When a New York decedent's estate distributes her mixed retirement benefits - a pension-linked IRA rollover, a Voluntary Employee Contribution Account, and a Flexible Premium Annuity - to nonresident beneficiaries, is that income subject to New York personal income tax under Article 22?

Plain-English summary

Petitioner Richard Hoffman asked, on behalf of a decedent's estate, whether retirement benefits passed through the estate to nonresident beneficiaries are subject to New York personal income tax. The decedent was a 73-year-old Bronx County resident who worked for a non-government New York employer and accumulated $349,000 in retirement benefits, payable to her estate as beneficiary. Before she died, she was already receiving benefits from her pension and from a "Voluntary Employee Contribution Account," and $287,000 of her pension benefits had been rolled over directly into an IRA. After her death in 1995, the full $349,000 was distributed to the estate and then out to the beneficiaries, all of whom are New York nonresidents. On the estate's federal Form 1041 the $349,000 was reported as "pension income," broken down on Form 706 into a $16,000 Flexible Premium Annuity, a $20,000 Voluntary Employee Contribution Account, and a $313,000 IRA distribution (the $287,000 pension rollover, having grown by the time of distribution).

The Department analyzed the three components separately under 20 NYCRR 132.4(d), which exempts a nonresident's pension or retirement benefit from New York tax only if it qualifies as an "annuity" under the regulation's technical definition; if it doesn't, it is treated as compensation for New York services and is taxable. The Voluntary Employee Contribution Account keeps whatever character it had for the decedent: if it was an annuity when she received it, it stays an annuity (and non-taxable, non-NY-source) in the beneficiaries' hands; if it wasn't, it is taxable NY-source income to the nonresident beneficiaries. The Flexible Premium Annuity, despite its name, never actually paid the decedent anything before she died, so it fails the regulation's annuity definition and is treated as fully taxable compensation for New York services. The IRA distribution retains its character as an IRA distribution as it passes through the estate (which acts merely as a conduit for federal tax purposes), and is taxable to the extent the decedent's contributions - here, the rolled-over pension money - were attributable to services she performed within New York, citing the Department's prior opinions in Ormsby, Smith, and Kaszubinski.

Finally, if the decedent qualified for the $20,000 pension and annuity income subtraction under Tax Law § 612(c)(3-a) (i.e., she was at least 59 1/2 when she died), the estate can claim that subtraction as a "fiduciary adjustment" under Tax Law § 619, which then flows proportionally to each beneficiary based on their share of the estate's distributable net income; where there are multiple beneficiaries, the $20,000 cap is allocated among them so their combined subtraction never exceeds $20,000. The opinion illustrates this with a worked example: if all three components qualified for the pension exclusion but only the IRA distribution were New York-source, only about 89.7% (313,100/349,000) of each beneficiary's fiduciary-adjustment share for the pension exclusion would count toward New York-source income. The bottom line: each nonresident beneficiary does have New York-source income for 1995 and is subject to New York tax, but exactly how much depends on whether the Voluntary Employee Contribution Account was an annuity for the decedent, the fully taxable Flexible Premium Annuity, the New York-sourced portion of the IRA distribution, and any available $20,000 pension exclusion.

What this means for you

Executors distributing a decedent's mixed retirement benefits to nonresident beneficiaries

If you're administering a New York decedent's estate that holds several different retirement accounts - a pension, an IRA rollover, a supplemental annuity, an employee contribution account - don't assume they all get the same New York tax treatment once distributed to out-of-state beneficiaries. Each component needs to be traced back to what it was for the decedent (an actual annuity already being paid, a rollover attributable to New York services, or something else) before you can tell a nonresident beneficiary how much of their share is New York-source income.

Accountants and tax professionals tracking "annuity" character through an estate

The label on an account (like "Flexible Premium Annuity") doesn't control its New York tax treatment - what matters is whether the decedent had actually started receiving periodic payments that met 20 NYCRR 132.4(d)'s technical definition before death. An account that never made a payment to the decedent can't carry annuity treatment through the estate to a beneficiary, no matter what it's called. Also track the source of any IRA contributions (including pension rollovers) to determine what fraction is attributable to New York services, and calculate whether a decedent's age at death (59 1/2 or older) opens up the $20,000 pension and annuity subtraction as a fiduciary adjustment to allocate among beneficiaries.

