for compensation for his services or the unincorporated business exemptions) of $15,000. He actually with drew from the business a salary of $6,000. Assuming the amount drawn would not exceed a reasonable allowance, the allowable deduction for A's services is $3,000, (20% of the $15,000) which in this case is the maximum deduction allowable. The $5,000 limitation is not applicable because it exceeds the 20% of income limitation on the aggregate of allowable deductions for compensation of a proprietor and active partners under the foregoing subdivision.

Example 2: If, in Example 1 above, A withdrew no salary, the $3,000 would be allowable as a deduction for his services, assuming such amount would not exceed a reasonable allowance under the circumstances.

Example 3: A, an individual, has unincorporated business taxable income (computed without deductions for compensation for his services or the unincorporated business exemptions) of $30,000. He did not charge or withdraw any salary from the business. Assuming the amount would not exceed a reasonable allowance, the maximum allowable deduction for A's services is $5,000. The 20% of income limitation has no application here because the amount thereof, $6,000 (20% of $30,000), exceeds the limitation of $5,000 for each individual.

Example 4: Partnership XYZ has unincorporated business taxable income (computed without benefit of deduction for compensation for services of partners or the unincorporated business exemptions) of $40,000. No salaries are paid or credited to any of the partners. The firm has two active partners, X and Y, and one inactive partner, Z. Assuming the amount would not exceed a reasonable allowance, the maximum allowable deduction for the services of the two active partners, X and Y, is $8,000 (20% of $40,000). No deduction under this subdivision (a) is allowable with respect to the inactive partner, Z. The limitation of $5,000 for each active partner is not applicable here because the amount thereof, $10,000 ($5,000 each for X and Y), would exceed the 20% of income limitation on the aggregate of allowable deductions under this subdivision (a).

Example 5: Assuming the same facts as those in Example 4, except that the unincorporated business income (computed without deduction for compensation for partners' services or the unincorporated business exemptions) is $60,000, then the deductions under this subdivision (a) representing a reasonable allowance for services of the active partners cannot exceed $10,000 ($5,000 for each partner). Here again, no deduction is allowable with respect to the inactive partner, Z. The 20% of income limitation has no application here because the amount thereof, $12,000 (20% of $60,000), exceeds the aggregate of the maximum allowable individual deductions of $5,000 per active partner.

Example 6: Assuming the same facts presented in Example 5, except that the business was carried on both within and without New York City, with 80% of the income allocable to New York City, the maximum deduction for reasonable compensation for the services of the active partners is $9,600, computed as follows:

Total taxable income (without deduction for services of partners or unincorporated business exemptions)	$60,000
Portion allocated to New York City (80%)	$48,000
Aggregate deduction for active partners, X and Y, limited to 20 percent of amount allocated to New York City	$9,600

Example 7: XYZ Partnership is engaged in the business of making commercial loans. The partnership consists of 2 individuals, X and Y and one corporation, Z Corporation. The officers of Z Corporation have a background in investments and real estate. They advise the partnership regarding loans under consideration, attend meetings of the partnership and consult with the other partners relating to accepting or rejecting loan applications. XYZ Partnership is entitled to a deduction for reasonable compensation paid to its three active partners, not to exceed the lesser of $15,000 or 20% of the unincorporated business taxable income.

(3) For purposes of this subdivision, a person will be considered a partner of an entity if that person would be considered to be a partner under 19 RCNY § 28-06(d)(1)(iv).

(b) Modifications for special depreciation and research and development expenditures. (Administrative Code § 11-509(b)).

(1) General.

(i) At the election of the taxpayer, special optional modifications for depreciation of certain property and for certain expenditures for property used for research or development purposes are permitted, without allocation under 19 RCNY § 28-07, upon the terms and conditions prescribed by this subdivision (b). Either or both of the deductions set forth in subparagraphs (1)(ii) and (1)(iii) of this paragraph (1) shall be allowed, except that only one of these deductions shall be allowed with respect to any one item of property.

(ii) Where an individual, partnership, estate or trust constructs, reconstructs, erects or acquires qualifying property as defined in paragraph (2) of this subdivision (b), there shall, subject to the terms and conditions prescribed by this subdivision (b), at the election of the taxpayer, be allowed in respect of such qualifying property a deduction for depreciation not exceeding twice the depreciation allowed with respect to the same property for Federal income tax purposes. A deduction pursuant to this subparagraph (ii) is allowed only upon the condition that no other deduction for depreciation of such property shall be permitted for the taxable year.

