Can amounts rolled over from another state's 529 college savings plan, or rebates accumulated through the Upromise Rewards Service, be deducted as contributions to New York's 529 plan under Tax Law section 612(c)(32)?

Plain-English summary

Upromise Investments, Inc. asked the Department two related questions about New York's college-savings tax deduction. Tax Law § 612(c)(32) lets an account owner subtract contributions to a New York 529 Plan (the College Choice Tuition Savings Program) from federal adjusted gross income, up to $5,000 for an individual or $10,000 for a married couple filing jointly. The first question was whether money rolled over from a 529 plan established by another state into a New York 529 Plan counts as a "contribution" eligible for that subtraction. The second question involved the Upromise Rewards Service, a consumer loyalty program where participating merchants pay rebates into a Member's Upromise account based on the Member's purchases; the question was whether rebates a Member directs from that account into a New York 529 Plan likewise count as a deductible contribution.

On the rollover question, the Department noted that a 2001 federal law (EGTRRA) amended IRC § 529(c)(3)(C)(i) to let an account owner roll over a 529 plan balance to another state's 529 plan for the same beneficiary, tax-free, if the transfer happens within 60 days. Because that federal rollover is not taxed, the Department concluded that a transfer from another state's 529 Plan into a New York 529 Plan is a "contribution" for purposes of § 612(c)(32) - including the earnings portion of the rolled-over distribution, not just the amount originally invested in the other state's plan.

On the Upromise question, the Department focused on who controls the money. Rebates are deposited into a Member's own Upromise account, and the Member has no obligation to send them to any 529 plan - a Member can instead withdraw the funds, gift them to another Member, donate them to the Upromise Education Foundation, or change the account's beneficiary. Because the Member decides whether the rebates go into the New York 529 Plan, get paid out personally, or go somewhere else entirely, the Department treated a Member's decision to direct rebates into the New York 529 Plan as the Member's own contribution, drawing an analogy to an IRS ruling that treated a cardholder's affirmative election to send credit-card rebates to charity as a deductible charitable contribution by the cardholder.

The upshot: both the rolled-over 529 funds and the self-directed Upromise rebates are treated as contributions made "by an account owner" within the meaning of § 612(c)(32), so both are eligible for the New York subtraction modification, subject to the statute's dollar caps.

What this means for you

Families rolling over an out-of-state 529 plan into New York's plan

If you roll over an account from another state's 529 plan into the New York 529 Plan for the same beneficiary (or a family member of the beneficiary) within the 60-day window that IRC § 529(c)(3)(C)(i) allows, the full amount transferred - including any earnings - can be treated as a "contribution" for purposes of the New York subtraction under Tax Law § 612(c)(32), up to the $5,000/$10,000 annual cap.

Upromise (or similar rebate-program) participants funding a 529 plan

If you accumulate purchase rebates in a Upromise-style rewards account and then choose to direct those rebates into your New York 529 Plan account, that election counts as your own contribution for deduction purposes - because you, not the rebate program, control whether the money goes to the 529 plan, gets paid out to you, or goes somewhere else.

Accountants and tax professionals

When verifying a client's § 612(c)(32) subtraction, look past the label on the deposit source (rollover, rebate-program transfer, etc.) and confirm that the account owner - not a third party - had discretion over where the funds ultimately went. Discretion held by the account owner is what makes a transfer a "contribution" rather than a mere administrative pass-through.

Common questions

Q: Does rolling over funds from another state's 529 plan into New York's plan qualify for the New York deduction?
A: Yes. The Department treated such a rollover, including its earnings portion, as a contribution eligible for the Tax Law § 612(c)(32) subtraction, provided it meets the IRC § 529(c)(3)(C)(i) rollover requirements (same beneficiary or family member, completed within 60 days).

Q: Are Upromise rebates directed into a New York 529 Plan deductible the same way as cash contributions?
A: Yes, according to this opinion - because Members have exclusive control over their rebate balances and can choose to send them to the 529 plan, withdraw them, gift them, or donate them elsewhere, a Member's election to fund the New York 529 Plan is treated as the Member's own contribution.