Common questions

Q: Why didn't the Flexible Premium Annuity count as a tax-exempt "annuity" despite its name?
A: Under 20 NYCRR 132.4(d), a retirement benefit only qualifies as an exempt "annuity" if the individual was actually receiving it as a pattern of payments. The decedent here never received any payment from the Flexible Premium Annuity before she died, so it failed that technical definition and was instead treated as compensation for New York services - fully taxable to the nonresident beneficiaries.

Q: Does an IRA distribution keep the same New York-source character when it passes through an estate?
A: Yes. Under Tax Law § 634(a)(3)(B), amounts allocated to beneficiaries retain the same character they had for federal income tax purposes. Because the estate is treated as a conduit, the IRA distribution stays an IRA distribution in the beneficiaries' hands, taxable to the extent the decedent's original IRA contributions (including the rolled-over pension money) were attributable to services performed in New York.

Q: How is the $20,000 pension and annuity exclusion split when an estate has multiple beneficiaries?
A: The estate can claim the exclusion as a fiduciary adjustment under Tax Law § 619 if the decedent qualified for it (generally, was 59 1/2 or older at death). That adjustment is then divided among beneficiaries in proportion to their shares of the estate's distributable net income, and the combined subtraction across all beneficiaries cannot exceed $20,000 in the aggregate.

Q: Does the Voluntary Employee Contribution Account's tax treatment depend on anything besides its name?
A: Yes - it depends entirely on whether the benefits the decedent received from that account, while she was alive, met the 20 NYCRR 132.4(d) annuity definition. If they did, the account keeps its exempt annuity character when passed to a nonresident beneficiary; if they didn't, it is treated as taxable compensation for New York services, just like the Flexible Premium Annuity.

Q: Does it matter that all of the beneficiaries here are nonresidents of New York?
A: Yes. New York taxes nonresidents only on New York-source income under Tax Law § 601(e) and § 631(a). If the beneficiaries had been New York residents, the entire distribution would generally be taxable regardless of source; because they're nonresidents, the analysis has to isolate exactly which components of the estate's distributable net income are New York-source under § 634(a).

Q: Why does it matter where the decedent's IRA contributions came from?
A: Because an IRA distribution to a nonresident is New York-source income only to the extent the underlying contributions are attributable to services performed within New York State, following the Department's earlier opinions in Ormsby, Smith, and Kaszubinski. Since the $287,000 rolled into this IRA came from a New York-based pension, the resulting IRA distribution (grown to $313,000) is treated as attributable to New York services.

Citations and references

• Tax Law § 601(e) - imposes tax on a nonresident's New York-source taxable income, computed as if the individual were a resident and multiplied by the New York source income fraction
• Tax Law § 631(a) - a nonresident's New York-source income includes the individual's share of estate income, gain, loss, and deduction, determined under § 634
• Tax Law § 631(b)(1)(B) - income connected to a business, trade, profession, or occupation carried on in New York is New York-source
• Tax Law § 631(b)(2) - intangible income, including annuities, is New York-source only to the extent tied to a New York business
• Tax Law § 634(a) - sets out how a nonresident beneficiary's share of an estate's New York-source distributable net income is determined and allocated among beneficiaries, retaining the same character as for federal purposes
• Tax Law § 612(c)(3-a) and 20 NYCRR 112.3(c)(2) - the $20,000 pension and annuity income subtraction modification, including allocation among multiple beneficiaries of a decedent
• Tax Law § 619 - allows the estate's pension and annuity subtraction to be claimed as a fiduciary adjustment, passed through to beneficiaries
• 20 NYCRR 132.4(d) - defines when a pension or retirement benefit paid to a nonresident (or to a deceased employee's beneficiary) qualifies as an exempt "annuity" versus taxable compensation for New York services
• John E. Ormsby, TSB-A-94(10)I; Robert Vincent Smith, TSB-A-86(3)I; and Richard W. Kaszubinski, TSB-A-84(1)I - prior advisory opinions holding that IRA distributions to a nonresident are New York-source income to the extent the contributions are attributable to New York services

