If someone becomes a statutory resident of New York City, is income they receive that year - like restricted stock, bonuses, and deferred compensation - taxable to the city even though it was earned in earlier years while they lived elsewhere?

Plain-English summary

Kenneth W. and Janice W. Freeman asked the Department whether certain income items paid to Kenneth in 1996 - but earned in earlier years - were taxable for New York City personal income tax purposes. Kenneth Freeman had lived in Corning, New York until September 1, 1996, when his family relocated to New York City; he also worked temporarily in New Jersey and kept a transitional New York City apartment. He spent 200 total days in the city during 1996 (80 before the family moved, 120 after), which the parties agreed made him a statutory resident of New York City for that entire year.

The income at issue included restricted stock awards from a previous employer (granted between 1986 and 1996, totaling over $2.6 million), a pre-1996 cash award, funding of a "Rabbi Trust" for a nonqualified deferred compensation obligation, two pre-1996 unfunded nonqualified deferred compensation bonuses, and a 1995 goal-sharing bonus - together another roughly $1.05 million. All of these amounts were included in his federal adjusted gross income for 1996 because that is when he actually or constructively received them, consistent with the general federal timing rule in the Treasury regulations under IRC § 1.451-1(a) and, for the restricted stock, the vesting rules of IRC § 83.

The Department reasoned that because Freeman was a statutory resident for the whole year, this was not a case of someone changing status from nonresident to resident mid-year. Special accrual provisions - Tax Law § 1307(b), NYC Administrative Code § 11-1754, and Tax Law § 639(b) - exist to let a part-year resident carve pre-change income out of city tax; those provisions apply only when a residency change actually occurs during the year, so they were inapplicable here.

Because New York City resident income tracks federal adjusted gross income (via Tax Law §§ 1303, 611, and 612(a)), and New York's method-of-accounting rule (Tax Law § 605(a)(3)) simply follows the federal method with no modification for timing, all of the income Freeman actually received in 1996 while a statutory city resident was taxable to New York City for 1996 - even though it was earned for services performed in prior years, some of them while he was a nonresident of the city.

What this means for you

Statutory residents receiving deferred or delayed compensation

If you qualify as a statutory resident of New York City for a full tax year (by maintaining a permanent place of abode and spending more than 183 days in the city), income you actually or constructively receive that year - restricted stock vesting, deferred compensation payouts, delayed bonuses - is taxable as city resident income for that year. It does not matter that the underlying services were performed in an earlier year, or even in a year when you were a nonresident of the city; there is no exclusion for "income earned while a nonresident" once you're a full-year statutory resident when it's received.

Distinguishing a true change of residency status

The accrual carve-out in Tax Law § 1307(b)/§ 639(b) is narrow: it only helps someone who changes from nonresident to resident status during the taxable year, letting them accrue pre-change items to the nonresident period. It does not help a taxpayer who is a statutory resident for the entire year, even if that person moved into a permanent New York City home partway through the year - what matters for this rule is whether residency status itself changed, not when the move happened.

Common questions

Q: Kenneth Freeman didn't get a permanent New York City apartment until partway through 1996 - why wasn't he treated as a part-year resident?
A: Because he met the statutory residency test (permanent place of abode plus more than 183 days in the city) for the full year, he was assumed to be a full-year statutory city resident, not someone whose residency status changed mid-year. The part-year accrual rules only apply to an actual change in residency status.

Q: Does it matter that some of the restricted stock and deferred compensation was earned years before 1996, while he lived in Corning?
A: No. New York City income tax follows the same timing as federal adjusted gross income, which includes income when it is actually or constructively received. Since Freeman received all these amounts in 1996 while a statutory city resident, they were fully taxable that year regardless of when the services were performed.

Q: What is a "Rabbi Trust," and did funding it change the timing analysis?
A: A Rabbi Trust is a nonqualified, irrevocable trust an employer sets up to fund deferred compensation for employees, but its assets remain subject to the employer's general creditors' claims. Because of that risk, IRS guidance treats amounts contributed to such a trust as not currently includible in the employee's income until actually received - the opinion referenced this only as background on why the funding itself wasn't taxed earlier; the amount was still included in Freeman's 1996 federal adjusted gross income when received.

