§ 617. Resident partners and shareholders of S corporations. (a)
Partner's and shareholder's modifications. In determining New York
adjusted gross income and New York taxable income of a resident partner
or a resident shareholder of an S corporation (other than an S
corporation which is a New York C corporation), any modification
described in subsections (b), (c) or (d) of section six hundred twelve,
subsection (c) of section six hundred fifteen or paragraphs (2) or (3)
of subsection (d) of such section, which relates to an item of
partnership or S corporation income, gain, loss or deduction shall be
made in accordance with the partner's distributive share or the
shareholder's pro rata share, for federal income tax purposes, of the
item to which the modification relates. Where a partner's distributive
share or a shareholder's pro rata share of any such item is not required
to be taken into account separately for federal income tax purposes, the
partner's or shareholder's share of such item shall be determined in
accordance with his share, for federal income tax purposes, of
partnership or S corporation taxable income or loss generally. In the
case of a New York S termination year, his pro rata share of any such
item shall be determined under subsection (s) of section six hundred
twelve.

(b) Character of items. Each item of partnership and S corporation
income, gain, loss, or deduction shall have the same character for a
partner or shareholder under this article as for federal income tax
purposes. Where an item is not characterized for federal income tax
purposes, it shall have the same character for a partner or shareholder
as if realized directly from the source from which realized by the
partnership or S corporation or incurred in the same manner as incurred
by the partnership or S corporation.

(c) New York tax avoidance or evasion. Where a partner's distributive
share of an item of partnership income, gain, loss or deduction is
determined for federal income tax purposes by special provision in the
partnership agreement with respect to such item, and where the principal
purpose of such provision is the avoidance or evasion of tax under this
article, the partner's distributive share of such item, and any
modification required with respect thereto, shall be determined as if
the partnership agreement made no special provision with respect to such
item.