March 2000

Court Rules on Tax Treatment for Moving In and Out of State

In Greig, the New York State Tax Appeals Tribunal invalidated a regulation prohibiting taxpayers who have moved into or out of New York state from prorating their share of partnership income between their residency and nonresidency periods (Robert and Susan Greig, DTA No. 815529, September 16, 1999). At first glance, this seemed to give taxpayers an opportunity to consider some options.

By invalidating New York State Tax Department Regulations section 154.6, the court struck down a rule in force since 1990 requiring that the entire partnership share be included as income if the partnership year falls within the residency period of the partner. Conversely, the partnership share would need to be excluded in full if the partnership year falls into the period when the partner was not a New York state resident.

The Greig decision--which permitted allocating partnership income between the residency and nonresidency period--appeared to give taxpayers a choice between two methods. However, shortly after this decision, the New York state administrative law judge in Montgomerie (Bruce M. and Claire M. Montgomerie, DTA No. 812425, October 29, 1999) determined that the Greig decision did not allow this choice.

The courts' decisions hold for S corporations as well as partnerships. New York state will soon issue a technical service memorandum applying the partnership allocation rules to S corporations.

Keep in mind that 1999 New York state nonresident Form 203, line 11, instructs S corporation shareholders as well as members of partnerships to allocate income between the periods of residency and nonresidency. In the wake of these recent rulings, practitioners should consider allocation as the safest course of action. *

Editor's Note: The Greig decision mentioned above also has implications for reporting partners' self-employment income as a result of the repeal of the New York City nonresident earnings tax. See the February issue of The Trusted Professional and http://www.nysscpa.org for more details.

Robert Halfon is a member of the NYSSCPA New York State, Municipal, and Local Taxation Committee and a partner at David Berdon & Co. LLP in New York City.