How are New York's College Choice Tuition Savings Program and its participants taxed for franchise tax, personal income tax, and estate and gift tax purposes?

Plain-English summary

The Comptroller of New York, the Higher Education Services Corporation (HESC), and TIAA (the program manager) jointly asked how New York taxes the College Choice Tuition Savings Program -- New York's IRC section 529 "qualified state tuition program" -- and the people who participate. The opinion answers 21 questions across three tax areas.

Franchise tax (Corporation Tax). The Program, its assets, its trust fund, and the related LLC are a governmental arrangement, not a corporation or association, so they fall outside Article 9-A. Their income and net worth are not subject to franchise tax, and the Program is not subject to tax on unrelated business income.

Personal income tax. Several key rules:
- Contributions to a family tuition account are deductible from the account owner's New York adjusted gross income, up to $5,000 per year for all of the owner's accounts (section 612(c)(32)); a spouse filing jointly gets the deduction regardless of her own income.
- Contributions are not income to the designated beneficiary.
- Earnings in the account are not taxed until withdrawal (tax-deferred).
- Qualified withdrawals are excluded from income (section 612(c)(33)); changing the beneficiary to a family member or rolling to another family account is not a taxable event.
- Non-qualified withdrawals are included in the distributee's income (section 612(b)(34)) -- even amounts that were funded with after-tax (over-the-$5,000-cap) contributions -- but a deductible federal withdrawal penalty reduces the included amount. Withdrawals that are non-qualified only because the account has not yet met the 36-month requirement are not included.
- Nonresidents get the same New-York-AGI treatment, but the income and deductions are not New York source for apportionment.

Estate and gift tax. Because the New York estate tax was conformed to the IRC as of August 5, 1997 (Chapter 56, Laws of 1998), account contributions, earnings, and withdrawals follow federal estate tax treatment. There is no New York gift tax: it is repealed for gifts made on or after January 1, 2000, and for earlier contributions the Department's position is that a contribution to one's own revocable account is not a completed gift (the owner keeps control), so no gift tax applies.

Reporting. New York reporting responsibilities cannot be fixed until the federal reporting requirements are finalized.

What this means for you

The Program itself is not a taxable entity

As a governmental program, it owes no franchise, income, or unrelated-business-income tax.

Savers get a deduction now and tax-free growth

Up to $5,000 of contributions a year is deductible from New York AGI, earnings grow tax-deferred, and qualified withdrawals for college are tax-free.

Non-qualified withdrawals are taxed -- with limited exceptions

Pulling money out for non-college purposes is taxable income, reduced by any deductible federal penalty; but a withdrawal that is non-qualified solely because of the 36-month waiting period is not taxed.

Common questions

Q: How much can I deduct for contributions?
A: Up to $5,000 per year across all your family tuition accounts, from your New York adjusted gross income.

Q: Are qualified college withdrawals taxed?
A: No. Qualified withdrawals are excluded from New York income for both the owner and the beneficiary.

Q: Is there a New York gift tax on contributions?
A: No. The gift tax is repealed for gifts on or after January 1, 2000, and earlier contributions to one's own revocable account are not completed gifts.

Citations and references

Statutes, regulations, and authorities:
- IRC section 529 (qualified state tuition programs)
- Education Law article 14-A (New York State College Choice Tuition Savings Program)
- Tax Law section 612(a) (New York adjusted gross income starts from federal)
- Tax Law section 612(c)(32) (subtraction for contributions to a family tuition account)
- Tax Law section 612(c)(33) (subtraction for qualified withdrawals)
- Tax Law section 612(b)(34) (addback for non-qualified withdrawals)
- Tax Law section 601(e) (nonresident personal income tax)
- Tax Law section 954(a) (New York gross estate conforms to federal)
- Tax Law section 1000(a) (gift tax incorporates the IRC only through Nov. 5, 1990)
- Chapter 56 of the Laws of 1998 (estate tax conformed to IRC as of Aug. 5, 1997)
- Chapter 389 of the Laws of 1997 (repeal of the New York gift tax for gifts on or after Jan. 1, 2000)
- Comptroller of the State of New York, TSB-A-98(19)C / TSB-A-98(12)I / TSB-A-98(3)M (Oct. 7, 1998)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a98_19c_12i_3m.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(19)C
Corporation Tax
TSB-A-98(12)I
Income Tax
TSB-A-98(3)M
Estate & Gift Tax
October 7, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z980810A