(iii) Subject to limitations prescribed in this subdivision (b), a taxpayer likewise may, in lieu of any deduction (as an expenditure or as depreciation) otherwise allowable for Federal income tax purposes, elect to deduct any amount expended during the taxable year for the construction, reconstruction, erection or acquisition of qualifying property, as defined in paragraph (2) of this subdivision (b) which is used for purposes of research or development in the experimental or laboratory sense. Such purposes do not include the ordinary testing or inspection of materials or products for quality control, efficiency surveys, management studies, consumer surveys, advertising, promotions or research in connection with literary, historical or similar projects.

(iv) Any amount allowed for Federal income tax purposes as depreciation or as an expenditure with respect to the property which is the subject of an election under subparagraphs (ii) or (iii) of this paragraph (b) shall be added to the taxpayers Federal adjusted gross income for the taxable year.

(v) An election made with respect to a specific item of property or expenditure is binding for all subsequent taxable years unless the Commissioner of Finance consents to a change with respect thereto upon such terms and conditions as he may fix.

(vi) An election with respect to qualifying property of a partnership must be made by the partnership and shall apply to all partnership members. An election with respect to qualifying property of an estate or trust shall be made by the fiduciary and shall be binding on all beneficiaries of the estate or trust.

(2) Qualifying property. The term "qualifying property" means tangible personal property which

(i) is depreciable pursuant to § 167 of the Internal Revenue Code, and

(ii) has a situs in New York City, and

(iii) is used in the taxpayer's trade or business, and

(iv) (A) the construction, reconstruction or erection of which is completed after December 31, 1967, and then only with respect to that portion of the basis thereof or the expenditures relating thereto which is properly attributable to such construction, reconstruction or erection after December 31, 1963, or

(B) acquired after December 31, 1967, by purchase as defined in § 179(d) of the Internal Revenue Code, if the original use of such property commenced with the taxpayer, commenced in New York City and commenced after December 31, 1965.

(3) Limitations.

(i) The total of all deductions allowed pursuant to this subdivision (b) in any taxable year or years with respect to an item of property shall not exceed the cost or other basis of the property for Federal income tax purposes. Only one election, either to claim additional depreciation, or to claim a deduction as an expenditure for property used for research or development, may be made in connection with any one item of property which qualifies for election under subparagraphs (i) and (ii) of paragraph (1) of this subdivision (b). When property subject to an election under this subdivision (b) is used or to be used for research or development only in part, or during only part of its useful life, the allowable special deduction shall be limited to a proportionate part of the expenditures relating thereto.

(ii) With respect to the depreciation deduction allowed under subparagraph (1)(ii) of paragraph (1), such deduction shall be allowed with respect to property described in this paragraph (2) only on condition that such property shall be principally used by the taxpayer in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing. For purposes of the preceding sentence, manufacturing shall mean the process of working raw materials into wares suitable for use or which gives new shapes, new qualities or new combinations to matter which already has gone through some artificial process by the use of machinery, tools, appliances and other similar equipment. Property used in the production of goods shall include machinery, equipment or other tangible property which is principally used in the repair and service of other machinery, equipment or other tangible property used principally in the production of goods, and shall include all facilities used in the manufacturing operation, including storage of material to be used in the manufacturing, and of the products that are manufactured.

(iii) At the option of the taxpayer, air and water pollution control facilities which qualify for elective deductions under 19 RCNY § 28-06(i), may be treated, for purposes of this paragraph (2), as tangible property principally used in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing, in which event, a deduction shall not be allowed under such 19 RCNY § 28-06(i).

(iv) No deduction shall be permitted under this subdivision (b) for research and experimental expenditures treated as deductible expenses under § 174(a) of the Internal Revenue Code or as amortizable deferred expenses under § 174(b) of the Internal Revenue Code (such expenditures will be reflected in the computation of New York City taxable income through the use of Federal amounts in accordance with the general provisions of these regulations).

