Main Menu Main Content
Noonan’s Notes Blog

About This Blog

Noonan’s Notes Blog is written by a team of Hodgson Russ tax attorneys led by the blog’s namesake, Tim Noonan. Noonan’s Notes Blog regularly provides analysis of and commentary on developments in the world of New York and multistate tax law. Noonan's Notes Blog is a winner of CreditDonkey's Best Tax Blogs Award 2017.

Contributors

Timothy Noonan 
Ariele Doolittle
Joseph Endres
Daniel Kelly
Elizabeth Pascal 
Craig Reilly
Andrew Wright 

Can a New York Resident Claim a Resident Tax Credit for the Connecticut Pass-through Entity Tax?

By on

Last week the Massachusetts Department of Revenue released a Directive (Directive 19-1) announcing its position that its residents can claim a credit for the taxes paid by pass-through entities under Connecticut’s PET, the Connecticut workaround to the federal cap on state and local tax deductions. Practitioners with New York clients have been asking the same question, but the New York Tax Department has not, up to this point, provided any similar guidance.

So what do we think from this corner? Again, the question is whether a New York resident can claim a resident tax credit under Tax Law § 620 for the portion of the PET tax paid on its behalf.

Under Tax Law § 620(a), a resident is allowed a credit “for any income tax imposed for the taxable year by another state of the United States . . . upon income both derived therefrom and subject to tax under this article.”  The language of the statute, interestingly enough, does not specifically indicate that the tax has to be paid directly by the individual taxpayer. Moreover, there is a specific provision under Tax Law § 620(d) relative to S-corporation shareholders making clear that the term “income tax” under subsection (a) of Tax Law § 620 “shall not include any such tax imposed upon or payable by the corporation.”  So from one perspective, it would appear that if the law under 620(a) prohibited the application of a credit for an entity-level tax, this S corporation carve-out would not be needed. Thus, since Tax Law § 620(a) does not specifically require the tax to be paid by the individual taxpayer, a reasonable conclusion can be reached that an entity level income tax paid by a partnership or a limited liability company is creditable under Tax Law § 620. 

Unfortunately, as noted above, there are no official Tax Department publications or tax return instructions providing this guidance. One reason for this could be that there is some concern that taking such a public position might actually undermine what Connecticut is trying to do and therefore cause more harm than good. For instance, as we noted in our November 2018 article on the PET tax, if a partner is allowed a resident credit for the tax paid in her home state by the pass-through entity, does this give the IRS more basis to claim that the “tax” here was really on the partner, not the entity? For now, as has been reported, the IRS’s silence on the issue is leading some to conclude that it won’t attack these types of passthrough-entity-tax workarounds in the same way they attached the charitable-deduction workarounds.

For what it’s worth, I did speak with a Tax Department official about this and was told that the Tax Department has not taken a formal position on this issue. However, it has been providing informal guidance to taxpayers who have asked the question. That guidance is as follows: “if you believe that the taxpayer is entitled to a credit, the credit can be taken on the return and an explanation should be included disclosing the position.” Something like this probably works for a statement:

The taxpayer is claiming a credit of $____for income taxes paid to the state of Connecticut on its behalf by [INSERT NAME OF ENTITY].  Because this Connecticut tax was paid by the entity upon an income both derived from Connecticut and income that is subject to tax under this article, the taxpayer believes a credit is allowable under Tax Law § 620.” 

Given the Tax Department’s ambivalence on this issue, I would guess that the Tax Department will not be actively seeking to deny credits claimed by taxpayers for the Connecticut pass-through entity tax, at least for taxes paid by partnerships or LLCs. That said, because of the specific carve-out for S-corporation shareholders in Tax Law §620 (d), it is less likely that an S-corporation shareholder would be able to claim credit for the pass-through entity tax paid by the corporation. Still, and again given the Department’s relative silence on the issue, even S- corporation shareholders could consider taking the approach above, i.e., to claim the resident credit but include a statement with the return disclosing the position.

Of course, none of this constitutes any sort of binding, legal advice….probably best for you to not get that from a blog! However, you know where to find us if you want advice.

Post a comment:

*All fields are required.

Attorney Advertising
Hodgson Russ LLP

Principal Address:
The Guaranty Building
140 Pearl Street, Suite 100
Buffalo, NY 14202
Tel: 716.856.4000
Stay Connected
RSS LinkedIn

About This Firm

Hodgson Russ attorneys facilitate the U.S. legal aspects of transactions around the world. We practice in every major area of law and use multidisciplinary work teams to serve the specific, often complex, needs of our clients, which include public and privately held businesses, governmental entities, nonprofit institutions, and individuals.