On August 10, 1998, a Petition for Advisory Opinion was received from
Comptroller of the State of New York, Office of the State Comptroller, Governor
Alfred E. Smith Office Building, 6 th Floor, Albany, New York 12236, NYS Higher
Education Services Corporation, 99 Washington Avenue, Room 1445 (14 th Floor),
Albany, New York 12255, and Teachers Insurance and Annuity Association of
America, 730 Third Avenue, New York, New York 10017.
The issues raised by Petitioners, Comptroller of the State of New York, NYS
Higher Education Services Corporation, and Teachers Insurance and Annuity
Association of America, concern the New York State College Choice Tuition Savings
Program and participants in the Program with respect to Corporation Franchise
Tax, Personal Income Tax, Estate Tax, Gift Tax and the reporting responsibilities
for the Program.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
On September 10, 1997, The Governor of New York State signed the New York
State College Choice Tuition Savings Program Act, 1997 NY Laws, c. 546 (the
"Act"), which took effect immediately and is applicable to taxable years after
December 31, 1997. Section 3 of the Act added Article 14-A to the New York
Education Law (the "Education Law"), which provides for the establishment of the
New York State College Choice Tuition Savings Program (the "Program").
The
general purposes of the Program, as described in section 695-a of the Education
Law, are to authorize the establishment of family tuition accounts and to provide
guidelines for the maintenance of such accounts to enable residents of New York
and other states to benefit from the tax incentive provided for qualified State
tuition programs under section 529 of the Internal Revenue Code (the "IRC") and
to attract students to public and private colleges and universities within the
state. Under section 695-c of the Education Law, the Comptroller of the State
of New York (the "Comptroller") and the New York State Higher Education Services
Corporation (the "HESC") are directed to implement the Program under the terms
and conditions established by Article 14-A of the Education Law and a Memorandum
of Understanding relating to any terms or conditions not otherwise expressly
provided for in Article 14-A. On November 10, 1997, the Comptroller and HESC
entered into a Memorandum of Understanding relating to the implementation of the
Program. Under section 652 of the Education Law, HESC is an agency functioning
under the authority of the University of the State of New York, as established
by action of the Board of Regents.

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Under section 695-d of the Education Law, the Comptroller is authorized to
implement the Program through the use of financial organizations as account
depositories and managers. The Comptroller is directed to select the financial
organization through a bidding process, and is authorized to enter into a
contract with the financial organization providing for detailed terms as to the
management of the Program.
The Comptroller and HESC have selected Teachers
Insurance and Annuity Association of America (the "TIAA"), a New York stock life
insurance company, as the manager of the Program, and entered into a management
contract on July 31, 1998.
Section 695-e(2) of the Education Law provides for the establishment under
the Program of "family tuition accounts", which may be opened by any person who
desires to save money for the payment of the qualified higher education expenses
of the designated beneficiary. Section 695-e(4) of the Education Law provides
that contributions to family tuition accounts under the Program may be made only
in cash, which will include contributions made by check, payroll deduction or
automatic deduction from a bank account.
Under section 695-b(8) of the Education Law, "qualified higher education
expenses" mean any qualified higher education expenses included in section 529
of the IRC.
Section 695-e(7) of the Education Law provides that, in the case of any
non-qualified withdrawal from a family tuition account, an amount equal to five
percent of the portion of the withdrawal constituting income as determined in
accordance with the principles of section 529 of the IRC shall be withheld as a
penalty and paid to the Program's trust fund. A "non-qualified withdrawal" is
defined in section 695-b(10) of the Education Law as any withdrawal from a family
tuition account, except for (1) a qualified withdrawal, (2) a withdrawal made as
the result of the death or disability of the designated beneficiary of the family
tuition account, or (3) a withdrawal made on account of a scholarship. However,
sections 695-e(8)and (9) of the Education Law give the Comptroller and HESC the
power to increase or decrease the penalty, depending primarily on what is
determined to constitute a greater than de minimis penalty for purposes of
section 529(b)(3) of the IRC, and these agencies expect to ensure that the terms
of section 529(b)(3) of the IRC are satisfied. Based on recent conversations
with the Internal Revenue Service (the "IRS"), the penalty will be 10 percent.
Pursuant to section 695-e(5) of the Education Law and regulations to be
promulgated by the Comptroller, appropriate certifications will be required that
will enable the determination as to whether a withdrawal is a qualified
withdrawal or a non-qualified withdrawal.
Section 695-e(11) of the Education Law provides that the Program shall
provide separate accounting for each designated beneficiary. As Program manager,
TIAA will be primarily responsible for maintaining the separate accounts for the
designated beneficiaries. Section 695-e(12) of the Education Law provides that

