After the De Buono decision, is a qualified ERISA retirement plan subject to the New York Article 13 tax on unrelated business taxable income?

Plain-English summary

This is a modified advisory opinion that reverses the retirement-plan conclusion of TSB-A-97(10)C. The original opinion held that ERISA preempted the Article 13 tax on a qualified plan's unrelated business taxable income (UBTI), relying on Morgan Guaranty.

After that opinion, the U.S. Supreme Court decided De Buono v NYSA-ILA Medical and Clinical Services Fund (1997), holding that a New York tax of general applicability that merely burdens an ERISA plan is not preempted -- the term "relate to" in ERISA cannot be read literally, and a tax law gets no stricter preemption standard.

So a qualified section 401(a) plan that carries on an unrelated trade or business in New York is now subject to the Article 13 tax under section 290: 9% of its allocated UBTI or $250, whichever is greater, and it must file returns under section 294. Even if the plan's UBTI is below the $1,000 federal specific deduction (section 512(b)(12)) so it has no federal UBTI, the plan still owes the $250 minimum because it is carrying on an unrelated business in New York. (The IRA conclusion in the original opinion was not changed.)

What this means for you

A qualified ERISA plan's unrelated business income is taxable in New York

After De Buono, the Article 13 UBTI tax is not preempted by ERISA. A plan with an unrelated trade or business in New York owes 9% of its allocated UBTI or the $250 minimum and must file Article 13 returns.

A general-applicability tax that merely burdens a plan is not preempted

De Buono narrowed ERISA preemption: a neutral state tax that only imposes some burden on plan administration does not "relate to" the plan, even though it depletes plan assets and even though it is a tax.

The $250 minimum applies even with little or no UBTI

If UBTI is under the $1,000 federal deduction, there may be no federal (and no New York) UBTI, but a plan carrying on an unrelated business in New York still owes the $250 minimum tax.

Common questions

Q: Does a qualified retirement plan owe New York tax on unrelated business income?
A: Yes, after De Buono. It owes the Article 13 tax -- 9% of allocated UBTI or $250, whichever is greater -- and must file Article 13 returns.

Q: What changed from the original opinion?
A: The original TSB-A-97(10)C said ERISA preempted the tax. The Supreme Court's De Buono decision held a general-applicability tax is not preempted, so this modified opinion makes the plan taxable.

Q: What if the plan's unrelated business income is under $1,000?
A: It may have no federal or New York UBTI after the $1,000 deduction, but if it carries on an unrelated business in New York it still owes the $250 minimum tax.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 290 (Article 13 tax; 9% of allocated UBTI or $250 minimum)
- Tax Law section 292 (UBTI follows federal with modifications)
- Tax Law section 294 (Article 13 return requirement)
- IRC section 511 (unrelated business income tax); IRC section 512(b)(12) ($1,000 deduction)
- De Buono v NYSA-ILA Medical and Clinical Services Fund, 520 US 806 (1997)
- TSB-A-97(10)C (original opinion, modified by this one)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a97_10_1c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(10.1)C
Corporation Tax
December 2, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
MODIFIED ADVISORY OPINION

