New York’s Governor Cuomo is having a bad 2021. Some may attribute this to his hubris or to karma; others may point to an emboldened, and now veto-proof,[i] progressive State Legislature; many will claim that Mr. Cuomo is paying the price for being out of touch with the electorate. Whatever the reason, his fall from “political grace” has been precipitous, and it has had immediate[ii] consequences for tax policy in New York, as manifested in the $212 billion budget agreement (the “Bill”) that the Governor announced last week.

The Budget Deal

Among the Bill’s[iii] tax-related provisions are the following: a “temporary” increase in personal income tax rates for higher-income taxpayers;[iv] a temporary increase in the corporate income tax rate;[v] the extension of liability for real estate transfer taxes to so-called “responsible persons”; the imposition of a pass-through entity tax;[vi] and the modification of some “inclusions and exclusions for certain definitions of income.”[vii]

The Bill goes much further than the Governor’s original budget proposal,[viii] and marks a significant retreat from his earlier refusals to increase income taxes for fear of driving affluent New Yorkers and their businesses out of the State.[ix]

Likewise, the Bill did not go as far as the Legislature – and especially the progressive arm of the State’s Democratic Party – would have preferred insofar as “taxing the rich” is concerned.[x]

Even so, the Legislature seems to have succeeded in denying New York residents the ability to defer the recognition of capital gain and, therefore, the imposition of state and local taxes upon such gain, by investing the amount of the gain in a manner prescribed by the Code, as amended by the TCJA.[xi]


But how, you may ask, can New York prevent a taxpayer from claiming a benefit created under federal law? Easy – by “decoupling” from, or choosing not to conform to, specific provisions of the Code.

About sixty years ago, New York revised its personal income tax law to achieve close conformity with the federal system of income taxation.[xii] The stated purpose for the revision was to simplify tax return preparation, improve compliance and enforcement, and aid in the interpretation of tax law provisions. In furtherance of this policy of conformity, as the Code is amended by Congress, New York automatically adopts the federal changes.[xiii]

However, New York’s Tax Law does not conform to the Code in all respects. Indeed, there are several instances in which New York has chosen not to conform to, or has “decoupled” from, specific provisions of or amendments to the Code.[xiv]

By far, the most significant example of New York’s conformity to the Code is found in the State’s computation of a New York taxpayer’s State income tax liability; this begins with the taxpayer’s federal adjusted gross income,[xv] which is then modified by certain New York “additions” and subtractions”[xvi] – basically, items for which New York has decided a different tax treatment is appropriate for its own purposes.

In general, a taxpayer’s adjusted gross income is determined by reducing their gross income by certain deductions attributable to the taxpayer’s trade or business, deductions attributable to the production of rental income, and losses from the sale or exchange of certain property.[xvii]

Of course, a taxpayer’s gross income includes gain realized on the sale or exchange of property, unless such gain is excluded by law.[xviii]

Qualified Opportunity Zones

By now, you may be wondering from what TCJA-related provision(s) of the Code does New York plan to decouple?

The answer: The Qualified Opportunity Zone rules, which provide for the deferred recognition of capital gain (plus other benefits) for eligible taxpayers who make an equity investment in a qualified opportunity fund (“QOF”).[xix]

These rules were enacted with the stated purpose of spurring economic growth and job creation in designated distressed communities (“qualified opportunity zones,” or “QOZ”) by providing federal income tax benefits to taxpayers who invest in businesses located within these zones.

Low-income communities and certain contiguous communities generally qualified as opportunity zones if a state nominated them for that designation and the federal government certified that nomination.

New York participated in the opportunity zone program. Based on analyses by Empire State Development, New York State Homes and Community Renewal, New York State Department of State, and the State’s Regional Economic Development Councils, New York recommended 514 census tracts to the U.S. Department of the Treasury for designation as QOZs.[xx]

The Code provides three income tax incentives to encourage investment in a QOZ:

  • the temporary deferral[xxi] of inclusion in gross income of certain capital gains to the extent they are reinvested in a QOF;
  • the partial exclusion of such capital gains from gross income to the extent they remain invested in the QOF for a certain length of time;[xxii] and
  • the permanent exclusion of post-acquisition capital gains (appreciation) from the sale or exchange of an interest in a QOF held for at least 10 years.[xxiii]

Obviously, the tax incentives under the QOZ program seek to encourage a long-term investment.