Q: Is there a dollar limit on how much can be subtracted under section 612(c)(32)?
A: Yes. The subtraction cannot exceed $5,000 for an individual or head of household, or $10,000 for a married couple filing a joint New York return, regardless of whether the funds came from a rollover, a rebate program, or a direct deposit.

Q: What if a Upromise Member never directs their rebates to a 529 plan?
A: Nothing requires it. Members may instead withdraw the balance, gift it to another Member through the "Family and Friends" network, donate it to the Upromise Education Foundation, or simply leave it in the account - the § 612(c)(32) deduction only applies to amounts actually contributed to a New York 529 Plan.

Citations and references

• Tax Law § 612(a) - New York adjusted gross income defined by reference to federal adjusted gross income
• Tax Law § 612(c)(32) - subtraction modification for contributions to a New York 529 college savings account, capped at $5,000 (individual/head of household) or $10,000 (married filing jointly)
• IRC § 529(c)(3)(A) - qualified tuition program distributions are includible in gross income under IRC § 72 unless excluded
• IRC § 529(c)(3)(C)(i) - excludes from income a distribution rolled over within 60 days to another qualified tuition program for the same or a family-member beneficiary (as amended by the Economic Growth and Tax Relief Reconciliation Act of 2001)
• IRS Letter Ruling 200228001 (April 10, 2002) - cited by analogy for the principle that an affirmative election by the account holder to redirect rebates makes the redirected amount the account holder's own contribution

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2005.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a05_7i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-05(7)I
Income Tax
December 28, 2005

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I050307A

On March 7, 2005, a Petition for Advisory Opinion was received from Upromise
Investments, Inc., c/o Jennifer Coates, Esq., Sidley, Austin, Brown & Wood, LLP, 787 7th Ave.,
New York, New York 10019.
The issues raised by Petitioner, Upromise Investments, Inc., are:

1. Whether amounts transferred from an account in a college savings plan established by
   another state under section 529 of the Internal Revenue Code (IRC) (529 Plan) to the
   New York State College Choice Tuition Savings Program (New York 529 Plan) can
   be deducted pursuant to section 612(c)(32) of the Tax Law in determining New York
   adjusted gross income.
2. Whether amounts accumulated under the Upromise Rewards Service program
   described below and contributed to the New York 529 Plan can be deducted pursuant
   to section 612(c)(32) of the Tax Law in determining New York adjusted gross
   income.
   Petitioner submits the following facts as the basis for this Advisory Opinion.
   The New York 529 Plan was established under Article 14-A of the Education Law
   authorizing the establishment of family tuition accounts. According to Petitioner, an account
   owner may make contributions to the New York 529 Plan by any of the following methods:
   check, automatic investment plan, electronic bank transfer, transfer from a Upromise Rewards
   Service Account, rollover from another state’s 529 plan, transfer from another account within the
   New York 529 Plan, transfer from a Coverdell Education Savings Account, redemption of a
   qualified United States Savings Bond, payroll deduction, and transfer from a custodial account
   under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act. Only an account
   owner may make contributions to an account in the New York 529 Plan after it is opened.
   The Upromise Rewards Service program (Upromise Service) is a consumer loyalty
   program sponsored by Upromise Inc. (together with its subsidiary Upromise Investments, Inc.,
   “Upromise”) that is designed to encourage and facilitate college savings. Upromise enters into
   agreements with participating vendors of goods and services (Merchant Participants) and
   customers participating in the Upromise Service (Members) allowing Members to purchase
   goods or services at the same price as other consumers and to receive rebates from Merchant
   Participants. The amount of the rebate is negotiated between Upromise and each Merchant
   Participant. Certain Merchant Participants, instead of paying a rebate to Members, pay referral
   fees to Upromise for Member purchases of goods and services on the Internet through a link
   from the Upromise Web site. Upromise passes all or a portion of such fees on to its Members as