(v) With respect to the depreciation deduction under subparagraph (1)(ii) of this subdivision (b), for any taxable year beginning on or after January 1, 1968, no deduction is allowed for tangible personal property leased to any other person or corporation. Any contract or agreement to lease or rent or for a license to use such property is considered a lease; provided, however, that with respect to property which a taxpayer uses for purposes other than leasing for part of a taxable year and leases for another part of a taxable year, a deduction may be taken in proportion to the part of the year such property is used by the taxpayer.

(vi) The special depreciation and expenditure deduction is only allowed with respect to property which has not been the subject of a depreciation deduction pursuant to 19 RCNY § 28-06. With respect to the expenditure deductions allowed by subparagraph (1)(iii) of this subdivision (b), such expenditure deduction shall be allowed only if for the taxable year and all succeeding taxable years, no deduction shall be allowed pursuant to 19 RCNY § 28-06 on account of such expenditures or on account of depreciation of the same property, except to the extent that its basis may be attributable to factors other than such expenditures, or in case a deduction is allowable pursuant to this paragraph for only a part of such expenditures, on condition that any deduction allowable for federal income tax purposes on account of such expenditures or on account of depreciation of the same property shall be proportionately reduced in determining the deductions allowable pursuant to 19 RCNY § 28-06 for the taxable year and all succeeding taxable years.

(vii) In the case of an unincorporated business carried on both within and without New York City, the total of the deduction for depreciation or the deduction for expenditures shall not exceed

(A) such expenditures, and in the case of depreciation, its costs or other basis,

(B) multiplied by the allocation percentage determined under 19 RCNY § 28-07, which is used in allocating the excess of the taxpayer's unincorporated business gross income over its unincorporated business deductions to New York City for the first year such depreciation is deducted or the first year such expenditure is paid or incurred, whichever is applicable.

(4) A similar special depreciation or expenditure deduction applies with respect to tangible personal property, having a situs in the City, used in the taxpayer's trade or business, and acquired, constructed, erected or reconstructed between January 1, 1966 and December 31, 1969. For definitions, limitations and requirements, see § 11-509(b) of the Administrative Code.

(5) Adjustment of basis upon sale or other disposition.

(i) In any tax able year when property, with respect to which a deduction under this subdivision (b) has been allowed, is sold or otherwise disposed of, the basis of such property shall be adjusted to reflect such deduction and if the basis as so adjusted is lower than the adjusted basis of the same property for Federal income tax purposes, the difference between the basis as so adjusted and the adjusted basis of the same property for Federal income tax purposes shall be added to the taxpayer's Federal adjusted gross income (or Federal taxable income of a fiduciary, where applicable) in determining New York City unincorporated business taxable income.

(ii) A sale or disposition of qualifying property includes any transfer or exchange without regard to whether gain or loss from the transaction is recognized for Federal income tax purposes. (Even if the gain or loss from the sale or disposition is a long-term capital gain or loss for Federal income tax purposes, the amount to be taken into account under this paragraph (5) shall be the entire difference between the adjusted bases.)

(6) Reporting change in use of research or development property. If a taxpayer has been allowed a deduction under subparagraph (1)(iii) of this subdivision (b) for an expenditure for a qualifying research or development property and such property is used for purposes other than research or development to a greater extent than originally reported, the taxpayer shall report such use in the return for the first taxable year during which it occurs, and the Commissioner of Finance may recompute the tax for year or years for which the deduction was made and may assess any additional tax resulting from such recomputation within the time fixed by § 11-523(c)(7) of the Administrative Code.

(7) Carryover of unused deductions. If the deductions allowable under this subdivision (b) for any taxable year exceed the taxpayer's unincorporated business taxable income determined without the allowance of such deductions, the excess may be carried over to the following taxable year or years of the same taxpayer (without allocation under 19 RCNY § 28-07) in computing unincorporated business taxable income for such year or years. If a carryover under this subdivision (b) is claimed, complete details of the computation of the carryover must be submitted with the taxpayer's return.

(8) Rule for making elections. An election to deduct additional depreciation or expenditures for research or development purposes under this subdivision (b) shall be made by filing with the unincorporated business income tax return or returns in which such deductions are claimed a statement evidencing such election and containing complete details of the qualifying property involved and the computation of the related deduction and modification. (Such statement and information shall be submitted on form NYC-324, "Special Depreciation and Expenditure Schedule.")

