The Alimony Deduction and Non-Residents

Article excerpt

New York State has lost another round in their never-ending attempt to deny nonresidents of New York State the deduction allowed for alimony paid, in the Matter of the Petition of Christopher H. Lunding et al. v. Tax Appeals Tribunal of the State of New York et al., New York Supreme Court, Appellate Division, Third Department, No.74021, March 14, 1996.

Before discussing Lunding, a brief history of New York's tax treatment of alimony paid is appropriate.

Since 1976, when the Federal treatment of alimony was changed from an itemized deduction to an adjustment toward Adjusted Gross Income, New York had taken the position that the adjustment for alimony was governed by Tax Law Sec. 632(a)(1) (old law prior to 1988), which limited adjustments to income to those amounts derived from or connected with New York sources. Based on Sec. 632(a)(1), the Department of Taxation and Finance administratively took the position that alimony was not connected with, or derived from, New York source income.

In 1985, the Department of Taxation and Finance issued Technical Services Bureau Memorandum TSB-M-85(7)-I (the TSB-M) in response to the NYS Court of Appeals decision in the Matter of Lance J. Friedsam v. State Tax Commission, 192 N.Y.LJ. No. 122, p.19 (December 27, 1984).

In Friedsam, the New York State Court of Appeals held on statutory, not constitutional, grounds that New York must allow an alimony deduction as an "adjustment to income" in the same manner that it was previously allowed as an itemized deduction. In response to this decision, the Department of Taxation and Finance issued Technical Services Bureau nK memorandum, TSB-M-85-(7)-I, which spells out how to compute the alimony paid adjustment for nonresidents. The TSB-M defined how a nonresident should compute the amount of the Federal alimony paid adjustment that may be deducted against New York source income.

The computation as defined in the TS&M is shown in the Figure.

The TSB-M remained in effect until 1987, when the Tax Law was amended and Sec. 631(b)(6) was added.

Effective for years beginning after 1987, alimony was disallowed, by statute, as a deduction for nonresidents under Tax Law Sec. 631(b)(6), which states, "The deduction allowed by section two hundred fifteen of the internal revenue code relating to alimony, shall not constitute a deduction derived from New York Sources." Since the enactment of Sec.631(b)(6), New York has disallowed any alimony deduction taken against New York income

As mentioned previously, in March 1996 the Appellate Division, once again, handed down a decision that overturns New York's position with respect to the allowance of an alimony paid adjustment against New York source income. …