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rebates. The Merchant Participants represent a broad spectrum of the consumer economy,
including groceries, consumer goods, utilities, automobiles, computers, travel, and entertainment.
During the enrollment process, a Member provides Upromise with his or her credit or
debit card numbers and registers for certain Merchant Participants from which the Member
expects to make purchases of goods or services. Thereafter, Members generally will not be
required to provide any additional purchase or transaction information in order to receive rebates
from the designated entities. Members can also make online purchases of products and services
through Upromise’s Web site. Information about a Member’s purchases is gathered by
Upromise either by a direct information feed from the Merchant Participant or by an information
feed from a third party experienced in processing such data. Upromise matches the information
provided by the Merchant Participant or third party with the Member’s identification to calculate
the rebate amount. Based on this transaction data, Merchant Participants forward a payment
representing the amount of the Member’s rebate to an account maintained for the benefit of the
Member by Upromise for the purpose of accumulating rebates earned through the Upromise
Service (a Member Account). In the case of Merchant Participants that are on-line merchants
and that pay Upromise a referral fee, Upromise forwards to Member Accounts a portion of such
fees as rebates upon notice of receipt of payment from the merchant.
Pursuant to its agreements with Merchant Participants and Members, Upromise is
contractually obligated to allocate the rebate portion of payments received from Merchant
Participants to Member Accounts. The agreements between the Members and Upromise state
that a Member has no rights to rebate amounts until deposited into the Member Account for the
benefit of the Member. Funds in Member Accounts are held for the benefit of the Members, and
neither Upromise nor any affiliate of Upromise has any right to apply amounts credited to
Members for any purpose other than at the direction of the respective Member. However, any
interest earned on amounts held in the Member Accounts is paid to and retained by Upromise.
Under the Member agreement, Upromise may terminate a Member Account if there has been no
activity within 12 months. In such case, Upromise will distribute the balance pursuant to
instructions from the Member, or if no instructions have been received, as a cash withdrawal to
the Member.
Members are encouraged to direct rebates accumulated in their Member Accounts into
the New York 529 Plan or an account opened in a college savings plan established by another
state under section 529 of the IRC. Upromise has entered into contractual arrangements with
program managers of 529 Plans or broker-dealers selling interests in 529 Plans to facilitate the
opening of 529 Plan accounts and transfers of Member Account balances to the accounts. Thus,
a Member can link his or her Member Account with a 529 Plan account after properly enrolling
in and opening a 529 Plan and otherwise meeting the eligibility requirements of the 529 Plan.
Once a Member establishes a linked 529 Plan, the Member can instruct Upromise to transfer
amounts credited to the Member’s Account to the 529 Plan. Provided the applicable 529 Plan’s
minimum investment requirements are met, amounts in the Member’s Account can be
transferred automatically on a periodic basis to the 529 Plan. Upromise does not have any
discretion in determining the manner in which balances are transferred to a Member’s chosen

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529 Plan, and balances are transferred strictly in accordance with the Member’s 529 Plan
designations. An election by a Member to invest amounts in his or her Member Account in a
529 Plan can be withdrawn by the Member at any time with respect to amounts not yet invested
in a 529 Plan.
Although Upromise Service encourages the use of rebates for college expenses, Members
are not required to apply their Member Account balances to the New York 529 Plan or any other
529 Plan. A Member may withdraw some or all of the amounts in a Member Account, make a
gift of accumulated rebates to another Member by transferring all or a portion of the account
balance to the account of another Member through the Upromise “Family and Friends” network,
or donate all or a portion of the account balance to the Upromise Education Foundation. At any
time, a Member may designate another individual as a beneficiary of the assets in the Member
Account.
Applicable law and regulations
Section 612(a) of the Tax Law provides:
General. The New York adjusted gross income of a resident individual means his
federal adjusted gross income as defined in the laws of the United States for the taxable
year, with the modifications specified in this section.
Section 612(c) of the Tax Law provides, in part:
Modifications reducing federal adjusted gross income. There shall be subtracted
from federal adjusted gross income:
*

*

*

(32) Contributions made during the taxable year by an account owner to one or
more family tuition accounts established under the New York state college choice tuition
savings program provided for under article fourteen-A of the education law, to the extent
not deductible or eligible for credit for federal income tax purposes, provided, however,
the exclusion provided for in this paragraph shall not exceed five thousand dollars for an
individual or head of household, and for married couples who file joint tax returns, shall
not exceed ten thousand dollars.
Section 529(c)(3) of the IRC, for purposes of the tax treatment of beneficiaries and
contributors under qualified tuition programs, provides, in part:
(A) In general. Any distribution under a qualified tuition program shall be
includible in the gross income of the distributee in the manner as provided under section
72 to the extent not excluded from gross income under any other provision of this
chapter.

