20 NYCRR 132.8 Section 132.8 Undistributed taxable income, net operating loss and gain or loss on sale or exchange of stock with respect to an electing small business corporation. [Tax Law, §632(b)(2)-(4)]

For a nonresident individual who is a shareholder of a corporation which is an electing small business corporation for Federal income tax purposes:
(a) undistributed taxable income of such corporation does not constitute income or gain derived from New York State sources;
(b) a net operating loss of such corporation does not constitute a loss or deduction derived from or connected with New York State sources; and
(c) any gain or loss realized or incurred on the sale or exchange by such dividual of stock of a small business corporation does not constitute a gain or loss derived from or connected with New York State sources. This includes a loss incurred by such individual which is treated as an ordinary loss under section 1244 of the Internal Revenue Code.