§ 28-09 Unincorporated Business Exemptions.

(a) Specific exemption. (Administrative Code § 11-510(1)).

(1) In addition to the deductions otherwise allowable under 19 RCNY §§ 28-06 and 28-08, there is allowed a specific annual exemption of $5,000 which is deductible in computing the unincorporated business taxable income. If the business was carried on or was being liquidated for a period of less than an entire taxable year of 12 months, the exemption must be prorated. The proration shall be made on a dally basis at the rate of $13.70 per calendar day unless the return is filed for a period of one or more whole months beginning on the first day and ending on the last day of a calendar month, in which event the proration is to be made on a monthly basis at the rate of $416.67 per month.

(2) This exemption is not subject to allocation even though the unincorporated business is carried on both within and without New York City. Only one specific exemption is allowed to an individual, partnership or other unincorporated entity, even though the individual or other entity carries on two or more unincorporated businesses. (See: 19 RCNY § 28-02(a)(4).)

Example 1: If a partnership in existence and carrying on business on January 1, 1975 ceases business operations and completely liquidates on August 15, 1975, an exemption of $3,109.90, representing 227 days at $13.70 per day, is allowed for the period beginning January 1, 1975 and ending August 15, 1975.

Example 2: If, in Example 1, the complete liquidation occurred on July 31, 1975, the exemption would be $2,916.69, representing seven months at $416.67 per month.

Example 3: Partnership A & B, in existence and doing business on January 1, 1975, is terminated and liquidated on May 31, 1975 by the admission of a new partner, C, and the formation of a new partnership A B C which continues the business from June 1, 1975 through December 15, 1975, at which time it is terminated and completely liquidated. On the unincorporated business income tax return of partnership A & B for the period beginning January 1, 1975 and ended May 31, 1975, a prorated exemption of $2,083.35 representing five months at $416.67 per month, will be allowed. The prorated exemption allowable to partnership A B C for the period June 1, 1975 through December 15, 1975 is $2,712.60, or 198 days at $13.70 per day.

Example 4: Individual A sold his unincorporated business under a deferred payment agreement on December 31, 1973 and received payments under the agreement in 1974 and in 1975, with the final payment being received on April 15, 1975. A's unincorporated business exemption will be $5,000 for 1974 and $1,438.50 (105 days at $13.70 per day) for 1975.

(b) Additional exemption. (Administrative Code § 11-510(2)).

(1) General. For taxable years beginning before July 1, 1994, a partnership (or other unincorporated entity which is considered to be a partnership for unincorporated business tax purposes, see 19 RCNY § 28-02(c)) is allowed an exemption in addition to the specific exemption described in 19 RCNY § 28-09(a)(1) if a partner or member of such partnership or other entity is, in its separate capacity, taxable under the general corporation tax imposed pursuant to Chapter 6 of Title 11 of the Administrative Code or the unincorporated business tax imposed pursuant to Chapter 5 of Title 11 of the Administrative Code. The additional exemption allowable in such a case is the amount of such partner's or member's proportionate interest in the excess of the partnership's unincorporated business gross income (as computed under 19 RCNY § 28-05) over the partnership's unincorporated business deductions allowed under 19 RCNY §§ 28-06 and 28-08. If the unincorporated business of a partnership which qualified for the additional exemption under this subdivision (b) is carried on both within and without New York City, the proportionate interest of a partner or member with respect to which the additional exemption is allowable is computed without regard to any allocation the partnership may be permitted to make under 19 RCNY § 28-07, other than an allocation applicable to a net operating loss deduction allowable under 19 RCNY § 28-06. No additional exemption is allowed for amounts distributed to an individual member of a partnership who also carries on his own separate and independent unincorporated business and who, pursuant to 19 RCNY § 28-05(a), is not required or permitted to include his distributive share of partnership income in computing his own separate unincorporated business gross income. Notwithstanding anything in these rules to the contrary, no additional exemption shall be allowed to an unincorporated business for any taxable year of the unincorporated business beginning after June 30, 1994.

