Law Firms: New York Tax Treatment of Certain Retirement Payments Made to Nonresident Partners
12/16/2011
In light of numerous inquiries regarding New York State taxation of retirement payments made to nonresident partners, including retired partners from New York law firms who no longer live in New York, we thought it would be helpful to summarize New York State Department of Taxation and Finance’s (“Department”) position on such payments.
Recent amendments to Federal law prohibit states from taxing certain retirement income of nonresidents in relation to retirement payments made to retired partners. As a result of these changes, the Department revised its previous position set forth in TSB-M-06(3)I, and now conforms to the Federal treatment (see TSB-M-07(2)I). Accordingly, certain retirement payments are longer deemed to be New York source income.
Under the new Federal law, retirement payments that are made under a nonqualified plan maintained by a law firm partnership and meet certain criteria are taxable only by a state where the retired partner is a resident or domiciled at the time the payments are received. To qualify for this treatment, the retirement payments must satisfy all of the following criteria:
- The payments must be pursuant to a written plan, program, or arrangement that was in effect prior to the partner’s retirement;
- The payments must be in recognition of prior services performed by the partner for the partnership; and
- The payments must be made over the life expectancy of the recipient or over a period of at least 10 years, must be paid at least annually, and must be paid in equal periodic payments.
The new law does not apply to retired partner payments that represent payments for the partner’s capital interest or other interest in partnership property, unrealized receivables, inventory, or goodwill.
If you have any questions on the treatment of payments made to retired partners or other state and local tax matters, please contact Corey L. Rosenthal, JD, a J.H. Cohn director and member of the Firm’s State and Local Tax (“SALT”) Practice, at crosenthal@jhcohn.com or 646-625-5729 or Richard Puzo, CPA, partner and director of the Firm’s Law Firms Industry Practice, at rpuzo@jhcohn.com or 973-364-6675.
About J.H. Cohn’s Law Firm Industry Practice
J.H. Cohn’s Law Firm Industry Practice has earned a reputation among law firms for our industry expertise, partner-level involvement, and solutions-driven attest, tax, and consulting services. We help our clients drive profits and increase personal wealth by understanding their unique operations and challenges and delivering value-added services via a cost-effective structure. Our practice aids client’s in analyzing their business to identify risks, implement cost-reduction strategies, and assess opportunities to enhance billings. Examples of our value-added services include: alternative fee arrangement analysis, mergers and acquisitions support, internal control studies, trust accounting reconciliations and management, and IT consulting.
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This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and J.H. Cohn LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.