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no account owner or designated beneficiary of any family tuition account shall
be permitted to direct the investment of any contributions to an account or the
earnings thereon. All investment decisions for the Program will be made by TIAA
with oversight by the Comptroller.
Section 695-e(13) of the Education Law
provides that neither an account owner nor a designated beneficiary may use an
interest in a family tuition account as security for a loan, and that any pledge
of any interest in an account shall be of no force and effect.
Section 695-e(14) of the Education Law provides that the Comptroller shall
promulgate rules or regulations to prevent contributions on behalf of a
designated beneficiary in excess of $100,000 and to require that any excess
balances with respect to a designated beneficiary be promptly withdrawn in a non­
qualified withdrawal or transferred to another account. The Comptroller will
promulgate such regulations.
Section 695-e(6)(a) of the Education Law provides that an account owner may
change the designated beneficiary of a family tuition account to an individual
who is a family member (as defined under section 529 of the IRC) of the prior
designated beneficiary.
Section 695-e(6)(b) of the Education Law further
provides that an account owner may transfer all or a portion of a family tuition
account to the family tuition account of another family member of the designated
beneficiary. Any balance at the time of the designated beneficiary's graduation
could also be applied to the designated beneficiary's postgraduate education or
withdrawn as a non-qualified withdrawal.
Section 4 of the Act added section 78 to the New York State Finance Law
(the "Finance Law"), which provides that the Program's assets (the "Assets"),
consisting of contributions and earnings thereon pursuant to the Program, will
be held by the Comptroller, as trustee, in a trust fund (the "Trust Fund").
Pursuant to section 78(3) of the Finance Law, the Assets will, in turn, be held
by a newly-formed limited liability company (the "LLC"). The LLC will initially
have two members, the Trust Fund and TIAA which will only have a nominal
investment of $100,000. This nominal investment will be redeemed by the LLC on
receipt of a ruling from the IRS that sole ownership by the Trust Fund will not
have adverse federal tax consequences. After redemption of TIAA's interest, the
Trust Fund will be the LLC's only member, and the LLC will be disregarded as an
entity for federal income tax purposes, and all of its income will be income of
the Trust Fund. During the period of TIAA's nominal investment in the LLC, the
LLC will be treated as a partnership for tax purposes and the Trust Fund and TIAA
will receive their respective portions of the LLC's income. TIAA, as a taxable
entity, will be subject to tax on such income. Petitioners state that the income
of the Trust Fund would be exempt pursuant to section 529 of the IRC and the New
York State Tax Law.
The LLC will be managed by TIAA and will be structured as a series fund.
Contributions to accounts will be invested in one of nine program series (the

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"Program Series"). The age of a designated beneficiary will be used to determine
into which of the nine Program Series a contribution will be invested. Each
Program Series will operate as a fund of funds, investing in three other
underlying portfolios (the "Underlying Portfolios") established solely for the
use of the Program. Each Underlying Portfolio will have a distinct investment
objective and pursue distinct investment policies with limitations, all as
approved by the Comptroller. Initially, one will be a money market portfolio,
one will invest primarily in bonds and other fixed-income investments, and one
will invest primarily in growth stocks. Each Program Series will allocate assets
among the three Underlying Portfolios with the basic goal of achieving investment
returns over the applicable investment horizon for a particular designated
beneficiary that at least equal the rate of increasing higher education expenses.
For instance, a Program Series representing younger designated beneficiaries will
have its investment allocations weighted more heavily toward the Underlying
Portfolio invested primarily in stock, while a Program Series representing older
designated beneficiaries will have its investment allocations weighted more
heavily toward the Underlying Portfolios primarily invested in bonds and money
market instruments.
The opinions set forth herein are premised upon the qualification of the
Program as a "qualified state tuition program" within the meaning of section 529
of the IRC.
Corporation Franchise Tax
Applicable Law