In general, a QOF is an investment vehicle organized as a corporation or as a partnership for the purpose of investing in qualified opportunity zone property. To be able to defer the recognition of capital gain, a taxpayer must generally invest in a QOF during the 180-day period beginning on the date of the sale or exchange giving rise to the gain.[xxiv]

Qualified opportunity zone property is a QOF’s qualifying ownership interest in a corporation or partnership that operates a qualified opportunity zone business in a QOZ, or certain tangible property of the QOF that is used in a business in the QOZ.[xxv]

New York’s Initial Take on QOZs

New York conformed to the QOZ rules as enacted by the TCJA.

According to New York’s “QOZ FAQs,” both the deferral and the exclusion of a taxpayer’s capital gains from federal income will flow through to the State; meaning, those gains will also be deferred and excluded from the taxpayer’s New York taxable income.

However, it did not take long after the enactment of the QOZ rules late in 2017 – and, indeed, only four months after the IRS proposed its first set of long-awaited regulations under such rules in October 2018, and just before the second set of regulations was proposed in April 2019 – that State Senator Mike Gianaris[xxvi] announced that he would introduce legislation to eliminate, for purposes of the New York income tax, the deferral and exclusion tax benefits associated with investments in QOZs.

According to the Senate Deputy Leader, this legislation would prevent “a massive and unjust giveaway of state resources” to the wealthy.[xxvii]

Fast forward.

The Bill and QOFs

As indicated above, the Bill decouples the State’s tax treatment of taxpayer investments in QOFs from the federal tax treatment thereof under the Code.

It does this by amending the definition of “entire net income,” in the case of corporate taxpayers, such that the amount of gain excluded under the Code for the taxable year in question is not excluded from the corporation’s New York entire net income. Similarly, in the case of individual taxpayers, the Bill requires that the amount of gain excluded under the Code be added back to the taxpayer’s adjusted gross income for purposes of determining their New York income tax liability.[xxviii]

The Bill is proposed to take effect immediately and shall apply to taxable years beginning on or after January 1, 2021.[xxix]

Thus, once the Bill is enacted, New York taxpayers will not be able to defer or exclude their recognition of capital gain, for purposes of determining their 2021 State or local income tax liability, by making a timely and qualifying investment in a QOF that operates within a New York QOZ. Rather, such gain will have to recognized currently, and the New York income tax imposed thereon will have to be paid, perhaps even at the higher tax rates provided under the Bill.

It appears that this recognition rule will apply even if the taxpayer realized the capital gain between January 1, 2021 and the enactment date of the Bill, and even if such taxpayer has made a pre-enactment-date investment in a QOF that is effective for federal tax purposes.[xxx]

The above change in New York’s tax treatment of investments in QOFs will not affect the benefits available to the taxpayer under federal law, assuming the Biden administration and Congress do not tamper with the Code’s QOF rules.[xxxi] That said, unless Congress repeals or increases the SALT cap, the New York tax liabilities incurred by taxpayers because of the Bill’s decoupling from the federal QOZ rules will not be deductible for federal tax purposes, unless the Bill’s SALT workaround provision applies.

What Does It Mean?

Whatever the basis (empirical or otherwise) for Senator Mike’s conclusion[xxxii] that the QOZ/QOF regime benefits only wealthy investors, without any benefit for the communities in which QOFs operate, the Democrats now control the White House and the Congress in Washington, as well as the Executive Mansion and the State Capitol in Albany. If the program needs tweaking, then tweak it, but do not cast it in the light of a plan that was conceived only to provide the wealthy with additional tax benefits.[xxxiii] The concept of encouraging investment in QOZs by providing tax benefits is sound and should be continued – give the program a chance.

What will happen at the federal level remains to be seen, but Candidate Biden expressed no interest in discarding the QOZ/QOF regime. Rather, he indicated that he would reform it; for example, by tasking the Treasury Department to review the social and economic benefits arising from the program, and based thereon, to make appropriate changes.

Of course, the decision has already been made at the State level to stop supporting the program by denying New York taxpayers the state and local tax savings that would otherwise arise from their investment in QOZs under the policy of conformity.

How does one reconcile New York’s position with what will likely be the federal approach? Is it likely that sponsors of QOFs will focus their efforts within other taxing jurisdictions that, unlike New York, continue to conform to the Code? Will investors and businesses interpret Albany’s actions as further evidence of the State’s hostility toward them?

Stay tuned.

[i] Following the November 2020 elections.

[ii] Some would add, “and adverse.”

[iii] NY A03009. .

[iv]  Including an increased rate (from 8.82% to 9.65%) for joint filers with over $2.2 million of taxable income for a taxable year, and the creation of new rate brackets: 10.3% for joint filers with over $10 million of taxable income, and 10.9% for those with over $50 million. These new rates would expire in 2027.

