If accumulated sick-leave hours were earned entirely during an out-of-state job, but the lump-sum payout check arrives after the employee has already moved to New York and become a resident, is that payment taxed as New York income?

Plain-English summary

Petitioner David C. Mallen was a nonresident of New York employed by the State of Florida. Florida had a policy of paying employees a one-time lump sum for accumulated sick leave - 25% of accumulated hours at the employee's current rate of pay - if they terminated employment on or after their tenth work anniversary. Mallen reached his tenth Florida anniversary on November 1, 1995, and terminated his Florida employment shortly after, before he had any New York employment or residency. His full-time New York employment began November 27, 1995, and he did not become a New York resident until December 10, 1995. In February 1996 - after he was already a New York resident - Florida paid him a lump sum of $3,453.98 for the sick leave hours he had accumulated over his entire ten years there.

The Department applied Tax Law § 639(b), which governs what happens to income items when someone changes from nonresident to resident status mid-stream: any item of income "accruing prior to the change of status" must be accrued to the nonresident period (with the usual § 612/§ 615/§ 622 modifications), unless it's New York-source income. Section 639(c) then prevents that same item from being counted again in a later year. Because the sick-leave hours - and the right to be paid for them - were entirely generated by Mallen's Florida employment before he ever worked in or resided in New York, the Department treated the payment as accruing to the pre-1996 nonresident period, even though the check itself didn't arrive until February 1996, after residency had already begun. The date of accrual (when the entitlement was earned), not the date of payment, controlled.

As a result, the $3,453.98 lump sum, along with any related federal AGI modifications and adjustments under §§ 612, 615, and 622, is excluded from Mallen's 1996 New York taxable income. The opinion also flags an important wrinkle for the straddle year: because Mallen was only a part-year New York resident in 1995, his 1995 tax is computed as if he'd been a full-year resident and then reduced by a New York source fraction (NY-source income for the nonresident part of the year plus all income for the resident part of the year, divided by total New York adjusted gross income for the full year). Even though the sick-leave payment wasn't received until 1996 and is excluded from 1996 income, it still has to be included in the denominator of that 1995 fraction (total New York AGI for the year) - just not in the numerator, since it isn't New York-source income.

What this means for you

People moving to New York who have deferred or lump-sum pay coming from a prior out-of-state job

If you're owed a payment - like accrued sick leave, vacation payout, or other deferred compensation - that was entirely earned during employment in another state before you became a New York resident, the fact that the check doesn't arrive until after you've moved doesn't automatically make it New York taxable income. Under Tax Law § 639(b), what matters is when the income accrued (was earned), not when it was paid. Income that accrued entirely to your nonresident period, and isn't New York-source, gets accrued back to that nonresident period and excluded from the resident year in which it happens to be paid.

Accountants preparing part-year-resident New York returns

When a client changes from nonresident to resident mid-year and later receives a payment attributable to pre-move employment elsewhere, don't stop at excluding it from the year of receipt. Check whether the year of the residency change itself is affected: this opinion shows that an amount accrued to the nonresident period and excluded from a later year's taxable income must still be folded into the denominator of the New York source income fraction (total New York AGI for the full year) used to compute the part-year resident's tax for the year residency began - even though it's excluded from the numerator because it isn't New York-source income.

Common questions

Q: Does the date the payment was actually received control, or the period during which it was earned?
A: The period during which it was earned controls. Tax Law § 639(b) accrues income items to the nonresident period if they arose ("accru[ed]") before the change of status, regardless of the taxpayer's accounting method or when the check actually arrives.

Q: Mallen received the payment in February 1996, after he was already a New York resident. Why wasn't it taxed as 1996 resident income?
A: Because the sick-leave hours were accumulated entirely during his Florida employment, before he had any New York residency or employment, the entitlement accrued to the nonresident period under § 639(b). Section 639(c) then bars that same item from being taxed again in the later (1996) year in which it was actually paid.

Q: If the payment is excluded from 1996 income, why does it still matter for the 1995 return?
A: Mallen was a part-year New York resident in 1995 (resident only from December 10, 1995 onward). His 1995 tax is computed as if he were a full-year resident and then reduced by the New York source fraction. The accrued sick-leave payment must be included in the denominator of that fraction (total New York adjusted gross income for the full year) even though it's excluded from the numerator, since it's not New York-source income.

Q: Would the answer be different if Mallen had still been working for Florida, or not yet a New York resident, when he received the payment?
A: The opinion's holding turns on the payment being attributable entirely to a period before Mallen's New York employment and residency began. The facts here - termination of Florida employment before any New York employment or residency - are what let the Department treat the entire payment as accrued to the nonresident period.

Q: Does this exclusion also cover related federal adjustments, or only the raw lump-sum amount?
A: It covers both. The opinion says that when computing 1996 New York taxable income, the taxpayer should exclude the lump-sum payment itself as well as any applicable modifications and adjustments to federal adjusted gross income, itemized deductions, and items of tax preference under Tax Law §§ 612, 615, and 622 that are attributable to that income.