Section 209.1 of the Tax Law imposes, annually, a franchise tax on every
corporation for the privilege of exercising its corporate franchise, or of doing
business, or of employing capital, or of owning or leasing property in New York
State in a corporate or organized capacity, or of maintaining an office in New
York State for all or any part of each of its fiscal or calendar years.
Section 208.1 of Article 9-A of the Tax Law provides that: "the term
'corporation' includes (a) an association within the meaning of paragraph three
of subsection (a) of section seventy-seven hundred one of the internal revenue
code (including a limited liability company), (b) a joint-stock company or
association, (c) a publicly traded partnership treated as a corporation for
purposes of the internal revenue code pursuant to section seventy-seven hundred
four thereof and (d) any business conducted by a trustee or trustees wherein
interest or ownership is evidenced by certificate or other written instrument
...."
Section 1451 of Article 32 of the Tax Law imposes an annual franchise tax
on every banking corporation for the privilege of exercising its franchise or
doing business in New York State in a corporate or organized capacity during the

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taxable year. Generally, a "banking corporation" for purposes of Article 32 of
the Tax Law is a corporation which is doing a banking business or a corporation
which is principally engaged in a business that is substantially similar to a
banking business and is beneficially owned by a banking corporation.
Section 1501(a) of Article 33 of the Tax Law imposes a franchise tax on
every insurance corporation for the privilege of doing business or of employing
capital, or of owning or leasing property in New York State in a corporate or
organized capacity, or of maintaining an office in New York State for all or any
part of its taxable year.
An insurance corporation includes a corporation,
association, joint stock company or association, person, society, aggregation or
partnership, by whatever name known, doing an insurance business.

Section 2.5 of the Tax Law defines an LLC as a domestic limited liability
company or a foreign limited liability company, as defined in section 102 of the
Limited Liability Company Law.
It has been established that the classification of an LLC for New York
State tax purposes will follow the classification accorded the LLC for federal
income tax purposes under section 301.7701-3 of the Treasury Regulations. (See,
FGIC CMRC Corp, Adv Op Comm T & F, April 1, 1996, TSB-A-96(11)C; and Department
of Taxation and Finance Memorandum, TSB-M-94(6)I and (8)C, October 25, 1994.)
Where a single member LLC does not make the election to be treated as an entity
separate from its owner for federal income tax purposes, pursuant to section
301.7701-3 of the Treasury Regulations, it will not be classified as an entity
separate from its owner for New York State tax purposes. If the owner is a
corporation, the single member LLC will be considered a branch or division of the
owner corporation. (See, McDermott, Will & Emery, Adv Op Comm T & F, July 24,
1996, TSB-A-96(19)C.)
Section 290 of Article 13 of the Tax Law imposes a tax on the unrelated
business taxable income of every organization described in section 511(a)(2) of
the IRC and every trust described in section 511(b)(2) of the IRC that carries
on an unrelated trade or business in New York. Section 292 of the Tax Law
provides that the unrelated business taxable income of a taxpayer subject to tax
under Article 13 is the taxpayer's federal unrelated business taxable income, as
defined in the IRC for the taxable year, with the modifications described in
section 292 of the Tax Law.
Question 1. Will the Program, the Assets, the Trust Fund and the LLC, which is
expected to be the investment vehicle that will hold the Assets, constitute legal
entities subject to any of the franchise taxes imposed by New York State,
including but not limited to, the franchise taxes imposed on business
corporations, banking corporations and insurance companies?

