N.Y. Comp. Codes R. & Regs. tit. 20, § 3-7.2 – Method of computation.

(a) When a taxpayer has a capital loss carry back or carry forward, Federal taxable income must be recomputed. Entire net income must also be recomputed, with the recomputed Federal taxable income as the starting point. In recomputing entire net income, any loss from subsidiary capital included in the capital loss carry back or carry forward must be added to the recomputed Federal taxable income. Any loss from investment capital included in the capital loss carry back or carry forward must be subtracted from investment income. Investment capital losses may only reduce investment income to zero. If the investment capital loss exceeds the investment income, the excess is applied to business income.

Example:

Assume that a taxpayer has a 1971 capital loss of $15,000 which includes a $3,000 subsidiary capital loss, a $10,000 investment capital loss, and the loss is allowed as a carry back to its 1968 taxable year. For taxable year 1968, the taxpayer had a capital gain of $17,000, including a $12,000 business capital gain and a $5,000 investment capital gain.

The taxpayer's original computation for 1968 showed the following:
		Federal taxable income (before any net operating loss deduction and special deductions)	$100,000
		Add: New York State franchise tax deducted on Federal return	5,000
		Total	$105,000
	Subtract: dividends from subsidiary capital	$ 2,000
	Subtract: 50 percent of dividends received from non-subsidiary capital	4,000	6,000
		Entire net income	$ 99,000
	Investment Income:
	50 percent of dividends received from non-subsidiary capital	$ 4,000
	Capital gain	5,000	9,000
		Business income	$ 90,000
The recomputation to allow the carry back is as follows:
		Federal taxable income (before net operating loss deduction and special deductions	$100,000
		Subtract: 1971 capital loss carry back allowed on federal return	15,000
		Recomputed Federal taxable income	$ 85,000
	Add: 1971 loss from subsidiary capital	$ 3,000
	Add: New York State franchise tax deducted on Federal return	5,000	8,000
		Total	$ 93,000
	Subtract: dividends from subsidiary capital	$ 2,000
	Subtract: 50 percent of dividends received from non-subsidiary capital	4,000	6,000
		Entire net income	$ 87,000
	Investment Income:
	50 percent of dividends received from non-subsidiary capital	$ 4,000
	Capital gain	5,000
	Total investment income	$ 9,000
	Subtract: investment capital loss	10,000
		Subtract: net investment income	0
		Business income	$ 87,000

(b) When a taxpayer has both a net operating loss deduction and a capital loss carry back or carry forward to a year in which it has investment income and business income, the ratio of investment income to entire net income must be recomputed to reflect the capital loss carry back or carry forward before apportioning the net operating loss deduction between business income and investment income. For methods of determining the ratio see section 3-8.8 of this Part—Net operating loss deduction of taxpayer with business income and investment income.
(c) When a taxpayer has a capital loss carry forward any loss from investment capital included in the capital loss must be subtracted from the investment income. If the investment capital loss exceeds the investment income, the excess is applied to business income.