Q: Could Freeman have excluded any of this income by arguing he was a nonresident when he earned it?
A: No. The Department found no modification under Tax Law § 612 that changes the taxable year in which income already reflected in federal adjusted gross income is included for New York State or City purposes, so the source of the income in earlier nonresident years didn't matter once it was received in 1996.

Citations and references

• Tax Law § 1301(b) - New York City personal income tax provisions must conform to Article 22 of the Tax Law
• Tax Law § 1305(a)(2) and NYC Administrative Code § 11-1705(b)(1)(B) - definition of a New York City "statutory resident"
• Tax Law § 1303 and NYC Administrative Code § 11-1711(a) - a city resident's taxable income equals New York taxable income under Tax Law § 611
• Tax Law § 611 - New York taxable income of a resident individual
• Tax Law § 612(a) - New York adjusted gross income equals federal adjusted gross income, with specified modifications
• Tax Law § 605(a)(3) and NYC Administrative Code § 11-1705(a)(3) - a taxpayer's accounting method for state/city purposes matches the federal method
• 26 CFR § 1.451-1(a) - income is included in gross income when actually or constructively received (cash method) or when the right to it is fixed (accrual method)
• Internal Revenue Code § 83 - taxation of property (e.g., restricted stock) transferred in connection with services
• Tax Law § 1307(b), NYC Administrative Code § 11-1754, and Tax Law § 639(b) - accrual of income to the nonresident period when a taxpayer changes from nonresident to resident status during the year (found inapplicable here)
• IRS Rev. Rul. 69-649 - discretionary incentive bonuses under an unfunded deferred compensation plan are not constructively received until actually paid or made available
• IRS Letter Ruling 8730041 (Apr. 28, 1987) - amounts contributed to a "Rabbi Trust" and their earnings are not currently includible in the participating employee's income

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2001.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a01_3i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-01(3)I
Income Tax
July 31, 2001

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I001114K

On November 14, 2000, a Petition for Advisory Opinion was received from Kenneth W. &
Janice W. Freeman, 15 West 81st Street, New York, New York 10024.
The issue raised by Petitioners, Kenneth W. & Janice W. Freeman, is whether certain items
of income that were paid to Kenneth W. Freeman in 1996, but were earned in previous years during
the period he was a nonresident of New York City are taxable for New York City personal income
tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Kenneth W. Freeman was a resident of Corning, New York until September 1, 1996, at which
time he removed his children from the Corning School District and enrolled them in school in
New York City. Kenneth W. Freeman was assigned to temporarily work in New Jersey, and had a
transitional apartment in New York City during 1996. He spent a total of 200 nights and days in
New York City for 1996, allocated as 80 days and nights prior to his family relocation and 120 days
and nights after his family relocated. Petitioners state that he appears to meet the definition of a
statutory resident of New York City for the tax year 1996. Therefore, this Advisory Opinion
assumes that Kenneth W. Freeman was a statutory resident of New York City for tax year 1996.
Kenneth W. Freeman’s wage compensation included in his federal adjusted gross income for
taxable year 1996 consisted of the following:
(a) Restricted stock awards paid by his previous employer:

(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)

AWARD DATE
04-24-86
12-03-86
12-05-90
12-01-93
12-07-94
02-01-95
12-06-95
Sub-total
02-07-96
TOTAL

AMOUNT
$ 615,810
280,143
50,325
419,375
419,375
196,687
608,094
$2,589,809
31,034
$2,620,843

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(b) Cash award pre 1996
(c) Funding pension trust
(d) Deferred Compensation pre 1996 (bonus)
Deferred Compensation pre 1996 (bonus)
(e) 1995 Bonus (Goal Sharing- general bonus)
TOTAL

