New York Advisory Opinion TSB-H-81(16)I: Are pension benefits a retired Long Island Rail Road employee has been receiving since 1980 exempt from New York personal income tax as a state or municipal pension?

Plain-English summary

Wilbur W. Stillwagon, who had been receiving pension benefits from the Long Island Rail Road Company Pension Plan and its Plan for Additional Pensions since July 1, 1980, asked whether those payments were exempt from New York personal income tax.

This opinion, issued the same day as a companion ruling on the identical LIRR pension question (TSB-H-81(15)I, for a different petitioner not yet receiving benefits), reaches the same result on the same reasoning. New York's Constitution exempts "pensions" of state and municipal officers and employees from taxation, and Tax Law section 612(c)(3) (implemented by 20 NYCRR 116.3) codifies that exemption - but only where two conditions are both met: the recipient must be a former officer or employee of New York or one of its subdivisions/agencies, and the benefit must actually be payable from a state or municipal retirement system.

LIRR had been reincorporated in February 1980 as a public benefit subsidiary of the Metropolitan Transportation Authority (MTA), which under the Public Authorities Law made its employees "public employees" - satisfying the first condition. But the LIRR pension plans themselves remained privately trusteed and privately funded, predating LIRR's public reorganization, never created by legislative act, and never designated exempt from New York income tax by law; LIRR's employer had also chosen not to bring employees into the New York State Employees Retirement System when it had that option. Because public benefit corporations are legally distinct from the State itself (citing several New York cases on that point), the LIRR plans never became a state or municipal retirement system, and Stillwagon's pension payments - which he had already been collecting since mid-1980 - remained fully subject to the Personal Income Tax.

What this means for you

Retired employees of public benefit corporations already collecting a pension

Already receiving payments doesn't change the analysis - if the underlying plan is a privately trusteed, privately funded plan rather than a genuine state or municipal retirement system, the pension stays taxable regardless of whether you're a current retiree or a future one.

LIRR retirees and similarly situated public-benefit-corporation employees

This ruling (and its companion, TSB-H-81(15)I) both confirm the LIRR Pension Plan and Plan for Additional Pensions don't qualify for New York's pension exemption - don't assume LIRR's status as an MTA public benefit subsidiary extends the exemption to its retirees' pensions.

Accountants preparing returns for public-benefit-corporation retirees

Verify whether a client's specific pension plan is legislatively created and statutorily exempt, or part of an actual system like the New York State Employees Retirement System, before excluding pension income - being a "public employee" alone doesn't establish the exemption.

Common questions

Q: Does it matter that this petitioner was already receiving his pension, unlike the companion ruling's petitioner?
A: No - the timing of eligibility doesn't affect the legal analysis; both rulings reach the identical conclusion that the LIRR plans aren't a state or municipal retirement system.

Q: Why isn't LIRR's pension plan treated as a state or municipal retirement system now that LIRR is a public benefit corporation?
A: The plan is privately trusteed and privately funded, predates LIRR's reincorporation, was never created by legislative act, and was never made exempt from New York income tax by any law - public benefit corporations are legally distinct from the State itself under established New York case law.

Q: Is there any way LIRR retirees' pensions could become exempt?
A: The ruling notes LIRR's employer could have opted to make it a "participating employer" in the New York State Employees Retirement System, which would bring employees within an actual state retirement system, but chose not to.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/h81_16i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81-(16)-I
Income Tax
April 14, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I80ll21A

On November 21, 1980 a Petition for Advisory Opinion was received from
Wilbur W. Stillwagon, 749 Virginia Drive, North Bellmore, New York 11710.
The issue raised by Petitioner is whether pension benefits payable to
retired employees of the Long Island Rail Road Company pursuant to the Long
Island Rail Road Company Pension Plan and the Long Island Rail Road Company Plan
for additional pensions would be exempt from the Personal Income Tax imposed
under Article 22 of the Tax Law.
Article XVI,§5 of the Constitution of the State of New York provides as
follows: "All salaries, wages and other compensation, except pension, paid to
officers and employees of the state and its subdivisions and agencies shall be
subject to taxation." Article V, §7 provides that "After July first, nineteen
hundred forty, membership in any pension or retirement system of the state or of
a civil division thereof shall be a contractual relationship, the benefits of
which shall not be diminished or impaired."
These constitutional provisions exempting certain pensions from taxation
are embodied in section 612(c)(3) of the Tax Law. In effect, this provision
exempts from the Personal Income Tax imposed under Article 22 of the Tax Law
"Pensions of officers and employees of this state, its subdivisions and
agencies...." This statutory language is elucidated in the Personal Income Tax
Regulations, as follows:
"The following items are to be subtracted from Federal adjusted gross
income in order to properly compute the New York adjusted gross income of a
resident individual:
(c)

Pensions to New York State and municipal officers and employees and
other benefits payable by State and municipal retirement systems. If
a taxpayer's Federal adjusted gross income includes any amount on
account of a pension payable to him as an officer or employee of
this State or of any of its subdivisions or agencies, or as the
beneficiary of a deceased officer or employee, this should be
subtracted in computing his New York adjusted gross income. The same
is true of any other benefit to the taxpayer by a New York State or
municipal retirement system created under a law which provides that
all rights therein shall be exempt from New York income tax." 20
NYCRR 116.3.