Citations and references

• Tax Law § 611 - a resident individual's New York taxable income is New York adjusted gross income less New York deductions and exemptions
• Tax Law § 639(b) - items of income, gain, loss, or deduction accruing prior to a change from nonresident to resident status are accrued to the nonresident period (with §§ 612/615/622 modifications), except items derived from New York sources
• Tax Law § 639(c) - an item of income accrued under § 639 is not taken into account again in determining tax for any subsequent taxable year
• Tax Law §§ 612, 615, and 622 - the modifications and adjustments to federal adjusted gross income, itemized deductions, and items of tax preference applied to income accrued under § 639(b)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a98_2i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(2)I
Income Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I971126C

On November 26, 1997, a Petition for Advisory Opinion was received from
David C. Mallen, 8 Tanglewood Road, New Hartford, New York 13413.
The issue raised by Petitioner, David C. Mallen, is whether a lump sum
payment for accumulated sick leave should be excluded from New York taxable
income under Article 22 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner was a nonresident of New York State and was employed by the
State of Florida. Petitioner's tenth anniversary with the State of Florida was
November 1, 1995, and during his employment he accumulated sick leave hours.
It is the policy and routine practice of the State of Florida to issue a
one time payment for accumulated sick leave for any employee who terminates his
employment with the State on or after his tenth year of employment. The policy
allows the State to reimburse an employee 25 percent of accumulated hours at the
employee's current rate of pay.
Petitioner terminated his employment with the State of Florida after his
tenth anniversary. This was prior to his employment or residency in New York
State. Petitioner's full time employment in New York State commenced officially
on November 27, 1995. He did not become a resident of New York until December
10, 1995.
In February 1996, Petitioner received a lump sum payment of $3,453.98 for
the sick leave hours accumulated over the 10 year period he was employed by the
State of Florida.
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 639(b) of the Tax Law provides for accruals when an individual
changes status from a nonresident to a resident of New York State. It provides
as follows:

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TSB-A-98(2)I
Income Tax

If an individual changes status from nonresident to resident [the
individual] shall, regardless of [the individual's] method of
accounting, accrue to the period of nonresidence any items of
income, gain, loss or deduction, items of tax preference or ordinary
income portion of a lump sum distribution accruing prior to the
change of status, with the applicable modifications and adjustments
to federal adjusted gross income, itemized deductions and items of
tax preference under sections six hundred twelve, six hundred
fifteen and six hundred twenty-two, other than items derived from or
connected with New York sources, if not otherwise properly
includible or allowable for New York income tax purposes for such
period or for a prior taxable year under [the individual's] method
of accounting.
Section 639(c) of the Tax Law provides that "no item of income, gain, loss,
deduction, item of tax preference, ordinary income portion of a lump sum
distribution or modification or adjustment which is accrued under this section
shall be taken into account in determining the tax under this article for any
subsequent taxable year."
In this case, Petitioner accumulated sick leave hours over a 10 year period
that was attributable to his employment by the State of Florida. Petitioner
terminated his employment with the State of Florida in 1995, and, in February
1996 Petitioner received a lump sum payment for the accumulated sick leave hours.
Petitioner was not employed in New York State nor did he become a resident of New
York State until after he terminated his employment with the State of Florida.
Accordingly, pursuant to section 639 of the Tax Law, the lump sum payment
of $3,453.98 that Petitioner received in 1996, for accumulated sick leave hours
attributable to Petitioner's employment by the State of Florida prior to
Petitioner's change of residence to New York State, is accruable to the
nonresident period prior to 1996 and not subject to New York State personal
income tax for tax year 1996. When computing New York taxable income for 1996,
Petitioner should exclude the amount of the lump sum payment as well as any
applicable modifications and adjustments to federal adjusted gross income,
itemized deductions and items of tax preference, determined under sections 612,
615, and 622 of the Tax Law, that are attributable to such income.
It should be noted that, since Petitioner was a part-year resident of New
York State in 1995, for taxable year 1995, Petitioner is subject to New York
State tax personal income tax on income received from New York sources while a
nonresident and on all income received while a resident of New York State. The
tax is equal to the tax computed as if Petitioner were a resident for the entire
year, reduced by certain credits and multiplied by the New York source fraction,
the numerator of which is the sum of Petitioner’s New York adjusted gross income
from New York sources for the nonresident period and all New York adjusted gross

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Income Tax

income for the resident period and the denominator of which is Petitioner’s New
York adjusted gross income for the entire year. In this instance, in determining
the tax computed as if Petitioner were a resident and the denominator of the New
York source fraction, Petitioner must include in New York adjusted gross income,
the amount of the accrued sick leave payment that was not received until 1996.
This accrual would not be included in the numerator because it would be non New
York source income accrued to the nonresident period.

DATED: February 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.