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a96_9i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-96 (9) I
Income Tax
December 24, 1996

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

PETITION NO. I960506A

On May 6, 1996, a Petition for Advisory Opinion was received from Richard
Hoffman, c/o Hoberman, Miller & Co., PC, 226 W. 26th Street, New York, New York
10001.
The issue raised by Petitioner, Richard Hoffman, is whether estate income,
consisting of retirement benefits, that is distributed to nonresident
beneficiaries of the estate is subject to tax under Article 22 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
The decedent was 73 years old and a Bronx County resident when she died.
During her lifetime, she worked for a non-government company in New York State
where she was able to accumulate various retirement benefits, with the estate as
beneficiary. These retirement benefits amounted to $349,000 at the time of her
death. Prior to her death, the decedent was receiving benefits from her pension
and the Voluntary Employee Contribution Account. Prior to her death, $287,000 of
the pension benefits was rolled over directly to an IRA account. After her death,
in 1995, the $349,000 was distributed to the estate. The estate distributed
these retirement benefits to the beneficiaries. All of the beneficiaries are
nonresidents of New York State.
For federal income tax purposes, on form 1041, the estate's federal
distributable net income included as "pension income" the $349,000 distribution
to the beneficiaries. This amount was characterized for federal estate tax
purposes on form 706 as follows:
Flexible Premium Annuity
Voluntary Employee Contribution Account
Distribution from IRA ($287,000 of pension benefits
received before death rolled into IRA)

$ 16,000
20,000

Total Pension Income

$349,000

313.000

Section 601(e) of the Tax Law imposes a personal income tax for each
taxable year on a nonresident individual's taxable income which is derived from
sources in New York State. The tax is equal to the tax computed as if the
individual were a resident, reduced by certain credits and multiplied by the New
York source fraction, the numerator of which is the individual's New York source
income and the denominator of which is the individual's New York adjusted gross
income.

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TSB-A-96 (9) I
Income Tax
December 24, 1996

Section 631(a) of the Tax Law provides that the New York source income of
a nonresident individual includes the net amount of items of income, gain, loss
and deduction entering into the individual's federal adjusted gross income that
is derived from or connected with New York sources, including the individual's
share of estate income, gain, loss and deduction, determined under section 634
of the Tax Law.
Section 634(a) of the Tax Law provides that the share of a nonresident
beneficiary of any estate, under section 631(a), in estate income, gain, loss and
deduction from New York sources is determined as follows:
(1) Items of distributable net income from New York sources.
There shall be determined the items of income, gain, loss and
deduction, derived from or connected with New York sources, which
enter into the definition of federal distributable net income of the
estate ... for the taxable year ... Such determination of source
shall be made in accordance with the applicable rules of section six
hundred thirty-one as in the case of a nonresident individual.
(2) Addition or subtraction of modifications. There shall be
added or subtracted (as the case may be) the modifications described
in section six hundred eighteen, to the extent relating to the items
of income, gain, loss and deduction derived from or connected with
New York sources as determined under paragraph one of this
subsection. No modification shall be made under this subsection
which has the effect of duplicating an item already reflected in the
definition of federal distributable net income.
(3) Allocation among beneficiaries.
(A) The amounts determined under paragraphs one and two
shall be allocated among the beneficiaries (and including,
solely for the purpose of this allocation, among the estate
... and resident beneficiaries) in proportion to their
respective shares of federal distributable net income.
(B) The amounts so allocated shall have the same
character under this article as for federal income tax
purposes ....
Section 631(b)(1)(B) of the Tax Law provides that items of income, gain,
loss and deduction derived from or connected with New York sources include those
items attributable to a business, trade, profession or occupation carried on in
New York State.
Section 631(b)(2) of the Tax Law provides that income from intangible
personal property, including annuities, dividends, interest and gains from the
disposition of intangible personal property, shall constitute income derived from
New York sources only to the extent that such income is from property employed
in a business, trade, profession or occupation carried on in New York State.