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Answer. Neither the Program, the Assets, the Trust Fund nor the LLC are
entities subject to any of the New York State franchise taxes under Articles 9-A,
32 or 33 of the Tax Law. The Program, Assets and Trust Fund are not corporations
or associations within the purview of these Articles, (nor are they a "person ...
doing an insurance business" under Article 33.) As to the LLC, as provided in
section 301.7701-3 of the Treasury Regulations, it may be either (1) a
partnership (because of the initial ownership by both the Trust Fund and TIAA)
or (2) a disregarded entity (because of ownership solely by the Trust Fund.) In
either event, whether as a partnership or a disregarded entity, the LLC is not
a corporation or association, and accordingly is not within the purview of the
franchise taxes.
Question 2. Will the income and net worth of the Program, the Assets, the Trust
Fund and the LLC be subject to any of the taxes referred to in Question 1?
Answer. Because the Program, the Assets, the Trust Fund and the LLC are
not taxable entities within the purview of Articles 9-A, 32 or 33, as discussed
in the Answer to Question 1, the income and net worth of these entities will not
be subject to any of the taxes under those Articles, except that when the LLC is
treated as a partnership, TIAA, a taxable entity that is a member of the LLC,
will be subject to tax on its distributive share of the LLC's income.
Question 3. Will the income of the program, the Trust Fund and the LLC
(collectively, the Program) be subject to tax on unrelated business income under
Article 13 of the Tax Law?
The income of the Program, the Trust Fund and the LLC
Answer.
(collectively, the Program) will not be subject to tax on unrelated business
income under Article 13 of the Tax Law. Section 529(a) of the IRC provides that
a qualified state tuition program shall be subject to the federal tax on
unrelated business income under section 511 of the IRC, and Article 13 of the Tax
Law imposes a like tax if it is imposed at the federal level.
There is no
exclusion provided in Article 13 which would apply to the Program. However, it
is the Department of Taxation and Finance's ("Department") position that the
Program has been created for a public purpose and has a sufficiently close
relationship with the State so as to be immune from taxation under Article 13,
independent of the statutory exemption scheme of the Article. ( Matter of City
of New York v Tully, 88 AD2d 701, lv to app den 57 NY2d 606); See, Matter of Town
of Fishkill v Royal Dutchess Properties Inc., 241 AD2d 286)
Personal Income Tax
Applicable Law
Section 601(a),(b) and (c) of the Tax Law imposes, for each taxable year,
the New York State personal income tax on the New York taxable income of every

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resident of New York State. Section 601(e) of the Tax Law imposes, for each
taxable year, the New York State personal income tax on the taxable income which
is derived from sources in New York State of every nonresident which is equal to
the tax base multiplied by the New York source fraction.
Section 611 of the Tax Law provides that the New York taxable income of a
resident individual is the individual's New York adjusted gross income less the
individual's New York deduction and New York exemptions as determined under
Article 22 of the Tax Law.

Section 612(a) of the Tax Law defines New York adjusted gross income of a
resident individual as the individual's federal adjusted gross income with
certain modifications.
Section 612(c)(32) of the Tax Law provides that when computing New York
adjusted gross income, federal adjusted gross income is decreased by
contributions made during the taxable year by an account owner to one or more
family tuition accounts established under the Program, to the extent not
deductible or eligible for credit for federal income tax purposes, provided
however, the contributions by the owner of an account or accounts for the taxable
year shall not exceed $5,000.
Section 612(c)(33) of the Tax Law provides that when computing New York
adjusted gross income, federal adjusted gross income is decreased by
distributions from a family tuition account established under the Program to the
extent includible in gross income for federal income tax purposes.

Section 612(b)(34) of the Tax Law provides that when computing New York
adjusted gross income, federal adjusted gross income is increased by
distributions received during the taxable year by a distributee of a family
tuition account established under the Program, to the extent that the
distributions are not qualified withdrawals within the meaning of section 695-b.9
of the Education Law.
Question 4. Will contributions by an account owner to a family tuition account
under the Program be deductible from the account owner's New York adjusted gross
income (to the extent not deductible or eligible for credit for federal income
tax purposes) in an amount not to exceed $5,000 in the aggregate in any calendar
year?
Answer. Contributions by an account owner to a family tuition account under
the Program will be deductible in determining the account owner's New York
adjusted gross income (to the extent not deductible or eligible for credit for
federal income tax purposes) in an amount not to exceed $5,000 for all such
accounts of the owner in any taxable year. (Section 612(c)(32) of the Tax Law.)