(2) Limitation on amount of additional exemption. The additional exemption allowable under paragraph (1) of this subdivision (b) is limited to the amount which is included in the partner's or member's unincorporated business taxable income allocable to New York City, or included in a corporate partner's or corporate member's net income allocable to New York City, under the provisions of Chapter 5 or Chapter 6 of Title 11 of the Administrative Code. Thus, the additional exemption attributable to a partner cannot exceed that partner's unincorporated business taxable income allocable to New York City in the case of an unincorporated partner or that partner's net income allocable to New York City in the case of a corporate partner.

(3) Other rules for computation of additional exemption.

(i) Where a partnership or other unincorporated entity is entitled to exemption under paragraph (1) of this subdivision (b) with respect to more than one of its partners or members, a separate computation with respect to each partner or member must be made.

Example 1: A joint venture is entered into by four individual venturers, and X & Y, a partnership, taxable under Chapter 5 of Title 11 of the Administrative Code, and Z Inc., a corporation taxable under Chapter 6 of Title 11 of the Administrative Code. The partnership X & Y and the corporation Z Inc. each have a one-third interest in the income and profits of the joint venture. The activities of the joint venture are carried on in such a manner as to constitute the carrying on of an unincorporated business. The interests of four individual members (other than X & Y partnership or Z Inc.) in the venture are not connected with any other business carried on by them and they devote their full business time to the operation of the venture. Partnership X & Y invested business funds in the venture and, as a separate entity, was engaged in the conduct of a separate unincorporated business which it carried on both within and without New York City with an allocation of 60 percent to New York City for unincorporated business income tax purposes. Partnership X & Y had allocated taxable business income of $200,000. The corporate return of Z Inc., which included the corporate partner's share of the joint venture income, showed a business allocation of 75 percent to New York City. Corporation Z had allocated taxable net income of $200,000. Assuming the joint venture net income (before deduction for compensation for services of partners) to be $300,000 (of which $100,000 is distributable to X & Y and $100,000 to Z Inc.), and assuming $30,000 allowable as the deduction for partners' services under 19 RCNY § 28-08(a), the additional exemptions allowed under this subdivision (b) would be computed in the following manner:

Joint venture net income (before 19 RCNY § 28-08(a) deduction)	$300,000
Deduction for services permitted under 19 RCNY § 28-08(a)	($30,000)
Excess of unincorporated business gross income over unincorporated business deductions	$270,000
Additional exemption allowable with respect to individual venturers	None
Additional exemption allowable with respect to Partnership X & Y (1/3 x $270,000)	$90,000
Additional exemption allowable with respect to Partner Z Inc. (1/3 x $270,000)	$90,000
Total additional exemptions allowable	$180,000

(The additional exemption computed above would not be affected by any allocation the joint venture would have been entitled to make if the unincorporated business of the joint venture had been carried on both within and without New York City. The additional exemption would be allowable in addition to the specific exemption of $5,000 provided for in 19 RCNY § 28-09(a).

The additional exemption of the joint venture allowable with respect to the X & Y Partnership or the corporation Z, Inc. is not limited by either the 60% allocation percentage used by X & Y Partnership on its tax return or the 75% allocation percentage used by the corporation Z, Inc. on its tax return, except to the extent that the allocation percentage may reduce allocated taxable income or entire net income to an amount less than the distributive share; see paragraph (2) and example 2 of paragraph (3) of this subdivision (b).

Example 2: Same facts as in Example 1, except that partnership X & Y had allocated taxable business income of $50,000 and corporation Z Inc. had allocated taxable net income of $25,000. The additional exemption is now limited by the amount of the allocated taxable business income and allocated taxable net income of the partners. The total additional exemption cannot exceed $50,000 (for Partnership X & Y) plus $25,000 (for corporation Z Inc.) or $75,000.

Example 3: A joint venture, whose business is conducted wholly in New York City is entered into by 4 equal partners, Corporation A, Corporation B, Partnership C and Partnership D. All 4 partners allocate their net or taxable income 100% to New York City. None of the four partners are actively engaged in the conduct of the unincorporated business.

