New York Advisory Opinion TSB-H-81(58)I: Is an accumulation distribution from a trust to a nonresident individual, consisting entirely of interest on bank accounts, subject to New York State personal income tax or New York City taxes?

Plain-English summary

William Zlot asked the Department how to treat an accumulation distribution paid to him, a nonresident individual, from a trust - where the entire distribution consisted of interest earned on bank accounts. He wanted to know whether it was subject to New York State personal income tax and to the New York City taxes that can apply to nonresidents who earn money connected to the city.

On the State tax question, Tax Law section 632(a) starts a nonresident's New York taxable income from only the income connected to New York sources, and section 632(b)(2) provides that income from intangible property - including interest - counts as New York-source income only if it comes from property employed in a business, trade, profession, or occupation carried on in New York. Because the accumulation distribution was entirely bank interest and wasn't tied to any New York business or profession, it wasn't included in Zlot's New York adjusted gross income and wasn't subject to State personal income tax.

On the New York City questions, the Department distinguished two separate city taxes. The City Personal Income Tax (imposed under Title T of the City's Administrative Code) applies only to City residents, so it couldn't reach a nonresident like Zlot regardless of the source of his income. The City Earnings Tax on Nonresidents (Title U, section U46-2.0) applies specifically to "wages" and "net earnings from self-employment," terms defined by cross-reference to the Internal Revenue Code as employee compensation and self-employment business income, respectively. A trust's accumulation distribution of bank interest is neither wages nor self-employment earnings, so it fell outside that tax too.

What this means for you

Nonresident beneficiaries receiving trust distributions

An accumulation distribution consisting purely of interest income (rather than income tied to a New York business or New York property) generally escapes both New York State personal income tax and New York City's nonresident earnings tax, because neither reaches passive intangible income unconnected to a New York trade or business.

Trustees and estate planners advising nonresident beneficiaries

The tax treatment of a distribution turns on what kind of income it represents at its source - bank interest is treated differently than, say, income from a New York rental property or a New York business interest, which would be New York-source income for a nonresident.

New York City tax questions specifically

Remember these are two distinct City taxes with different reach: the City Personal Income Tax only touches residents, while the City Earnings Tax on Nonresidents only touches wages and self-employment earnings - a distribution that is neither residency-based income nor earned income can fall through both.

Common questions

Q: Is a nonresident taxed by New York State on a trust distribution of bank interest?
A: Not under this ruling's facts - bank interest isn't New York-source income for a nonresident unless it comes from property used in a New York business, trade, or profession.

Q: Does New York City's nonresident earnings tax reach passive trust income like this?
A: No - that tax applies only to wages and net self-employment earnings, neither of which describes a trust's accumulation distribution of bank interest.

Q: Would the answer change if the trust's income came from a New York business instead of bank interest?
A: Yes - the ruling's reasoning turns specifically on the interest coming from bank accounts rather than from property employed in a business, trade, or profession carried on in New York; income of that latter kind would be New York-source income for a nonresident.

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_58i.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-H-81-(58)-I
Income Tax
April 24, 1981

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I801117A

On November 17,1980 a Petition for Advisory Opinion was received from
William Zlot, 11O Bleecker Street, New York, N.Y. 10012.
The issue raised by Petitioner is the proper treatment of an accumulation
distribution from a trust to a nonresident individual, where such distribution
consists entirely of interest on bank accounts, for purposes of the State
Personal Income Tax imposed under Article 22 of the Tax Law and applicable New
York City personal income taxes.
Section 632(a) of the Tax Law provides that the New York adjusted gross
income of a nonresident individual, the starting point in computing his New York
Taxable Income, if any, shall be the net amount of items of income, gain, loss,
and deduction entering into his federal adjusted gross income which are derived
from or connected with New York sources.
Section 632(b)(2) provides that income from intangible personal property,
including interest income, "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 this state."
Accordingly, since the accumulation distribution in question consists
entirely of interest on bank accounts and not from property employed in a
business, trade, or profession it would not be included in the New York adjusted
gross income of a State nonresident individual for purposes of the Personal
Income Tax.
The New York City City Personal Income Tax imposed under Title T of the
Administrative Code of the City of New York is imposed on the city taxable income
of residents of New York City only, and therefore would in no event be applicable
to the nonresident recipient of the trust distribution at issue. The New York
City Earnings Tax on Nonresidents, imposed under Title U of the Administrative
Code of the City of New York, is imposed on wages and net earnings from
self-employment. Adm. Code of the City of New York, §U46-2.0. These terms are
defined by cross-reference to sections 3401(a) and l402(a) of the Internal
Revenue Code, respectively. As there defined, "wages" means "remuneration...for
services performed by an employee for his employer..." and "net earnings from
self-employment" means "the gross income derived by an individual from any trade
or business carried on by such individual," with certain deductions, plus certain
income or loss "from any trade or business carried on by a partnership of which
he is a member." Accordingly, inasmuch as the accumulation distribution described
above does not fit within the categories of "wages" or "net earnings from
self-employment," it would not be subject to the New York City Earnings Tax on
Nonresidents.

DATED: April 7,1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (4/80)