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Question 5. Will contributions be includible in the New York taxable income of
designated beneficiaries for New York personal income tax purposes?
Answer. Contributions will not be includible in the New York adjusted gross
income of designated beneficiaries. (Section 612(a) of the Tax Law.)
Question 6. Will the deduction described in Question 4 be also available to the
spouse of an account owner regardless of the amount of such spouse's New York
adjusted gross income, provided that the spouses satisfy the requirements for
filing a joint New York personal income tax return?
Answer. The deduction described in Question 4 will also be available to the
spouse of an account owner regardless of the amount of such spouse's New York
adjusted gross income, provided that the spouses file a joint New York personal
tax return.
Question 7. If filing separately, will the deductions described in Question 4 be
limited by the amount of the spouses' individual New York adjusted gross incomes?
Answer. If filing separately, the deductions described in Question 4 would
be limited by the amount of the spouses' individual New York adjusted gross
incomes.
Question 8. Will the income earned in a family tuition account under the Program
be includible in the New York taxable income of either the account owner or the
designated beneficiary of the account prior to withdrawal?
Answer. Income earned in a family tuition account under the Program will
not be includible in the New York adjusted gross income of either the account
owner or the designated beneficiary of the account prior to withdrawal. (Section
529(c)(1),(c)(3)(A) of the IRC; and section 612(a) of the Tax Law.)
Question 9. Will an individual be required to include any amount in New York
taxable income for purposes of the New York personal income tax as a result of
the substitution of a designated beneficiary with a member of the family of the
prior designated beneficiary (within the meaning of section 529 of the IRC) or
as a result of a transfer of amounts of a family tuition account to another
family tuition account, the designated beneficiary of which is a member of the
family of the beneficiary of the first account (within the meaning of section 529
of the IRC)?
Answer. No individual will be required to include any amount in New York
adjusted gross income as a result of the substitution of a designated beneficiary
for a member of the family of the prior designated beneficiary, if such
substitution is excepted from federal income inclusion as provided in section
529(c)(3)(C)(ii) of the IRC. Likewise, no income inclusion will be required as

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a result of a transfer of amounts of a family tuition account to another such
account, the designated beneficiary of which is a member of the family of the
beneficiary of the first account, if such transfer is excepted from federal
income inclusion as provided in section 529(c)(3)(C)(i) of the IRC. (Section
612(a) of the Tax Law.)
Question 10. Will any portion of any qualified withdrawal from a family tuition
account be includible in the New York taxable income of either the account owner
or the designated beneficiary of the account for New York personal income tax
purposes?
Answer. No portion of any qualified withdrawal from a family tuition
account will be includible in the New York adjusted gross income of either the
account owner or the designated beneficiary of the account. (Section 612(c)(33)
of the Tax Law.)
Question 11. Will a qualified withdrawal from a family tuition account include
a withdrawal because of death, disability or the receipt of a scholarship?
Answer. A qualified withdrawal does not include a withdrawal because of
death, disability or the receipt of a scholarship.
Such withdrawals are
enumerated at section 695-b.10.b of the Education Law, separate from the
reference to qualified withdrawals at section 695-b.10.a of the Education Law.
Question 12. Will non-qualified withdrawals from a family tuition account be
includible in the New York taxable income of a distributee for New York personal
income tax purposes? Also, will non-qualified withdrawals constitute ordinary
income regardless of whether any portion of the amounts withdrawn were previously
taxed?
Answer. Withdrawals from a family tuition account that are not qualified
withdrawals are includible in the New York adjusted gross income of the
distributee. (Section 612(b)(34) of the Tax Law.) Withdrawals that are not such
qualified withdrawals are (1) non-qualified withdrawals, (2) withdrawals as the
result of death or disability of the designated beneficiary or (3) withdrawals
made on account of a scholarship. (Section 695-b.10 of the Education Law.) The
New York income inclusion is without regard to the fact that some of the amount
withdrawn may be attributable to funds which were previously taxed (because
contributions made in prior years which were in excess of the $5,000 deduction
limit were funded with, in effect, "after-tax" funds.)
The remaining type of withdrawal not addressed in the preceding paragraph
is a withdrawal which meets the definition of a qualified withdrawal at section
695-b.9 of the Education Law (to pay the qualified higher education expenses of
the designated beneficiary) but is not a qualified withdrawal by reason of
section 695-e.18 of the Education Law, which provides that an account must be

