Gordon Tresch, a retired New York public employee, receives yearly distributions from a deferred compensation plan he contributed to while working as a town clerk. Part of his 1984 contribution was already taxed by New York up front, under a rule since repealed, even though it wasn't taxed federally that year. When that same money comes back to him as a distribution, must he pay New York tax on it again?

Plain-English summary

Gordon H. Tresch was the Town Clerk of the Town of Tonawanda, New York, and, as a public employee, began participating in a deferred compensation plan in 1984. Deferred compensation plans for New York public employees are authorized under State Finance Law § 5, and in 1982, Chapter 547 of the Laws of 1982 amended the State Finance Law to implement them while also adding two new provisions to the Tax Law: section 612(b)(26), which required a participant to add the amount deferred during the year back into federal adjusted gross income when computing New York adjusted gross income, and section 612(c)(27), which later allowed a subtraction, when a distribution was made, for the portion of that distribution previously taxed under section 612(b)(26). The net effect was that a New York public employee got a federal tax deferral on contributions but not a New York one - New York taxed the contribution immediately, in the year it was made, rather than waiting until distribution the way the IRS did.

For 1984, Tresch contributed $7,500 to his plan. That contribution was excludable from his federal adjusted gross income for 1984 (the normal deferred-compensation treatment), but because of section 612(b)(26), it was still added back and taxed by New York that same year. Chapter 306 of the Laws of 1985 later repealed both section 612(b)(26) and section 612(c)(27) for taxable years beginning after December 31, 1984, bringing New York into line with federal treatment going forward: contributions excludable federally became excludible for New York purposes too, and distributions includible federally became includible for New York purposes, with no more up-front New York taxation of contributions.

Tresch retired in 1991 and began receiving $8,000 per year in distributions from the plan. Because $7,500 of what he would eventually receive back had already been taxed by New York in 1984 under the now-repealed section 612(b)(26) - even though the same amount hadn't yet been taxed federally that year - taxing that same $7,500 again when it was distributed in 1991 (and became federally taxable) would amount to double taxation for New York purposes. To prevent that, the Department ruled that Tresch may subtract $7,500 from his federal adjusted gross income when computing his 1991 New York adjusted gross income, representing the portion of his distribution that New York had already taxed him on back in 1984. The remaining $500 of his $8,000 1991 distribution - attributable to investment growth or other amounts not separately taxed in 1984 - is fully includible in his 1991 New York adjusted gross income, just like any other item of ordinary income. This relief is narrow and fact-specific: it applies only to the exact dollar amount previously taxed under the repealed section 612(b)(26), not to deferred compensation generally.

What this means for you

Public employees who contributed to a deferred compensation plan before 1985

If you (or someone you're helping) began participating in a New York public-employee deferred compensation plan before 1985, part of your early contributions may have already been taxed by New York up front under the now-repealed Tax Law section 612(b)(26), even though the same contributions were excludable federally that year. When those specific pre-1985 contribution amounts are eventually distributed to you and become taxable federally, you are entitled to subtract them from your federal adjusted gross income in computing your New York adjusted gross income, so New York doesn't tax the same dollars twice. Any growth, earnings, or later (post-1984) contributions included in the same distribution do not get this treatment and are simply includible in your New York income like ordinary income.

Accountants and tax preparers handling older deferred-comp distributions

When a client retiring from public service began contributing to a State Finance Law § 5 deferred compensation plan before 1985, check whether any portion of their contributions was added back to income under the now-repealed Tax Law § 612(b)(26). If so, keep records tying the specific dollar amount taxed in the contribution year to later distributions, since only that already-taxed amount is eligible for the offsetting subtraction under this ruling's reasoning - the client will need to track and substantiate the pre-1985 add-back amount separately from the rest of the account balance when it's eventually distributed.

Common questions

Q: Why was Tresch's 1984 contribution taxed by New York but not by the IRS in the same year?
A: Deferred compensation contributions were, and generally still are, excludible from federal adjusted gross income in the year contributed - that is the whole point of a deferred compensation plan federally. But from 1982 until the end of 1984, Tax Law section 612(b)(26) required New York public employees to add that same excluded amount back into their New York adjusted gross income in the year of contribution. So for those years, a participant got the federal deferral benefit but not a New York deferral benefit - New York collected its tax immediately instead of waiting until the money was distributed.

Q: Why did this rule change?
A: Chapter 306 of the Laws of 1985 repealed both the section 612(b)(26) add-back and the related section 612(c)(27) subtraction for taxable years beginning after December 31, 1984, giving public employees a real deferred-compensation tax benefit for New York purposes going forward - contributions excludable federally became excludible from New York income too, with taxation deferred until distribution just as it is federally.

Q: Since the law was repealed, why does it still matter for Tresch's 1991 distribution?
A: The repeal only applied prospectively, to taxable years beginning after December 31, 1984. It didn't undo the New York tax Tresch already paid on his $7,500 1984 contribution. Without relief, that same $7,500 would have been taxed by New York a second time when it came back to him as part of his 1991 distribution and became federally taxable. The Department's ruling prevents that specific double taxation by allowing a matching subtraction in the distribution year.

Q: Does the $7,500 subtraction mean Tresch's entire 1991 distribution is tax-free for New York purposes?
A: No. Only the $7,500 that was already taxed by New York in 1984 may be subtracted. The other $500 of his $8,000 1991 distribution - likely representing investment earnings or growth within the plan since 1984 - was never separately taxed by New York and is fully includible in his 1991 New York adjusted gross income like any other item of income.

