Certain Nonresident New York City Employees Must Pay Tax on All Income

By Mark H. Levin

Section 1127, “Condition Precedent to Employment,” enacted in 1973 (originally codified at section 822), provides the following:

(a) Notwithstanding the provisions of any local law, rule, or regulation to the contrary, every person seeking employment with the city of New York or any of its agencies regardless of civil service classification or status shall sign an agreement as a condition precedent to such employment to the effect that if such person is or becomes a nonresident individual ... such person will pay to the city an amount by which a city personal income tax on residents computed and determined as if such person were a resident individual ... during such employment, exceeds the amount of any city earnings tax and city personal income tax imposed on such person for the same taxable period.

(b) Whenever any provision of this charter, the administrative code of the city of New York, or any rule or regulation promulgated pursuant to such charter or administrative code employs the term ‘salary,’ ‘compensation,’ or any other word or words having a similar meaning, such terms shall be deemed and construed to mean the scheduled salary or compensation of any employee of the city of New York, undiminished by any amount payable pursuant to subdivision (a) of this section.

A recent court of appeals decision, Robert Fleming, et al., Appellants, v. Rudolph W. Giuliani, &c., et al., Respondents, New York Court of Appeals (No. 175, 12/21/2004), concerned whether this payment, in lieu of personal income taxes paid by certain nonresident New York City employees, is to be computed only on the amount earned from the employee’s New York City employment or on the employee’s total taxable income, from all sources, computed as if the employee were a resident of New York City. In Fleming, 13 physicians residing outside of New York City were employed part-time as district surgeons by the New York City Police Department and claimed that payments under section 1127 should apply only to the salaries that they earn from their city employment and not to any other income. The New York Court of Appeals held that the appellants’ reliance on the terminology in section 1127(b) was misplaced:

Section 1127(a), the dispositive provision, ... incorporates express references to the ‘city personal income tax’ and ‘city earnings tax.’ By the corresponding definitions, the provision is not limited to the salary or wages earned from city employment. Although section 1127(b) defines the terms ‘salary’ and ‘compensation’ ... those terms do not appear in section 1127(a). Rather, section 1127(b) merely explains that section 1127(a) payments do not diminish a city employee’s salary for purposes of, for example, pension benefits.

The court held that “[T]he city personal income tax is imposed on the ‘city taxable income’ of all city residents” (Administrative Code section 11-1701). The term “city taxable income” refers to a resident’s “city adjusted gross income less his city deduction(s) and city exemptions” [Administrative Code section 11-1711(a)]. The section 1127 payment must be computed as if the nonresident employee were a New York City resident and must include, in city taxable income, all income that would have been included if the nonresident employee had been a resident.

While taxing all income of certain nonresident employees of New York City might be harsh, a strict reading of section 1127 of the City Charter and the appropriate sections of the Administrative Code clearly support the court’s decision.

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