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open for at least three calendar years before a qualified withdrawal can be made.
It is the Department's position that such "36 month" withdrawals are not
includible in New York adjusted gross income, since the addback at section
612(b)(34) of the Tax Law refers solely to withdrawals that are not qualified
within the meaning of section 695-b.9 of the Education Law.
Question 13. To the extent that it is deductible for federal income tax purposes,
will any withdrawal penalty withheld from a non-qualified withdrawal offset
taxable income so that only the net amount received will be includible in the
distributee's New York taxable income for New York personal income tax purpose?
Answer. If a withdrawal penalty withheld from a non-qualified withdrawal
is deductible for federal purposes in determining the amount of federal adjusted
gross income recognized on the withdrawal, it will be deductible for New York
purposes so that only the net amount of the distribution (withdrawal less penalty
amount) will be includible in New York adjusted gross income under section
612(b)(34) of the Tax Law.
Question 14. Will a nonresident who is required to pay New York personal income
tax and who makes a qualified contribution to a family tuition account be
entitled to the same tax treatment described in Questions 4 through 13 above as
a resident for New York personal income tax purposes?
Answer. A nonresident who is required to pay New York personal income tax
and who makes contributions to a family tuition account is entitled to the same
tax treatment in the determination of New York adjusted gross income described
in Questions 4 through 13 as is a resident. (Section 601(e)(2) of the Tax Law.)
However, the income and deductions recognized in New York adjusted gross income
under that tax treatment are not New York source income and deductions of a
nonresident for purposes of apportioning the tax to New York.
(Sections
601(e)(3), 631(b) of the Tax Law.)
Question 15. Will the spouse of a nonresident, who files a joint New York
personal income tax return, be also entitled to the treatment described in
Question 14 regardless of whether such spouse has New York adjusted gross income
of such spouse's own?
Answer. The spouse of a nonresident, who files a joint New York personal
income tax return, is also entitled to the treatment described in Question 14,
regardless of whether such spouse has New York adjusted gross income of his or
her own.
Question 16. Since the New York City personal income tax on residents and the
City of Yonkers income tax surcharge on residents are generally based on New York
adjusted gross income and there is no statutory requirement to add back any items

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of excluded income, or to disallow any deductions, relating to the Program for
local income tax purposes, will any rulings received with respect to the New York
State personal income tax on residents be equally applicable for purposes of both
the New York City personal income tax on residents and the City of Yonkers income
tax surcharge on residents?
Answer. The tax treatment described in Questions 4 through 13 applies as
well (1) to a New York City resident under the New York City resident income tax
(section 1303 of the Tax Law), and (2) to a resident of the City of Yonkers under
the Yonkers resident income tax surcharge. (Sections 1321(a), 1323 of the Tax
Law.)
Question 17. Will the deduction for contributions described in Question 4 be
available for purposes of the New York City earnings tax on nonresidents and the
City of Yonkers earnings tax on nonresidents?
Answer. The deduction for contributions described in Question 4 is not
available under the New York City and City of Yonkers nonresident earnings taxes.
These taxes are imposed on wages and net earnings from self-employment (section
25-m.2(a) of the General City Law, section 1340(c)2.(a) of the Tax Law), which
bases do not include that contributions deduction.
Estate Tax
Applicable Law
Section 952 of the Tax Law imposes a tax on the transfer of the New York
estate by every deceased individual who at his or her death was a resident of New
York. Section 953 of the Tax Law provides that the New York taxable estate of
a deceased resident is his or her New York gross estate computed under section
954 of the Tax Law, less the deductions allowable under section 955 of the Tax
Law.
Section 954(a) of the Tax Law provides that the New York gross estate of
a deceased resident means his or her federal gross estate as defined in the IRC
(whether or not a federal estate tax return is required to be filed) with certain
modifications.
Section 960 of the Tax Law imposes a tax on transfer, from any deceased
individual who at his or her death was not a resident of New York State, of real
and tangible personal property having an actual situs in New York, and either (i)
includible in his or her federal gross estate or (ii) which would be includible
in his or her New York gross estate pursuant to section 957 of the Tax Law
(relating to certain limited powers of appointment) if he or she were a resident
of New York State.