$ 139,860
363,058 *
265,411 **
275,289 **
7,418
$1,051,036

• Petitioner states that this is what is commonly called a “Rabbi Trust”
  ** Petitioner states that this is an unfunded nonqualified deferred compensation plan
  The term “Rabbi Trust” is used to describe a certain type of trust that is a nonqualified irrevocable
  trust established by an employer to fund its obligation to pay deferred compensation to officers or
  employees following retirement. The assets and income of the trust are subject to the claims of the
  employer’s general creditors in the event of the employer’s bankruptcy or insolvency. It is so called,
  because a rabbi was the recipient of the first favorable Internal Revenue Service Letter Ruling
  regarding such trust.
  Discussion
  The New York City personal income tax on residents is authorized by Article 30 of the Tax
  Law. Section 1301(b) of Article 30 of the Tax Law provides that “[a]ll the provisions of the local
  laws imposing the taxes authorized by this article shall be identical to the corresponding provisions
  of article twenty-two of this chapter, except as to rate and except as otherwise provided in this
  article, so far as the provisions of such article twenty-two can be made applicable to the taxes
  authorized, with such limitations and modifications as may be necessary in order to adapt such
  language to the city income taxes authorized by this article.”
  Section 1305(a)(2) of Article 30 of the Tax Law and section 11-1705(b)(1)(B) of the
  Administrative Code of the City of New York provide that a city resident individual means an
  individual who is not domiciled in such city but maintains a permanent place of abode in such city
  and spends in the aggregate more than one hundred eighty-three days of the taxable year in such city,
  unless such individual is in active service in the armed forces of the United States. Such a resident
  individual is commonly called a “statutory resident”, and in this case it is assumed that Kenneth W.
  Freeman is a statutory city resident for calendar year 1996.
  Pursuant to section 1303 of Article 30 of the Tax Law and section 11-1711(a) of the
  Administrative Code of the City of New York, the city taxable income of a city resident individual
  is the same as his New York taxable income as defined in section 611 of the Tax Law.
  Section 611 of the Tax Law provides that the New York taxable income of a resident
  individual is the individual’s New York adjusted gross income less the individual’s New York
  deduction and New York exemptions as determined under Article 22 of the Tax Law. Section 612(a)

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of the Tax Law provides that the New York adjusted gross income of a resident individual means
his federal adjusted gross income as defined in the laws of the United States for the taxable year,
with the modifications specified in section 612 of the Tax Law. There is no modification under
section 612 of the Tax Law to change the taxable year that income which is reflected in the
taxpayer’s federal adjusted gross income is included for New York State and New York City income
tax purposes.
Section 605(a)(3) of Article 22 of the Tax Law and section 11-1705(a)(3) of the
Administrative Code of the City of New York provide that a taxpayer’s method of accounting under
such laws is the same as the individual’s method of accounting for federal income tax purposes.
Section 1.451-1 of the Treasury Regulations provides the general rule for determining
the taxable year that income is included in gross income for federal income tax purposes.
Section 1.451-(a) states, in pertinent part, that:
Gains, profits, and income are to be included in gross income for the taxable
year in which they are actually or constructively received by the taxpayer unless
includible for a different year in accordance with the taxpayer’s method of
accounting. Under an accrual method of accounting, income is includible in gross
income when all the events have occurred which fix the right to receive such income
and the amount thereof can be determined with reasonable accuracy. Therefore,
under such a method of accounting if, in the case of compensation for services, no
determination can be made as to the right to such compensation or the amount thereof
until the services are completed, the amount of compensation is ordinarily income
from the taxable year in which the determination can be made....
Pursuant to section 1.451-1(a) of the Treasury Regulations, under a cash method of
accounting, income is includible in gross income when it is actually received or constructively
received, and under an accrual method of accounting, income is includible in gross income when all
the events have occurred which fix the right to receive such income and the amount thereof can be
determined with reasonable accuracy.
In Internal Revenue Service Rev. Rul. 69-649, the issue concerned the constructive receipt
of income under the cash method of accounting. In the ruling the Service held that incentive bonuses
awarded to employees at the discretion of the employer-corporation, to be paid at a designated future
time in accordance with provisions of a nonqualified unfunded deferred compensation plan, are not
constructively received by the employees until such bonus awards are actually received by or
otherwise made available to the employees, whichever is earlier. The Service reasoned that the
obligations of the corporation under this supplementary retirement plan are merely contractual and
are not funded or secured, and the awards are nonassignable. Therefore, the employee’s control of
receipt of the incentive bonus is subject to substantial limitations or restrictions until it is actually

