(1) Expenses paid or incurred during the taxable year for:

(i) the production or collection of income which is exempt from New York State personal income tax; or

(ii) the management, conservation or maintenance of property held for the production of such income; and

(2) The amortizable bond premium for the taxable year on any bond the interest income on which is exempt from New York State personal income tax; to the extent such expenses and premiums are deductible in determining Federal adjusted gross income. Expenses, and amortizable bond premiums otherwise allowable, which are directly attributable to any class of income (either taxable or exempt for New York State personal income tax purposes) must be allocated to the class to which they relate, and if an item of expense or premium is attributable to both taxable and exempt income, a reasonable portion thereof, based on all facts and circumstances, must be allocated to each class. (See section 612[b][5] of the Tax Law.) A dealer in United States and municipal securities received $20,000 of interest income on United States bonds (fully taxable for Federal income tax purposes) and $30,000 of interest income on state and local bonds, $5,000 of which represented interest income on bonds issued by the City of New York. Expenses of the taxpayer (other than interest expense) attributable to the production and collection of such interest income amounted to $7,500, consisting of $1,500 attributable to the United States bond interest income, $4,500 attributable to the state and local bond interest income, and $1,500 attributable to both types of interest income. In determining Federal adjusted gross income, the taxpayer included the interest income on the United States bonds and deducted as business expenses the collection expenses of $7,500. For New York State personal income tax purposes, the modifications based on the foregoing income and expense items which are to be made in determining New York adjusted gross income are as follows: 1. The $20,000 of interest income on United States bonds is to be subtracted from Federal adjusted gross income (see section 112.3[a] of this Part). 2. The $25,000 of interest income on state and local bonds, other than the New York City bonds, is to be added to Federal adjusted gross income (see subdivision[a] of this section). 3. In accordance with this subdivision, expenses in the amount of $3,000 attributable to income exempt from New York State personal income tax are to be added to Federal adjusted gross income. The amount of expenses allocated to such exempt income is computed in the following manner: An individual engaged in business as a building contractor owns United States bonds which such individual regularly posts as security in lieu of performance bonds to guarantee completion of contracts entered into in the course of such individual's business. When such bonds are purchased at a premium, it is the taxpayer's regular practice to amortize the bond premium in accordance with the provisions of the Internal Revenue Code. Under these circumstances, the amortization of bond premium is deductible in arriving at Federal adjusted gross income since it is a deduction attributable to a trade or business. Since the interest income on the bonds involved is not subject to New York State personal income tax and is subtracted from Federal adjusted gross income in determining New York adjusted gross income (see section 112.3[a] of this Part), the taxpayer is required to add to Federal adjusted gross income the amount of any deduction for amortization of bond premium reflected therein with respect to the tax-exempt United States bonds.