Distribution of Joint Venture Income:

Corporation A	$100,000
Corporation B	$100,000
Partnership C	$100,000
Partnership D	$100,000
Total Income	$400,000
(Allocated 100% to NYC)

	Corp. A	Corp. B	Part. C	Part. D
Distribution from joint venture	$100,000	$100,000	$100,000	$100,000
Net Income From other business operations	$50,000	($150,000)	($100,000)	($50,000)
Total Taxable Net or Business Income	$150,000	($50,000)	$ -0-	$50,000
Additional Exemption Allowed	$100,000	$ -0-	$ -0-	$50,000

(ii) The excess of unincorporated business gross income over unincorporated business deductions includes amounts actually paid or incurred to a partner or member which are not allowed as a deduction under 19 RCNY § 28-06(d)(1). The computation of the proportionate interest of a partner or member in such excess must reflect these non-deductible direct payments made or incurred by the unincorporated business as well as the balance of the excess distributable by the unincorporated business. Payments or distributable amounts may be included in the computation of a partner's or member's proportionate interest in the excess of unincorporated business gross income over allowable unincorporated business deductions only if these payments or distributable amounts are included by the partner or member in computing its taxable income allocable to the City (for non-corporate partners) or net income allocable to the City (for corporate partners).

Example 4: Corporation A, Partnership B and Mr. C enter into a joint venture subject to the unincorporated business tax. Each partner is an equal member of the venture and is actively engaged in the conduct of the venture's business. Corporation A provides services to the venture for which it is paid $300,000 by the venture. This payment is for services of a type which are not allowed as a deduction under 19 RCNY § 28-06(d)(1) of these regulations. The venture incurs no other expenses during the year. The venture's gross income for the year is $450,000. $15,000 is allowable as the deduction for partners' services under 19 RCNY § 28-08(a). Since the $300,000 paid to Corporation A is not allowed as a deduction, the excess of gross income over allowable deductions is $435,000. Each partner's proportionate interest in this excess is computed in the following manner:

Joint venture net income before 19 RCNY § 28-08(a) deduction for services	$450,000
($300,000 payment to Corporation A is not an allowable deduction under 19 RCNY § 28-06(d)(1).)
Deduction for services permitted under 19 RCNY § 28-08(a)	($15,000)
Excess of U.B. gross income over U.B. deductions	$435,000
Direct payment to Corporation A which is not allowed as a deduction under 19 RCNY § 28-06(d)(1)	($300,000)
Balance distributable	$135,000

Corporation A's proportionate interest in the excess of U.B. gross income over U.B. deduction is the sum of:

Direct payments not deductible by the partnership	$300,000
Pro rata share of the distributable balance (1/3 of $135,000)	$45,000
	$345,000	$345,000

Partnership B's proportionate interest in the excess of U.B. gross income over U.B. deductions is the sum of:

Direct payments not deductible by the partnership	$0
Pro rata share of the distributable balance (1/3 of $135,000)	$45,000
	$45,000	$45,000

Mr C's proportionate interest in the excess of U.B. gross income over U.B. deductions is the sum of:

Direct payments not deductible by the partnership	$0
Pro rata share of the distributable balance (1/3 of $135,000)	$45,000
	$45,000	$45,000
Total of all proportionate interests in the excess of U.B. gross income over U.B. deductions		$435,000

If Corporation A's net income allocable to New York City is $345,000 or more, the venture will be allowed an additional exemption of $345,000 for its distributions and payments to Corporation A. If Partnership B's taxable income allocable to New York City is $45,000 or more, the venture will be allowed an additional exemption of $45,000 for its distribution to Partnership B. No additional exemption is allowed for distributions made to Mr. C. Example 5: Same facts as in example 4, except that the venture's gross income is $150,000. $15,000 is allowable as the deduction for partners' services under § 28-08(a) of these regulations. Since the $300,000 paid to Corporation A is not allowed as a deduction, the excess of gross income over allowable deductions is $135,000. Each partner's proportionate interest in this excess is computed in the following manner:

Joint venture net income before 19 RCNY § 28-08(a) deduction for services ($300,000 payment to Corporation A is not an allowable deduction under 19 RCNY § 28-06(d)(1).)	$150,000
Deduction for services permitted under 19 RCNY § 28-08(a)	($15,000)
Excess of U.B. gross income over U.B. deductions	$135,000
Direct payment to Corporation A which is not allowed as a deduction under 19 RCNY § 28-06(d)(1)	($300,000)
Balance distributable (not less than zero)	0