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*

*

*

(C) Change in beneficiaries or programs.
(i) Rollovers. Subparagraph (A) shall not apply to that portion of any distribution
which, within 60 days of such distribution, is transferred (I) to another qualified tuition program for the benefit of the designated
beneficiary, or
(II) to the credit of another designated beneficiary under a qualified tuition
program who is a member of the family of the designated beneficiary with respect to
which the distribution was made.
Opinion
Section 612(c)(32) of the Tax Law provides that contributions made during the taxable
year by an account owner to one or more New York 529 plans, not in excess of $5,000 for an
individual and $10,000 for married couples who file a joint New York personal income tax
return, may be subtracted from federal adjusted gross income when computing New York
adjusted gross income.
With respect to issue 1, as part of the Economic Growth and Tax Relief Reconciliation
Act of 2001 (EGTRRA), section 529 of the IRC respecting qualified tuition programs was
amended to grant the account owner the ability to roll over a 529 Plan without changing the
beneficiary. EGTRRA amended section 529(c)(3)(C)(i) of the IRC to allow the account owner,
after December 31, 2001, to roll over a 529 Plan to another state’s 529 Plan for the same
beneficiary. Section 529(c)(3)(C)(i) of the IRC does not subject distributions from a state
college savings plan to taxation if within sixty days the funds are rolled over to another state
college savings plan for the benefit of the designated beneficiary or member of the family of the
designated beneficiary.
For purposes of the subtraction modification under section 612(c)(32) of the Tax Law,
the term contribution includes amounts transferred from another state’s 529 Plan and rolled over
to a New York 529 Plan. This includes the earnings portion of the distribution from the other
state’s 529 Plan not included in federal gross income pursuant to IRC section 529(c)(3)(C)(i) and
the portion of the distribution considered an investment in the other state’s 529 Plan.
With respect to issue 2, in order for the amounts accumulated in a Member’s Account
under the Upromise Service and transferred to a New York 529 Plan to be deductible, the
transfer must represent a contribution to the New York 529 Plan by the account owner.

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In a related issue, Internal Revenue Service Letter Ruling 200228001, April 10, 2002,
addressed whether a taxpayer, as a company cardholder, makes a charitable contribution when a
rebate is transferred to a qualified charitable organization. In the ruling, the Service held that if
the taxpayer makes an affirmative election to donate merchant rebates to charity rather than to
receive them personally, rebates transferred to charity pursuant to that election are charitable
contributions deductible by the taxpayer. The participant must have the opportunity to decide
whether rebates on his or her purchases will be made to a charity or received personally. The
taxpayer is entitled to a charitable contribution deduction in the year that the company transfers
the rebate to charity.
In this case, the Member has exclusive rights to the rebates received from Merchant
Participants when the rebates are deposited in the Member’s Account. Members are encouraged
to direct rebates accumulated in their Member Accounts into a New York 529 Plan or into an
account opened in a college savings plan established by another state under section 529 of the
IRC. However, members are not required to apply their Member Account balances to the
New York 529 Plan or any other 529 Plan. A Member may withdraw some or all of the amount
in a Member Account, direct rebates accumulated in their Member Account into the New York
529 Plan or another state’s college savings plan, make a gift of accumulated rebates to another
Member by transferring all or a portion of the account balance to the account of the other
Member through the Upromise “Family and Friends” network, or donate all or a portion of the
account balance to the Upromise Education Foundation. At any time, the Member may
designate another individual as a beneficiary of the assets in the Member Account.
It appears, therefore, that Members decide whether rebates on their purchases under the
Upromise Service will be transferred into the New York 529 Plan or received personally or
directed to another individual or entity. Accordingly, amounts accumulated in a Member
Account under the Upromise Service and contributed to the New York 529 Plan are considered
a contribution by the Member for purposes of the subtraction modification under section
612(c)(32) of the Tax Law in determining New York adjusted gross income.

DATED: December 28, 2005

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.