§ 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.

   (c)   Allocation by taxpayer's books. (Administrative Code § 11-508(b)).

      (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

            (C)   payroll for the period for which it is subject to tax in New York City.

         (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.]

§ 28-11 [Reserved.]