Q: Does this ruling create a general tax break for all deferred compensation distributions?
A: No. This is narrow, fact-specific transition relief tied to the specific dollar amount a taxpayer can show was previously added back to income under the now-repealed section 612(b)(26) during 1984 (the only year the repealed provisions and the plan contribution period at issue overlapped for this petitioner). It is not a general exemption for deferred compensation; distributions attributable to contributions made after the 1985 repeal are taxed under the ordinary rule that amounts includible in federal adjusted gross income are also includible in New York adjusted gross income.

Citations and references

• Tax Law § 612(a) - defines New York adjusted gross income as a resident individual's federal adjusted gross income as modified by section 612
• Tax Law § 612(b)(26) (added by L.1982, ch.547; repealed for taxable years beginning after Dec. 31, 1984 by L.1985, ch.306) - required public employees to add deferred compensation plan contributions back to federal adjusted gross income in computing New York adjusted gross income
• Tax Law § 612(c)(27) (added by L.1982, ch.547; repealed for taxable years beginning after Dec. 31, 1984 by L.1985, ch.306) - permitted a subtraction, in the year of distribution, for amounts previously taxed under section 612(b)(26)
• State Finance Law § 5 - authorizes the deferred compensation plans for public employees of New York State and its political subdivisions under which Tresch participated
• Chapter 547 of the Laws of 1982 - amended the State Finance Law to implement public-employee deferred compensation plans and added Tax Law §§ 612(b)(26) and 612(c)(27)
• Chapter 306 of the Laws of 1985 - repealed Tax Law §§ 612(b)(26) and 612(c)(27) for taxable years beginning after December 31, 1984, conforming New York treatment of deferred compensation to federal treatment going forward

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a92_3i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-92(3) I
Income Tax
June 11, 1992

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I920319A

On March 19, 1992, a Petition for Advisory Opinion was received from Gordon
H. Tresch, 208 Willowgrove South, Tonawanda, New York 14150.
The issue raised by Petitioner, Gordon H. Tresch, is whether for New York
State personal income tax purposes distributions from a deferred compensation
plan attributable to contributions made into the plan that were taxed in the year
of contribution are taxable in the year of distribution.
Petitioner participated in a deferred compensation plan as a public
employee, namely Town Clerk of the Town of Tonawanda, New York, beginning in the
year 1984.
For 1984, Petitioner's $?,500 deferred compensation contribution
was excludible from federal adjusted gross income but was taxable for New York
State personal income tax purposes pursuant to section 612(b)(26) of the Tax Law.
Petitioner retired in 1991 and began to accept distributions from the
deferred compensation plan in the amount of $8,000 per year.
Section 612 of the Tax Law defines New York adjusted gross income as a
resident individual's federal adjusted gross income modified as required by
section 612.
Chapter 547 of the Laws of 1982 amended the New York State Finance Law to
provide for the implementation of deferred compensation plans for public
employees of New York State and its political subdivisions.
Chapter 547 also
added sections 612(b)(26) and 612(c)(27) to the New York State Tax Law. Section
612(b)(26) required participants to add to their federal adjusted gross income
the amount deferred under the plan during the taxable year. Section 612(c)(27)
permitted participants who properly included a distribution from the plan in
their federal adjusted gross income to subtract the part of the distribution that
was previously included in total New York income under section 612(b)(26). A
participant in the plan, therefore, received a tax benefit only for federal
income tax purposes.
Chapter 306 of the Laws of 1985 amended the Tax Law to allow public
employees, who participate in deferred compensation plans, a tax benefit for
purposes of the New York State personal income tax by repealing the above
addition and subtraction modifications for taxable years beginning after December
31, 1984. Therefore, contributions to the plans that are excludible from federal
adjusted gross income are also excludible from New York adjusted gross income and
distributions from the plans that are includible in federal adjusted gross income
are also includible in New York adjusted gross income.
However, to the extent that a taxpayer made a contribution, during 1984,
to a deferred compensation plan established under section five of the State
Finance Law and the taxpayer added the amount of such contribution to the

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TSB-A-92(3) I
Income Tax
June 11, 1992

taxpayer's federal adjusted gross income for 1984 pursuant to the add
modification contained in section 612(b)(26) of the Tax law, the taxpayer may,
to avoid double taxation of such income, subtract from the taxpayer's federal
adjusted gross income for the taxable year in which a distribution is made from
the plan, that portion of the distribution that was previously included in total
New York adjusted gross income pursuant to section 612(b)(26) of the Tax Law.
Herein, in taxable year 1984, Petitioner made a contribution of $7,500 into
a deferred compensation plan established pursuant to section five of the State
Finance Law.
For taxable year 1984, Petitioner added the amount of his
contribution to his federal adjusted gross income pursuant to section 612(b)(26)
of the Tax Law in computing New York adjusted gross income.
In 1991, Petitioner received a distribution of $8,000 from such plan.
Accordingly, to avoid double taxation of such income, Petitioner may, when
computing New York adjusted gross income for 1991, subtract from his federal
adjusted gross income, $7,500 of the distribution from the deferred compensation
plan which is the portion of the distribution that was included in the
Petitioner's New York adjusted gross income in 1984 pursuant to section
612(b)(26) of the Tax Law.

DATED:

June 11, 1992

NOTE:

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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