New York Advisory Opinion TSB-A-88 (13)I: Issues raised are (1) whether upon the death of a nonresident, the spouse and sole beneficiary of the deceased nonresident is entitled to a stepped-up basis for an installment sale thereby eliminating any future taxable gain for purposes of the personal income tax imposed under Article 22 of the Tax Law and (2) whether interest paid to a nonresident on an installment sale is taxable for purposes of the personal income tax imposed under Article 22 of the Tax Law.

Plain-English summary

Otto Koenigsreuter was a New York resident who sold his New York farm in an installment sale, then terminated his New York residency on April 5, 1981. For the 1981 tax year he filed both a resident return (IT-201) and a nonresident return (IT-203), reporting the sale gain and installment payments received, but not the interest paid on the note after his residency change. To avoid the special forced-accrual rule that would otherwise have made him include all pre-change-of-status gain immediately upon leaving New York, he entered into an agreement with the Department under Tax Law § 654(c)(4) and posted security. His wife, Jean Koenigsreuter (the Petitioner), filed joint returns with him for 1981 and personally signed both that joint return and the § 654(c)(4) agreement. He then filed nonresident returns for 1982 and 1983, again reporting the installment-sale gain but not the interest, and died a Florida resident on December 5, 1983. Jean, as his surviving spouse and sole beneficiary, asked (1) whether she gets a stepped-up basis on the installment sale that would wipe out any future taxable gain, and (2) whether interest paid to a nonresident on an installment sale is New York-taxable.

On the first issue, the Department said no. Tax Law § 654(c)(1) normally forces someone who stops being a New York resident to accrue, right at the point of the status change, all income and gain that built up while they were still a resident. Section 654(c)(4) lets a taxpayer avoid that immediate hit by posting a bond and agreeing to instead include those amounts in later years' New York returns as if residency had never changed - but if the taxpayer fails to include a required item, the agreement makes the entire deferred tax come due immediately. Because Jean filed a joint return with Otto for the year the gain was properly includible, Tax Law § 651(b) made her jointly and severally liable for the tax on that return. And because she personally signed the § 654(c)(4) agreement, she also took on personal responsibility for making sure the deferred amounts got reported correctly in later years. The Department concluded that her personal liability under both the joint return and the agreement survived her husband's death, so she does not get a stepped-up basis that would eliminate further taxable gain on the installment sale.

On the second issue, the Department said interest paid to a nonresident on an installment sale is generally not New York-taxable under Tax Law § 632(b), unless it comes from property used in a business, trade, profession, or occupation carried on in New York (citing Matter of Delmhorst v. State Tax Commission and Matter of Katz v. Tax Commission). But because Otto changed from resident to nonresident mid-sale, the same special-accrual mechanism that applied to the sale gain also applies to interest: any portion of the interest that must be accrued back into the resident period under § 654(c)(1) and Regs § 148.10(a) would still be taxable. The Department noted the petition didn't contain enough information to determine whether, or how much, interest should be accrued that way, so that part of the answer was left open pending further facts.

Note on dating: this opinion is catalogued under the TSB-A-88(13)I numbering, but the body of the opinion itself is dated July 12, 1985, and is signed under the old "STATE TAX COMMISSION" letterhead rather than the "Commissioner of Taxation and Finance" title used in later opinions. The stub does not explain why an opinion dated 1985 was catalogued under the 1988 numbering sequence; that discrepancy is simply noted here as it appears in the source document.

What this means for you

Surviving spouses of someone who changed New York residency mid-installment-sale

If your spouse sold property in New York on an installment basis, then moved out of state before the note was paid off, don't assume their death wipes out any lingering New York tax exposure tied to that sale. If your spouse used a section 654(c)(4) agreement to defer the special accrual that residency changes normally trigger, and you signed a joint return covering the year the gain was includible (or signed the agreement itself), that personal liability does not disappear at death - it can attach to you as the surviving spouse and beneficiary, and it can prevent any stepped-up basis from eliminating further taxable gain on the installment payments you continue to receive.

People posting a section 654(c)(4) bond to defer accrual when leaving New York

Section 654(c)(4) lets you avoid an immediate tax hit on unrealized gain when you stop being a New York resident, but it's a deferral, not a forgiveness - you're agreeing to report those amounts in future years exactly as if you'd never left. If you or the Department later determines a required item wasn't reported, the full deferred tax becomes due immediately, undoing the benefit of having made the election in the first place. Track every installment payment and any related interest carefully in the years after you sign such an agreement.

Accountants advising joint filers on the liability implications of a section 654(c)(4) agreement

When a client signs a joint New York return for a year in which their spouse is using a section 654(c)(4) deferral agreement, flag that Tax Law § 651(b) makes both spouses jointly and severally liable for that return's tax, and that signing the agreement itself (not just the return) can create independent personal liability. This exposure can outlast the signing spouse and become relevant to estate planning and to how a surviving spouse's basis is treated on inherited installment obligations.