[v] From 6.5% to 7.25%. This is a 3-year increase. We hope.

[vi] To circumvent the SALT cap enacted by the Tax Cuts and Jobs Act in 2017 (“TCJA”; P.L. 115-97).

The workaround is based upon IRS Notice 2020-75,  

See .

[vii] See Part DDD of the Bill.

[viii] See my article online, “Taxes in New York’s FY 2022 Budget,” January 25, 2021.

[ix] The Governor’s concern was based, in part, on the realization by many businesses and their employees that they did not require a physical presence in the State to conduct business. Why, then, would these businesses and individuals subject themselves to New York’s tax jurisdiction?

[x] The Legislature had proposed many other provisions aimed at increasing the tax liability of wealthier New York residents. Among the proposed changes that did not make it into the Bill are the following: (1) the imposition of a one percent surcharge – on top of the regular personal income tax – on the capital gains of taxpayers with adjusted gross incomes of over $1.0 million per year; (2) the imposition of a pied-a-terre tax on high-end second homes; and (3) the increase of the top estate tax rate from 16% to 20%. . Query how much political capital the Governor expended in keeping these measures out of the Bill?

[xi] Is the suspense killing you?

[xii] Thus, New York’s Tax Law provides that: “Any term used in this article shall have the same meaning as when used in a comparable context in the laws of the United States relating to Federal income taxes, unless a different meaning is clearly required but such meaning shall be subject to the exceptions or modifications prescribed in this article or by statute.” N.Y. Tax Law 607(a). Consistent with the foregoing, a taxpayer’s taxable year and accounting method for purposes of the Tax Law are the same as for Federal income tax purposes. N.Y. Tax Law Sec. 605.

[xiii] So-called “rolling conformity.”

[xiv] For example, New York elected not to conform to parts of the TCJA, including the limitation on certain itemized deductions. By decoupling, N.Y. effectively became a “fixed date” conformity jurisdiction: it applies the federal law as it was prior to the federal changes.

[xv] IRC Sec. 62.

[xvi] Start with Tax Law Sec. 612(a), (b) and (c).

[xvii] IRC Sec. 62(a). There are also a few other, targeted items.

[xviii] IRC Sec. 61; Reg. Sec. 1.61-6; IRC Sec. 1001.

[xix] IRC Sec. 1400Z-1 and 1400Z-2. These rules had their genesis in Democratic Party circles.

See my articles online: “Sale of a Business and Qualified Opportunity Funds: Deferral, Exclusion, and . . . Risk,” February 5, 2019; “Deferring Real Property Gain: Like Kind Exchange or Opportunity Fund?” April 2 and April 3, 2019 (two parts).

[xx] . Nationally, well over 8,000 QOZs were designated.

[xxi] The deferred gain must be included in the taxpayer’s gross income for the taxable year ending December 31, 2026, and taxed accordingly. No election may be made to defer gain recognition under the QOZ rules after 2026.

[xxii] If the taxpayer holds their investment in the QOF for at least 5 years through the end of 2026 (meaning the investment is made by the end of 2021), the gain to be recognized in 2026 will be reduced by 10%; if the taxpayer holds the investment for seven years (meaning they invested in the QOF by the end of 2019), the gain to be recognized will be reduced by another 5% – 15% in total.

[xxiii] IRC Sec. 1400Z-2.

[xxiv] The cash invested by a taxpayer in a QOF does not have to be traced to the transaction that generated the capital gain that is being deferred. The amount invested by the taxpayer may come from another source; it may even be borrowed by the taxpayer.

[xxv] In other words, the QOF may be invested in business entities that operate in the QOZ, or the QOF may itself be engaged directly in a business in the QOZ.

[xxvi] If Mike’s name sounds familiar, it should. He has also been labeled the “Amazon Killer” or the “Amazon Slayer.” (Good grief.) Now do you remember?

In his attack on QOZ designations in New York, he described “areas already suffering from overdevelopment and gentrification.”

[xxvii] .

[xxviii] S.2509/A.3009, Part DDD. Similar changes are made for purposes of New York City taxes.

[xxix] Section 13 of Part DDD of the Bill.

[xxx] In other words, the Bill will prevent taxpayers who realized capital gains during the period beginning January 1, 2021 and ending with the date of enactment from electing to defer the recognition of such gain for New York tax purposes by investing in a QOF.

[xxxi] More details regarding the President’s tax plan should be forthcoming over the next few weeks.

[xxxii] I should add that he is not alone, and that the criticism is not limited to New York legislators.

[xxxiii] That line may have played well to segments of society during the Trump-bashing era.