1. (1) Under the aggregate method, the taxpayer's distributive share (see section 704 of the Internal Revenue Code) of each partnership item of receipts, income, gain, loss, and deduction and the taxpayer's proportionate part of each partnership asset and liability and each partnership activity are included in the computation of the taxpayer's entire net income base, capital base, minimum taxable income base and the fixed dollar minimum and shall have the same source and character in the hands of the partner for article 9-A purposes as such item has in its hands for Federal income tax purposes. Where an item, amount or activity of the partnership is not characterized for Federal income tax purposes or is not required to be taken into account for Federal income tax purposes, the source and character of each item, amount or activity of the partnership shall be determined as if such item, amount or activity realized, incurred or experienced by the partnership were realized, incurred or experienced directly by the partner.

2. (2) A taxpayer's proportionate part of the partnership's assets and liabilities and activities is determined in accordance with the taxpayer's capital interest in the partnership. If using a taxpayer's capital interest in a partnership to determine the taxpayer's share of partnership items constituting business capital and investment capital does not properly reflect the taxpayer's share of partnership items constituting business income and investment income, then the taxpayer's proportionate part of the partnership's assets and liabilities and activities is determined using the percentage resulting from the manner in which the partners divide the partnership's profits in a profit year and losses in a loss year.

   1. (i) An allocation of an item, amount or activity, even if recognized for Federal income tax purposes, will not be recognized where it has as a principal purpose the avoidance or evasion of any tax imposed on the taxpayer, or the combined group of which the taxpayer is a member, by New York State or any of its political subdivisions. Where an allocation is not recognized, the taxpayer's distributive share shall be determined in accordance with the partner's interest in the partnership (determined by taking into account all facts and circumstances).

   2. (ii) The determination of whether a principal purpose of an allocation of an item, amount or activity is the avoidance or evasion of any tax imposed on the taxpayer, or the combined group of which the taxpayer is a member, by New York State or any of its political subdivisions depends on all the surrounding facts and circumstances. Among the relevant circumstances to be considered are the following:

      1. (a) whether the allocation has substantial economic effect, that is, whether the allocation may actually affect the dollar amount of the partners' shares of total partnership income or loss independently of the tax consequences;
      2. (b) whether the related items of partnership income, gain, loss and deduction from the same source are subject to the same allocation;
      3. (c) whether the allocation was made without recognition of normal business factors and only after the amount of the allocated item could reasonably be estimated;
      4. (d) the duration of the allocation; and

      5. (e) the overall tax consequences of the allocation.

         (b) Entire net income and minimum taxable income bases.

   Example:

   Corporations A and B are partners in partnership P. A will perform services for a 40 percent interest in the profits and losses of the partnership and B will contribute $1,000 for a 60 percent interest in the profits and losses of the partnership. B's capital interest is 100 percent and A's capital interest is zero. P's only asset is $1,000 of stock. The stock pays dividends of $30 during the taxable year. A's distributive share of the dividends is $12 and B's distributive share is $18. Based on capital interests, A's proportionate part of P's stock is zero ($1,000 × 0 percent) and B's proportionate part of P's stock is $1,000 ($1,000 × 100 percent). In this case, using capital interests does not properly reflect A's share of P's stock (which constitutes investment capital). This is because A receives 40 percent of P's dividends (which constitutes investment income) and using capital interests attributes none of P's stock (which constitutes investment capital) to A. Likewise, B receives 60 percent of P's dividends and using capital interests attributes all of P's stock to B. In this case, both A and B must determine their proportionate part of P's assets and liabilities in accordance with their profits and loss interest (40 percent and 60 percent, respectively) in P.

   (3)

3. (1) The taxpayer's distributive share of each partnership item of income, gain, loss and deduction shall be taken into account in the computation of entire net income and minimum taxable income. These amounts shall be taken into account in determining the taxpayer's business income and investment income. (See Subpart 3-2 of this Part and sections 208.9 and 210.1[a] of the Tax Law for information relating to the tax measured by the entire net income base. See Subpart 3-4 of this Part and sections 208.8-B and 210.1[c] of the Tax Law for information relating to the tax measured by the minimum taxable income base.)

4. (2) A taxpayer may use the reduced rate of tax for a small business taxpayer provided in section 210.1(a) of the Tax Law if the taxpayer qualifies as a small business taxpayer as defined in section 210.1(f) of the Tax Law. For purposes of the entire net income component of such section 210.1(f), it shall take into account its distributive share of the partnership items described in paragraph (1) of this subdivision that are included in determining its entire net income.

   (c) Capital base.

5. (1) The taxpayer's proportionate part of each asset and liability of the partnership, such amounts being valued pursuant to Subpart 3-3 of this Part, shall be taken into account in the computation of the capital base. These amounts shall be taken into account when determining business and investment capital. The capital base does not include any amount with respect to the taxpayer's interest in the partnership itself. (See Subpart 3-3 of this Part and sections 210.1[b], 210[1-c] and 210.2 of the Tax Law for information relating to the tax measured by the capital base. See section 3-3.3 of this Part and section 208.7 of the Tax Law for the definition of business capital, section 3-3.2 of this Part and section 208.5 of the Tax Law for the definition of investment capital, and for special rules relating to business and investment capital, see sections 3-3.2[a][1], 3-3.2[a][2][vii], 3-3.2[d][2][ii] and 3-3.3[d] of this Part.)

6. (2) For purposes of the exemption from the tax measured by the capital base for a small business concern, the taxpayer must qualify as a small business concern as defined in section 210(1-c) of the Tax Law. In determining whether the taxpayer qualifies, it shall take into account its proportionate part of partnership amounts described in paragraph (d) of such subdivision.

   (d) Fixed dollar minimum.

7. (1) A taxpayer's distributive share or proportionate part, as the case may be, of partnership amounts of the items described in section 3-5.1(b) of this Part shall be taken into account in determining the tax measured by the fixed dollar minimum. (See Subpart 3-5 of this Part and section 210.1[d] of the Tax Law for information relating to the tax measured by the fixed dollar minimum.)

   (e) Subsidiary capital base.

8. (1) A taxpayer's proportionate part of stock of a corporation owned by a partnership is not subsidiary capital unless the taxpayer directly owns more than 50 percent of the voting stock of such corporation. (See section 3-6.2 of this Part and section 208.3 of the Tax Law for the definition of the term subsidiary. See section 3-6.3 of this Part and section 208.4 of the Tax Law for the definition of subsidiary capital.)
9. (f) For rules relating to the computation of the business and investment allocation percentages, see section 4-6.5 of this Title.

(a)