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received by or otherwise made available to the employee, whichever is earlier. The Service also
held that the employer-corporation is entitled to deduct the deferred bonus award only in the taxable
year in which payments are actually made to the employee or his legal representative, to the extent
the payments are ordinary and necessary expenses under section 162 of the IRC.
Section 83 of the Internal Revenue Code provides rules for the taxation of property that is
transferred to an employee in connection with the performance of services and that is subject to
restrictions that affect its value. The person who performed such services generally includes in gross
income the fair market value of the property over any amount paid for it, in the first taxable year in
which the rights of the person having beneficial interest in such property are transferable or are not
subject to a substantial risk of forfeiture, whichever is applicable.
In Internal Revenue Service Letter Ruling 8730041, April 28, 1987, the Service held that a
nonqualified irrevocable trust termed a “rabbi trust” was established by an employer to fund its
obligation to pay deferred compensation to key executives following retirement. The assets of the
trust, including the income generated by those assets, were expressly made subject to the claims of
the employer’s general creditors in the event of the employer’s bankruptcy or insolvency. Because
of the provision regarding the employer’s creditors, the interests of the employees in the trust cannot
be considered to be substantially vested since these interests are either not transferable or are subject
to a substantial risk of forfeiture. The Service held that under section 83 of the Internal Revenue
Code, the amounts contributed to the trust by the employer and the earnings thereon are not currently
includible in the income of the key executive who participates in the deferred compensation
agreement.
Section 1307(b) Article 30 of the Tax Law, and section 11-1754 of the Administrative Code
of the City of New York, provide that if an individual changes his status during the taxable year from
city nonresident to city resident, he shall, regardless of his method of accounting, accrue for the
portion of the taxable year prior to such change of status any items of income, gain, loss or deduction
accruing prior to the change of status. Such accruals shall be made as provided in section 639(b)
(formerly section 654(c)) of Article 22 of the Tax Law. Section 639(b) of the Tax Law provides for
accruals when an individual changes status from a nonresident to a resident of New York during the
taxable year. It provides as follows:
If an individual changes status from nonresident to resident [the individual]
shall, regardless of [the individual’s] method of accounting, accrue to the period of
nonresidence any items of income, gain, loss or deduction, items of tax preference
or ordinary income portion of a lump sum distribution accruing prior to the change
of status, with the applicable modifications and adjustments to federal adjusted gross
income, itemized deductions and items of tax preference under sections six hundred
twelve, six hundred fifteen and six hundred twenty-two, other than items derived
from or connected with New York sources, if not otherwise properly includible or

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allowable for New York income tax purposes for such period or for a prior taxable
year under [the individual’s] method of accounting.
However, in this case, it is assumed that Kenneth W. Freeman is a statutory city resident for
calendar year 1996, pursuant to section 1305(a)(2) of Article 30 of the Tax Law and section
11-1705(b)(1)(B) of the Administrative Code of the City of New York. Accordingly, Kenneth W.
Freeman did not have a change of residence for New York City income tax purposes for taxable
year1996. Therefore, the provisions of section 1307(b) of Article 30 of the Tax Law, section
11-1754 of the Administrative Code of the City of New York and section 639(b) of Article 22 of the
Tax Law are not applicable.
The income that Kenneth W. Freeman actually received in 1996 when he was a statutory city
resident individual, that was attributable to services performed prior to 1996, was included in his
federal adjusted gross income for taxable year 1996 pursuant to section 1.451.-1(a) of the Treasury
Regulations. Pursuant to section 1303 of Article 30 of the Tax Law, section 11-1711(a) of the
Administrative Code of the City of New York and section 612 of the Tax Law, Kenneth W. Freeman
may not exclude such income from his city taxable income computed for 1996.

DATED: July 31, 2001

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist III
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.