Common questions

Q: Does a spouse's death cancel personal liability under a joint return and a section 654(c)(4) agreement?
A: No. In this opinion, Jean Koenigsreuter's personal liability - arising both from filing a joint return with her husband for the year the installment-sale gain was includible and from personally signing the section 654(c)(4) agreement - survived her husband's death. Because she remained liable for the outstanding tax, she did not receive a stepped-up basis that would have eliminated further taxable gain on the installment sale.

Q: Is interest on an installment sale taxable to a nonresident?
A: Generally no. Under Tax Law § 632(b), interest earned by a nonresident is not New York-taxable unless it comes from property employed in a business, trade, profession, or occupation carried on in New York. The exception here is for someone who changed from resident to nonresident mid-sale: any portion of the interest that must be accrued back into the resident period under section 654(c)(1) and Regs § 148.10(a) remains taxable, the same way the sale gain itself is accrued back.

Q: What does a section 654(c)(4) agreement actually require the taxpayer to do?
A: It requires the taxpayer to include, in their New York personal income tax returns for subsequent years, all income and gain that accrued before their change of residence, as if they had never changed resident status, and to pay the tax on it when due. If the Tax Commission determines the taxpayer failed to include a required item or pay required tax, the full amount that would have been due absent the section 654(c)(4) election becomes immediately due.

Q: Why didn't the Department just answer how much of the interest was taxable?
A: Because the petition didn't contain enough information about the specifics of the interest payments and the timing of the residency change to determine what portion, if any, of the interest needed to be accrued back into the resident period under section 654(c)(1) and Regs § 148.10(a). The Department confirmed the legal framework but left the actual accrual computation open.

Q: If I file a joint return with a spouse who is deferring gain under section 654(c)(4), am I automatically bound by that agreement?
A: Not automatically by the joint return alone, but in this case the surviving spouse was independently a signing party to the section 654(c)(4) agreement itself, in addition to having filed the joint return. Both facts together supported holding her personally liable for the full outstanding tax under the agreement's terms.

Citations and references

• Tax Law § 654(c)(1) - special accrual rule requiring a taxpayer changing from resident to nonresident status to accrue pre-change-of-status income/gain/loss/deduction items not otherwise includible for New York purposes
• Tax Law § 654(c)(4) - waives that forced accrual if the taxpayer posts an acceptable bond/security conditioned on including the accruable amounts in later years' New York adjusted gross income as if residency had never changed
• Tax Law § 651(b) - spouses filing a joint New York income tax return have joint and several tax liability, with exceptions not relevant here
• Tax Law § 632(b) - interest earned by a nonresident is not New York-taxable unless from property employed in a business, trade, profession, or occupation carried on in New York
• Regs § 148.10(a) - for the resident portion of a split tax year, the taxpayer must include all items that would be required on an accrual-basis federal return for that period, regardless of actual accounting method
• Matter of Delmhorst v. State Tax Commission, 92 AD2d 981, aff'd 60 NY2d 62 - interest earned by a nonresident is not New York-taxable absent a New York business connection
• Matter of Katz v. Tax Commission (AD2d, April 25, 1985) - same principle applied to nonresident interest income

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a88_13i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (13) I
Income Tax
July 12, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I840508B

On May 8, 1984, a Petition for Advisory Opinion was received from Jean Koenigsreuter, Box
770Q, Route 1, Summerfield, Florida 32691.
The issues raised are (1) whether upon the death of a nonresident, the spouse and sole
beneficiary of the deceased nonresident is entitled to a stepped-up basis for an installment sale
thereby eliminating any future taxable gain for purposes of the personal income tax imposed under
Article 22 of the Tax Law and (2) whether interest paid to a nonresident on an installment sale is
taxable for purposes of the personal income tax imposed under Article 22 of the Tax Law.
Otto Koenigsreuter (hereinafter the "Decedent") was a resident of New York State. The
Decedent terminated his New York State residence on April 5, 1981. Prior to that date, the decedent
sold his farm located in New York State in an installment sale. The Decedent filed a resident return
(form IT-201) and a nonresident return (form IT-203) for the tax year ending December 31, 1981.
He reported the gain on the sale of the property and the installment payments received but did not
report any interest paid to him with respect to the installment sale subsequent to his change of
resident status. The Decedent entered into an agreement with the New York State Department of
Taxation and Finance pursuant to section 654(c)(4) of the Tax Law and deposited suitable securities
with the Department in order to avoid the special accrual requirement of section 654(c)(1) of the Tax
Law. Jean Koenigsreuter (hereinafter the "Petitioner"), the Decedent's spouse, filed joint returns
with the Decedent for the 1981 tax year and signed such returns. Additionally, the Petitioner was
a party to and signed the agreement entered into by the Decedent with the Department of Taxation
and Finance pursuant to section 654(c)(4) of the Tax Law. The Decedent filed nonresident returns
(form IT-203) for the 1982 and 1983 tax year including in such returns gain from each installment
payment paid in those years but not including interest paid with respect to such installment
payments. The Decedent died a resident of the State of Florida on December 5, 1983.
Section 654(c) of the Tax Law provides in part:
(c) Special accruals. (1) If an individual changes his status from resident to
nonresident, he shall, regardless of his method of accounting, accrue for the portion
of the taxable year prior to such change of status any items of income, gain, loss or
deduction accruing prior to the change of status, if not otherwise properly includible
(whether or not because of an election to report on an installment basis) or allowable
for New York income tax purposes for such portion of the taxable year or for a prior
tax year. . . .