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TSB-A-96 (9) I
Income Tax
December 24, 1996

Section 132.4(d) of the Personal Income Tax Regulations provides the
following:
Pensions or other retirement benefits constituting an annuity. (1)
General. Where an individual formerly employed in New York State is
retired from service and thereafter receives a pension or other
retirement benefit attributable to [the individual's] former
services, the pension or retirement benefit is not taxable for New
York State personal income tax purposes if the individual receiving
it is a nonresident and if it constitutes an annuity as defined in
paragraph (2) of this subdivision.
Where a pension or other
retirement benefit does not constitute an annuity, it is
compensation for personal services and, if the individual receiving
it is a nonresident, it is taxable for New York State personal
income tax purposes to the extent that the services were performed
in New York State...
(2) Definition...
(v) In the case of a pension or other similar benefit paid to
a nonresident beneficiary of a deceased employee:
(a) where the employee died after retirement, if the pension
or other retirement benefit [the individual] was receiving
constituted an annuity, payments to [the individual's] beneficiary
... will constitute an annuity ....
In this case, pursuant to section 132.4(d) of the Personal Income Tax
Regulations, if the retirement benefits the decedent received from the item
characterized as the "Voluntary Employee Contribution Account" constituted an
annuity when received by the decedent, this item will constitute an annuity when
received by a nonresident beneficiary of the decedent's estate. An item that
constitutes an annuity is not taxable for personal income tax purposes and is not
included in New York source income or New York adjusted gross income of a
nonresident beneficiary.
However, if the benefits received by the decedent from the "Voluntary
Employee Contribution Account" did not constitute an annuity when received by the
decedent, the benefits would have been treated as compensation for personal
services performed in New York State and would have been taxable for personal
income tax purposes.
Therefore, the amounts received by a nonresident
beneficiary for these benefits that are included in the beneficiary's federal
adjusted gross income are income derived from or connected with New York sources
for purposes of section 631 of the Tax Law.
The decedent did not receive any retirement benefits from the item
characterized as the "Flexible Premium Annuity" before her death. Therefore, the
benefits from this account do not constitute an annuity pursuant to section
132.4(d) of the Personal Income Tax Regulations. Accordingly, the benefits from
the Flexible Premium Annuity distributed to the estate do not constitute an
annuity when received by a nonresident beneficiary of the decedent's estate.
These benefits are treated as compensation for personal services performed in New
York State and are taxable for personal income tax purposes. Therefore, the
amounts received by a nonresident beneficiary for these benefits that are
included in the beneficiary's federal adjusted gross income are income derived
from or connected with New York sources for purposes of section 631 of the Tax
Law.

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TSB-A-96 (9) I
Income Tax
December 24, 1996

The distributions from an individual's IRA while a nonresident of New York
are included in the individual's federal adjusted gross income and are included
in the individual's New York adjusted gross income as an item of income derived
from or connected with New York sources to the extent that the individual's
contributions to the IRA are attributable to services performed within New York
State. (See, John E. Ormsby, Adv Op Comm T &F, July 14, 1994, TSB-A-94(10)I;
Robert Vincent Smith, Adv Op St Tax Comm, March 7, 1986, TSB-A-86(3)I; and
Richard W. Kaszubinski, Adv Op St Tax Commn, April 16, 1984, TSB-A-84(1)I.)
In this case, when the distribution from the decedent's IRA was distributed
to the decedent's estate, as the beneficiary of the IRA, the distribution
retained its character as an IRA distribution. Where the estate distributes this
income to a beneficiary of the estate, the estate is treated as a conduit for
federal income tax purposes.
Therefore, the income that is taxable to the
beneficiary (i.e. the IRA distribution) retains the same character that it had
in the hands of the fiduciary. Pursuant to section 634(a)(3)(B) of the Tax Law,
the income distributed to the beneficiary of the estate has the same character
for New York State income tax purposes as for federal income tax purposes.
Accordingly, in this case, the item characterized as "Distribution from
IRA" is attributable to services performed within New York State by the decedent
and is taxable for personal income tax purposes. This income when received by
a nonresident beneficiary of the decedent's estate that is included in the
beneficiary's federal adjusted gross income is income derived from or connected
with New York sources for purposes of section 631 of the Tax Law.
Pursuant to section 631(a) of the Tax Law, New York source income is the
income derived from or connected with New York sources as modified by the
modifications contained in section 612(b) and (c) of the Tax Law that relate to
this income.
Section 612(c)(3-a) of the Tax Law and section 112.3(c)(2) of the Personal
Income Tax Regulations provide for a modification reducing federal adjusted gross
income for certain pension and annuity income. Section 112.3(c)(2) provides that:
(i) Pension and annuity income not subject to the modification [for
pensions and other retirement benefits paid to public officers and
public employees of New York State, its political subdivisions or
agencies or the federal government] and not in excess of $20,000,
received by an individual may be subtracted in determining New York
adjusted gross income providing [that certain] conditions are met
...
(ii) Distributions from an [IRA] ... will qualify for the pension
and annuity income modification ...
...