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Question 18. Will the amounts deposited in the Program and any earnings thereon
be treated in the same manner for New York estate tax purposes as for federal
estate tax purposes in the case of New York residents?
Answer. The New York estate tax was amended by Chapter 56, Laws of 1998
(section 33) to incorporate the IRC as of August 5, 1997. Accordingly, in the
case of New York residents, account contributions, earnings and withdrawals will
be treated in the same manner for New York estate tax purposes as for federal
estate tax purposes. (Section 954(a) of the Tax Law.)
Question 19. Will nonresidents include amounts in family tuition accounts in
their New York taxable estates?
Answer. If a nonresident of New York is subject to the New York estate tax
(because such individual has real or tangible personal property located in New
York), amounts in family tuition accounts are included in the New York taxable
estate determined as if he or she were a resident (to the extent includible in
the federal gross estate), but are not included in the New York gross estate for
purposes of apportioning the tax to New York. (Section 960(b) of the Tax Law.)
Gift Tax
Applicable Law
Section 1001 of the Tax Law imposes a tax on the transfer of property by
gift during the calendar year by any individual, resident or nonresident.
Section 1000(a) of the Tax Law provides that for purposes of the gift tax, any
reference to the IRC means the IRC of 1986, with all amendments enacted on or
before November 5, 1990.
Section 1003(a)(1) of the Tax Law provides that the New York gifts of a New
York resident are the total amount of gifts made in any calendar year within the
meaning of section 2503 of the IRC, less the amount of any gifts included therein
of real or tangible personal property having an actual situs outside New York
State, less the amount of any gifts included therein by reason of section 2519
of the IRC (unless such gifts have already been excluded therefrom by reason of
having an actual situs outside New York State) and increased as provided in
section 1003(a)(3)and (4) of the Tax Law.
Question 20. Will contributions to, and qualified withdrawals from, a family
tuition account be treated, for New York gift tax purposes, in the same manner
as for federal gift tax purposes in the case of New York residents? Also, will
nonresidents treat contributions to, and qualified withdrawals from, a family
tuition account as New York taxable gifts?

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Answer. The New York gift tax has been repealed effective for gifts made
on or after January 1, 2000. (Chapter 389, Laws of 1997, § 7.) Accordingly, there
is no New York gift tax on contributions made on or after that date.
For
contributions made before then, it is the Department's position that there is
likewise no New York gift tax, as discussed below.
Unlike the estate tax (Question 18), the New York gift tax was not amended
to incorporate the IRC as of August 5, 1997, and incorporates the IRC only
through November 5, 1990. (Section 1000(a) of the Tax Law.) Accordingly, the New
York gift tax does not incorporate the federal gift tax treatment provided in
section 529 of the IRC, since that section was not enacted until 1996. Prior to
the enactment of section 529, the federal gift tax treatment of contributions to
an account in the nature of a family tuition account was unclear. However, it
is the Department's position that a contribution to such an account would have
been treated under the pre-1996 IRC as not a completed gift.
There is no completed gift because the account remains at all times in the
nature of a revocable trust under the control of the owner. Only the owner can
make contributions to the account.
Likewise, only the owner can direct
withdrawals from the account, which, in the case of qualified withdrawals, are
paid upon instruction of the owner directly to an educational institution, and
in the case of withdrawals other than qualified withdrawals, are paid directly
to the owner. Accordingly, such contribution would not constitute a federal, nor
therefore a New York, taxable gift. (Section 1003(a)(1) of the Tax Law.)
It is also the Department's position that, since a completed gift does not
occur at the point of contribution, a completed gift, if any, will occur only at
the point of withdrawal. For a withdrawal to constitute a completed gift, it
must be one payable to or for the benefit of the beneficiary. Only a qualified
withdrawal meets this criterion, since withdrawals other than qualified
withdrawals are paid to the owner. Since a qualified withdrawal cannot occur
until the account has been in existence for 36 months, it cannot occur before the
expiration of the New York gift tax.
Accordingly, it is the Department's position that there is no New York gift
tax applicable to either contributions or withdrawals from accounts.
On the other hand, while a withdrawal, as such, cannot come within the New
York gift tax under this reasoning, the proceeds of the withdrawal may be paid
over by the owner to or for the benefit of the beneficiary in a transaction
constituting a completed gift. Such payments generally are not within the scope
of this opinion. However, in the case of a withdrawal which is not a qualified
withdrawal because of the 36 month account requirement, where the proceeds of the
withdrawal are paid by the owner on behalf of the beneficiary for tuition to an
educational organization, if such payment would have qualified for the tuition
exclusion from federal taxable gifts under the pre-1996 section 2503(e)(2)(A) of

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the IRC, it would also be excluded from New York taxable gifts.
1003(a)(1) of the Tax Law.)

(Section

Reporting Requirements for the Program
Question 21. Can the reporting responsibilities for the Program or those involved
in its operation or management be made before the final federal reporting
requirements have been evaluated by the Department?
Answer. No determination of reporting responsibilities for New York tax
purposes by the Program or those involved in its operation or management can be
made until the final federal reporting requirements have been evaluated by the
Department.

DATED: October 7, 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.