Corporation A's proportionate interest in the excess of U.B. gross income over U.B. deductions is the sum of:

Direct payments not deductible by the partnership (not to exceed 100% of the excess)	$135,000
Pro rata share of the distributable balance	0
	$135,000	$135,000

Partnership B's proportionate interest in the excess of U.B. gross income over U.B. deductions is the sum of:

Direct payments not deductible by the partnership	$0
Pro rata share of the distributable balance	$0
	$0	$0

Mr. C's proportionate interest in the excess of U.B. gross income over U.B. deductions is the sum of:

Direct payments not deductible by the partnership	$0
Pro rata share of the distributable balance	$0
	$0	$0
Total of all proportionate interests in the excess of U.B. gross income over U.B. deductions		$135,000

If Corporation A's net income allocable to New York City is $135,000 or more, the venture will be allowed an additional exemption of $135,000 for its payments to Corporation A. Partnership B has no part in the $135,000 excess of gross income over allowable deductions. No additional exemption is allowed the venture with respect to Partnership B. No additional exemption is allowed for distributions made to Mr. C.

(iii) Where an unincorporated business is entitled to an additional exemption with respect to a partner which is also a member in one or more other unincorporated businesses, the total additional exemption allowable to all the unincorporated business with respect to this common partner cannot exceed that partner's taxable or net income allocable to New York City. In the event the total of the common partner's proportionate interest in the excess of unincorporated business gross income over allowable deductions of all the unincorporated businesses is greater than the common partner's taxable or net income allocable to New York City, then each unincorporated business will be allowed an additional exemption with respect to this common partner which is limited to that unincorporated business' pro rata share of the common partner's taxable or net income allocable to New York City. The pro rata share is computed by multiplying the common partner's taxable or net income allocable to New York City by a fraction. The numerator of this fraction shall be the common partner's share of the excess of unincorporated business gross income over allowable deductions. The denominator shall be the total of all the shares of the excess of unincorporated business gross income over allowable deductions received by the common partner. No significance shall be given to whether all the unincorporated businesses are related or unrelated.

Example 6: Corporation A is a member of three joint ventures: AB, AC and AD. Corporation A's proportionate interest in the excess of venture AB's gross income over venture AB's allowable deductions is $100,000. Corporation A's proportionate interest in the excess of venture AC's gross income over venture AC's allowable deductions is $300,000. Corporation A's proportionate interest in the excess of venture AD's gross income over venture AD's allowable deductions is $400,000. Corporation A's other activities during the year have resulted in losses. Corporation A's net income allocable to New York City is $400,000.

The maximum additional exemption allowable to venture AB for Corporation A is its pro rata share of Corporation A's net income allocable to New York City or $50,000

[$400,000 × $100,000 = $50,000].
$800,000

The maximum additional exemption allowable to venture AC for its distribution to Corporation A is $150,000

[$400,000 × $300,000 = $150,000].
$800,000

The maximum additional exemption allowable to venture AD for its distribution to Corporation A is $200,000

[$400,000 × $400,000 = $200,000].
$800,000

(iv) The additional exemption allowed an unincorporated business with respect to a corporate partner is limited to the corporate partner's net income allocable to the City even though the corporate partner does not pay a New York City general corporation tax measured by allocated net income because one of the alternative measures of the general corporation tax produces a higher tax.

Example 7: Partnership ABC is composed of three corporate partners, Corporation A, Corporation B and Corporation C. The partnership distributes $100,000 to each corporate partner. Corporation A's other activities have resulted in losses. Corporation A's net income allocable to New York City is zero. Corporation A will pay its New York City general corporation tax computed on capital. Corporation B's net income allocable to New York City is $50,000, but because of large salary payments to officers its New York City general corporation tax liability will be determined under the alternative measure based on entire net income plus officer's compensation. This alternative base totals $75,000. Corporation C's net income allocable to New York City is $200,000. No additional exemption will be allowed Partnership ABC for its distribution to Corporation A because Corporation A's net income allocable to New York City is zero. The additional exemption allowed Partnership ABC for its distribution to Corporation B is $50,000. The additional exemption allowed Partnership ABC for its distribution to Corporation C is $100,000, the full amount of the distribution to Corporation C.

§ 28-10 [Reserved.]

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