Magazine article The CPA Journal

Lump-Sum Payments Made to Nonresidents May Be Taxable to New York

Magazine article The CPA Journal

Lump-Sum Payments Made to Nonresidents May Be Taxable to New York

Article excerpt

New York Tax Law Sec. 632 provides that a nonresident must include any income derived from "business, trade, profession or occupation" carried on in New York as New York source income for personal income tax purposes. Income may be received in the form of a lumpsum payment, such as an annuity pension, or employment severance pay.

Pursuant to New York State regulations, pensions or other retirement benefits that constitute an annuity are not taxable for New York State personal income tax purposes to a nonresident. Sec. 232.4(d) of the regulations defines an annuity as a payment that is paid in cash and at regular intervals, at least annually for the life of the individual receiving it or at least over a period that is not less than half of such individual's life expectancy as of the date the payments begin. If the pension or other retirement benefit does not constitute an annuity, it is compensation for personal services and taxable to a nonresident to the extent that the services were performed in New York State.

The New York Appellate Court has held that where a nonresident has a right to future employment which has no connection to New York and the nonresident relinquishes this right in exchange for a lumpsum settlement, the lumpsum settlement will not be taxable in New York (Matter of Donahue v. Chu 104 AD2D 523, 479 NYS2d NYS2d 889.

Based on the Donahue decision, the Tax Appeals Tribunal (The Tribunal), in the Mat of the Petition of Peter and Barbara D. McSpadden (DTA No. 910896, September 15, 1994), agreed with the Appellate Division, and decided that a lumpsum payment made to a nonresident that had no connection with employment in New York was not considered New York source income. Pete McSpadden, a Connecticut resident, negotiated a settlement with his employer wherein he would relinquish his rights under an existing employment contract in exchange for a lump-sum payment. The employment agreement provided that at no time would the taxpayer have to maintain an office or residence in New York. The Tribunal reasoned that since the taxpayer's rights under the employment agreement had no connection with New York, the lumpsum payment received by the taxpayer was not taxable by New York.

In contrast, when a nonresident receives a lumpsum payment for termination of employment in New York, the payment is taxable as New York source income. Two such cases were recently decided by the New York Division of Tax Appeals. …

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