PETITION NO. C961007A

On May 9, 1997, an Advisory Opinion was issued to Patrick D. Martin, Nixon, Hargrave,
Devans & Doyle, Clinton Square, Po Box 1051, Rochester, New York 14603. (TSB-A-97(10)C)
Subsequent to the issuance of the Advisory Opinion, a decision of the Supreme Court of the
United States has caused the reexamination of the issues involved and such Advisory Opinion is
modified by reversing the conclusion reached in issue "1" and modifying the conclusion in issue "3"
with respect to the Plan in issue "1" as follows.
The basis for the conclusions in the Advisory Opinion was the holding of the New York
Court of Appeals in Matter of Morgan Guaranty Trust Co. v Tax Appeals Tribunal, 80 NY2d 44
(June 9, 1992). The Court found that even though the New York Gains Tax was a neutral law of
general application it was nevertheless preempted by ERISA because it impacted on the structure
and administration of the employee benefit plan in question by reason of recordkeeping and reporting
requirements involving asset disposition, and, even more significantly, the tax would influence
investment strategy and directly deplete funds otherwise available for providing benefits.
In De Buono v NYSA-ILA Medical and Clinical Services Fund, 520 US __, 138 L Ed 2d 21,
decided June 2, 1997, the issue before the United States Supreme Court was whether a New York
tax on gross receipts for patient services at diagnostic and treatment centers (Public Health Law
§2807-d), which was used to reduce the State's Medicaid deficit, was preempted by ERISA inasmuch
as the medical centers were owned and operated by an ERISA-qualified plan. The Court held that,
relying on its earlier decision Conference of Blue Cross & Blue Shield Plans v Travelers Ins. Co.,
514 US 341, 131 L Ed 2d 695, the term "relate to" in ERISA cannot be read literally because doing
so would provide no stopping point for the ERISA preemption. It directed that the objectives of
ERISA must provide the basis for understanding the scope of Congress' intention and noted that
since the tax was an exercise of the power in a field "traditionally occupied by the [s]tates," the
[r]espondents therefore bear the considerable burden of overcoming 'the starting presumption that
Congress does not intend to supplant state law.'" The Court said:
This is not a case in which New York has forbidden a method of calculating
pension benefits that federal law permits, or required employers to provide certain
benefits. Nor is it a case in which the existence of a pension plan is a critical element
of a state law cause of action, or one in which the state statute contains provisions
that expressly refer to ERISA or ERISA plans.

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TSB-A-97(10.1)C
Corporation Tax
December 2, 1998

A consideration of the actual operation of the state statute leads us to the
conclusion that the HFA [the NY gross receipts tax] is one of "myriad state laws" of
general applicability that impose some burdens on the administration of ERISA plans
but nevertheless do not "relate to" them within the meaning of the governing statute.
The Court also noted (in footnote 11 of the decision) that it did not believe, when considering state
laws which could affect ERISA-qualified plans, a stricter standard of preemption applied because
a tax law was involved.
The Supreme Court decided the New York tax on the respondents in De Buono, supra, was
not preempted by ERISA.
Since the Supreme Court in its De Buono, supra, decision held that a New York State tax of
general applicability affecting (and necessarily depleting) assets of an ERISA entity does not, on that
basis alone, "relate" to a qualified employee benefit plan and is thus not federally preempted; it is
concluded that the earlier advisory opinion should be modified.
In this case, the Plan described in issue "1" is a qualified plan under section 401(a) of the
Internal Revenue Code ("IRC") and it is assumed that it is a plan covered by ERISA. Therefore, the
Plan constitutes a trust described in section 511(b)(2) of the IRC. Based on the Supreme Court
decision in De Buono, supra, the tax imposed under Article 13 of the Tax Law is not preempted by
ERISA.
Section 290 of Article 13 of the Tax Law, provides that for every taxable year, or part thereof,
every trust described in section 511(b)(2) of the IRC carrying on an unrelated trade or business in
New York shall pay a tax at the rate of nine percent on its allocated unrelated business taxable
income for such year, or $250, whichever is greater. Accordingly, the Plan is subject to the tax
imposed by section 290 of Article 13 of the Tax Law on its unrelated business income, or the
minimum tax of $250, whichever is higher, and must file New York tax returns as required by
section 294 of Article 13 of the Tax Law.
With respect to issue "3", the answer is no. Section 292 of Article 13 of the Tax Law
provides that the unrelated business taxable income is the taxpayer's federal unrelated business
taxable income for the taxable year with certain modifications. Section 512(b)(12) of the IRC
provides that when computing unrelated business taxable income there shall be allowed a specific
deduction of $1,000.
Accordingly, if the gross amount of the Plan's unrelated business income for federal income
tax purposes is less than $1,000, it appears that pursuant to section 512(b)(12) of the IRC, the Plan
would not have any federal unrelated business taxable income, in which case, the Plan may or may
not have any New York unrelated business taxable income depending on the modifications required
by section 292 of Article 13 of the Tax Law. However, the Plan would be carrying on an unrelated

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TSB-A-97(10.1)C
Corporation Tax
December 2, 1998

trade or business in New York, and pursuant to section 290 of Article 13 of the Tax Law would be
subject to the minimum tax of $250.

DATED: December 2, 1998

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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