(iv) (a) Where a beneficiary receives a payment which qualifies as
a pension or annuity created by the decedent, such payment will come
within the definition and meaning of 'pension and annuity' as
defined in this paragraph. If the decedent was qualified to receive
a pension or annuity and was 59 1/2 years of age or over at the time
of such decedent's death, the beneficiary will be entitled to the
same pension and annuity income modification that the decedent would

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TSB-A-96 (9) I
Income Tax
December 24, 1996

have been entitled to regardless of the age of the beneficiary.
(b) If the deceased has more than one beneficiary, the $20,000
pension and annuity income modification must be allocated among the
beneficiaries in the same ratio as the distribution is shared so
that the total pension and annuity income modification of all
beneficiaries does not exceed $20,000 in the aggregate.
In this case, if the decedent's pension benefits qualified for the $20,000
pension and annuity income modification under section 612(c)(3-a) of the Tax Law
and section 112.3(c)(2) of the Personal Income Tax Regulations, the decedent's
estate, as the beneficiary receiving the pension benefits, would be allowed to
make the modification. The modification is allowed in computing the estate's
fiduciary adjustment under section 619 of the Tax Law. Each beneficiary's share
of the fiduciary adjustment is then determined based upon their share of the
federal distributable net income of the estate. Each beneficiary, in computing
his or her New York State nonresident tax, would include his or her share of the
fiduciary adjustment in computing New York adjusted gross income as if a resident
(the denominator of the income percentage). In addition, the amount of the
fiduciary adjustment that is attributable to items derived from New York sources
is included in computing New York source income (the numerator of the income
percentage).
If only a portion of the items to which the fiduciary adjustment relates
is derived from New York sources, only that portion of the fiduciary adjustment
would be included in each beneficiary's New York source income. For example, if
in this case all three pension distributions qualify for the pension and annuity
exclusion, but only the IRA distribution is derived from New York sources, then
only 89.7 percent (313,100/349,000) of each beneficiary's share of the fiduciary
adjustment for the pension exclusion would be includible in computing New York
source income.
In conclusion, pursuant to section 601(e) of the Tax Law, in this case each
nonresident beneficiary has New York source income for tax year 1995 and is
subject to personal income tax under Article 22 of the Tax Law. Pursuant to
section 631(a) of the Tax Law, the New York source income of each nonresident
beneficiary includes the beneficiary's share of the estate income, gain, loss and
deduction, as determined under section 634 of the Tax Law.

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TSB-A-96 (9) I
Income Tax
December 24, 1996

For purposes of section 634(a)(1) of the Tax Law, the items of income,
gain, loss and deduction included in federal distributable net income of the
estate for taxable year 1995, that are derived from or connected with New York
sources include the "pension income" distribution of $349,000 except, to the
extent that the Voluntary Employee Contribution Account constitutes an annuity
under section 132.4(d) of the Personal Income Tax Regulations, and to the extent
the $20,000 subtraction modification contained in section 612(c)(3-a) of the Tax
Law is allowed under section 631(a) of the Tax Law.

DATED: December 24, 1996

s/John W. Bartlett
Deputy Director
Technical Services Bureau

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