1. (1) General. Where (i) the election to be treated as a New York S corporation under section 660(a) of the Tax Law is not in effect for one or more taxable years beginning after December 31, 1980, and (ii) a gain or loss is recognized for Federal income tax purposes from the disposition of stock or indebtedness of a corporation electing under Subchapter S of the Internal Revenue Code, and (iii) such gain or loss is reflected in Federal adjusted gross income; the modifications referred to in sections 112.2(r) and 112.3(q) of this Part are to be made in accordance with subdivisions (b), (c), and (d) of this section with regard to such gains or losses.
2. (2) Exception. A resident shareholder of an S corporation that cannot make the election provided for under section 660(a) of the Tax Law (e.g., a foreign S corporation [i.e., an S corporation that is not incorporated in New York State] that does not do business in New York State or an S corporation that is taxed under article 9 of the Tax Law) is not required to make the modification referred to in this paragraph.

3. (b) An addition shall be made to Federal adjusted gross income for the amount of the increase in the basis of such stock or indebtedness in accordance with:

   1. (1) section 1376(a) of the Internal Revenue Code, (relating to amounts of undistributed taxable income that were required to be included previously in the shareholder's Federal gross income) as such section was in effect for taxable years beginning before January 1, 1983; and
   2. (2) sections 1367(a)(1)(A) and (B) of the Internal Revenue Code (relating to S corporation items of income that were previously required to be included in the shareholder's Federal gross income).

4. (c) A subtraction shall be made to Federal adjusted gross income for the amount of the reduction in basis of such stock or indebtedness in accordance with:

   1. (1) section 1376(b) of the Internal Revenue Code, (relating to the shareholder's pro rata share of the corporations net operating loss) as such section was in effect for taxable years beginning before January 1, 1983; and
   2. (2) sections 1367(a)(2)(B) and (C) of the Internal Revenue Code, (relating to S corporation items of loss and deduction that were previously required to be included in the shareholder's Federal gross income).
5. (d) A subtraction shall be made from Federal adjusted gross income for the amount of any modifications made with respect to stock under section 612(b)(20) of the Tax Law (see section 112.2[q] of this Part).

Tax Law, § 612(n)

(a)