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Income Tax
July 12, 1985
(4) The accruals under this subsection shall not be required if the individual files with
the tax commission a bond or other security acceptable to the tax commission,
conditioned upon the inclusion of amounts accruable under this subsection in New
York adjusted gross income for one or more subsequent taxable years as if the
individual had not changed his resident status.
Section 651(b) of the Tax Law provides that if a husband and wife file a joint New York
income tax return their tax liabilities shall be joint and several (with exceptions not here relevant).
The agreement signed by the Decedent and the Petitioner provides:

Whereas, I elect, pursuant to Section 654(c)(1) of the Tax Law, to file my New York
personal income tax return for the period prior to my change of residence on the cash
receipt basis. . .
Now, therefore, I agree that: (1) I will include in my New York personal income tax
returns in subsequent taxable years (or periods) all income and gain accrued prior to
my change of residence as if I had not changed my resident status and will pay the tax
thereon when due; and (2) if the State Tax Commission determines that I have failed
to include in my New York personal income tax return for any taxable year (or
period) any item of income or gain which is required to be included therein or to pay
any tax required to be paid, under the terms of this Agreement, the full amount of tax
which would have been due, if the election under section 654(c)(4) of the Tax Law
had not been made, shall become due immediately. . . .
Section 148.10(a) of the personal income tax regulations provides, in part:
. . . in computing New York taxable income, New York personal service taxable
income and New York State minimum taxable income for the resident period, such
individual or trust must include all items required to be included if a federal income
tax return were being filed for the same period on the accrual basis. . . .
Pursuant to this provision, a taxpayer who changes status from resident to nonresident is
required to include in the resident portion of his or her year any income which has accrued before
the date of the taxpayer's change of residence. Income to be accrued to the resident period is
determined by recomputing the taxpayer's income as if such taxpayer were an accrual basis taxpayer.
This is done regardless of the accounting method ordinarily employed by the taxpayer.
Issue (1)
Accordingly, the gain from the installment sale was properly included in the Decedent's and
Petitioner's resident portion of their tax year. Since Petitioner filed a joint return with Decedent

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TSB-A-88 (13) I
Income Tax
July 12, 1985
for such tax year and was a party to the agreement entered into pursuant to the provisions of section
654(c)(4) of the Tax Law, Petitioner remains liable for the entire amount of personal income tax
outstanding under the terms of the agreement. If Petitioner fails to comply with the provisions of
such agreement, the full amount of the tax "shall become due immediately." Since Petitioner was
personally liable for the tax due as a result of signing the joint return and the agreement under section
654(c)(4), she will receive no step-up in basis so as to cancel any further taxable gain on the
installment sale.
Issue (2)
Interest earned pursuant to an installment sale by an individual while a nonresident of New
York is not subject to personal income tax pursuant to section 632(b) unless "such income is from
property employed in a business, trade, profession, or occupation carried on in this state." Matter of
Delmhorst v. State Tax Commission, (92 AD2d 981, affd. 60 NY2d 62:); Matter of Katz v. Tax
Commission, (
AD2d
, April 25, 1985). Interest received pursuant to an installment
sale by an individual who changed status from resident to nonresident is subject to tax but only to
the extent that any amount of interest earned on the installment sale is required to be accrued to such
individual's resident period pursuant to the provisions of section 654(c)(1) of the Tax Law and
regulation section 148.10(a). The Petition for Advisory Opinion contains insufficient information
to determine whether any portion of the interest paid should be so accrued.
Accordingly, the interest paid on the installment sale is not subject to tax except to the extent
that any portion of such interest paid must be accrued to the taxpayer's resident period.

DATED: July 12, 1985

s/ANDREW F. MARCHESE
Chief of Advisory Opinions

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.