It follows from the foregoing that two pre-requisites must be met in order
for a pension payment to qualify for the exemption. First, it must be received
by a former officer or employee of New York or one of its subdivisions or
agencies. Second, the benefit must be payable from a state or municipal
retirement system. See, in regard to this second criteron, Matter of Noone, State
Tax Commission Decision of September 7, 1979, TSB-H-79-(180)-I. In the present
instance as will be demonstrated below, only the first of the two criteria is
met. Consequently, the pension payments in question are subject to the Personal
Income Tax imposed under Article 22 of the Tax Law.

TP-8 (4/80)

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-H-81-(16)-I
Income Tax
April 14, 1981
The Long Island Railroad Company (hereinafter "LIRR") is stated by
Petitioner to be a public benefit subsidiary corporation of the Metropolitan
Transportation Authority (hereinafter "MTA"), having been reincorporated as such
on or about February 8, 1980. MTA is a public benefit corporation created under
Title II of Article 5 of the Public Authorities Law. Public authorities generally
are corporate instrumentalities of the State, created by the Legislature for the
futherance of certain public purposes. Public benefit corporations are
corporations "...organized to construct or operate a public improvement wholly
or partly within the state, the profits from which inure to the benefit of this
or other states, or to the people thereof." General Construction Law, §66.4
MTA is stated, in the Public Authorities Law, to be a "state agency" solely
for the purposes of sections 73 and 74 of the Public Officers Law. These
provisions relate to such matters as conflict of interest and ethical standards.
However, section 1265.9(a) of the Public Authorities Law, contained in Article
11, provide that "...no officer or employee of a subsidiary corporation of the
authority, other than a public benefit subsidiary corporation, shall be a public
officer or a public employee...." (Emphasis supplied). It follows that
Petitioner, an employee of a public benefit subsidiary corporation (a form of
public benefit corporation), is a "public employee." This may fairly be construed
to mean an employee falling within the Constitutional category of "employees of
the State and its subdivision and agencies."
Section 1265.9(b) of the Public Authorities Law provides that a public
benefit subsidiary corporation of the MTA may be a "participating employer" in
the New York State Employees Retirement System (hereinafter "ERS") with respect
to one or more classes of officers and employees of...such public benefit
subsidiary corporation." Petitioner's employer, however, has not chosen to so act
to bring Petitioner within the coverage of ERS, opting instead to continue to
utilize pension plans in existence prior to its reincorporation as a public
benefit subsidiary corporation.
The issue thus dispositive of the present matter is whether the pension
plans in question constitute "any pension or retirement system of the state or
of a civil subdivision thereof," (N.Y. Const. Art. V, §7), or a "State...[or]
municipal retirement..." system. 20 NYCRR 116.3(e).
The pension plans at issue are privately trusteed and are contributed to
by LIRR. Employee contributions are also required under certain circumstances.
The plans were established, prior to the time LIRR became a public benefit
subsidiary corporation, as private pension plans, privately funded. Prior to the
time LIRR became a public benefit subsidiary corporation benefits paid from such
plans were determined by the Counsel to the Department of Taxation and Finance
not to be exempt from the Personal Income Tax, based on a finding that "the
Company's pension plans are private plans making payments to private employees."
Memorandum L-140, October 25,1972. While LIRR'S employees are now "public
employees," the pension plans have not thereby become state or municipal
retirement systems. They were not created by legislative act nor, specifically,
"under a law which provides that all rights therein shall be exempt from New York
income tax." Further, pensions paid pursuant to such plans are not payable from
funds contributed to by the State, any of its subdivisions, municipalities, civil
divisions or agencies. LIRR, which is presently a type of public benefit
corporation and which funds and operates the pension plans at issue, does not
fall under any of the foregoing rubrics. Thus, it has been said that "The very
name, 'public benefit corporation', imparts a distinct connotation of
separateness and judicial distinction from the state, its political subdivisions
and municipal corporations. Bell v. Manhattan and Bronx Surface Transit Operating
Authority, 81 Misc. 2d 162, 364 N.Y.S. 2d 274. See also Hyde Park Fire and Water
v. Dutchess County, 97 Misc. 2d 104, 410 NYS 2d 783. Also germane to the present

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TSB-H-81-(16)-I
Income Tax
April 14, 1981
matter is the statement of the court in Smith v. Levitt, 37 A.D. 2d 418, 326 NYS
2d 335, that "Public benefit corporations created by the State for the purpose
of carrying out functions determined by the Legislature to be governmental in
nature are not identical with the State itself and enjoy a separate and
independent existence... Funds of the UDC cannot be considered moneys of the
State simply because the UDC is a public benefit corporation." Cf., Dormitory
Authority of N.Y. v. Span Electric Corp, 18 NY 2d 114, 271 NYS 2d 983.
Petitioner has indicated that he has been receiving his pension benefits
since July 1, 1980. In accordance with the foregoing considerations such payments
are and have been subject to the Personal Income Tax imposed under Article 22 of
the Tax Law, pursuant to the applicable provisions of the Tax Law and the
Constitution of the State of New York.

DATED: March 18, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau