Section 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.