Robert L. Hoffman, a lifelong Connecticut resident who worked for IBM for 29 years and 3 months - the first 20 years and 6 months entirely outside New York and the final 8 years and 9 months entirely within New York - asked what portion of the lump-sum 'Financial Assistance Payment' IBM gave him upon early retirement is subject to New York personal income tax.

Plain-English summary

Robert L. Hoffman worked for IBM for 29 years and 3 months, from January 11, 1960 until his early retirement on April 1, 1989. For his first 20 years and 6 months he performed his IBM duties entirely outside New York State; starting July 1, 1980 and continuing through his retirement, he performed his duties entirely within New York (about 8 years and 9 months). He never lived in New York and did no further work of any kind after retiring. Upon early retirement, IBM paid him a one-time lump sum called a "Financial Assistance Payment" - four weeks' pay at his final 1989 salary rate for each year of service, capped at two years' salary. This payment did not qualify as an "annuity" under Personal Income Tax Regs § 131.4(d)(2), so Hoffman asked the Department how much of it New York could tax.

Because the payment failed the annuity test, Regs § 131.4(d)(1) treats it instead as ordinary compensation for personal services - specifically naming "amounts received upon early retirement in consideration of past services rendered" - taxable to a nonresident only to the extent the underlying services were performed in New York. The allocation mechanics for that kind of payment come from Regs § 131.20: by default, a non-annuity retirement or severance payment is treated as attributable to services performed during the portion of the retirement year plus the three taxable years immediately preceding retirement, allocated using the New York-source-salary-to-total-salary ratio for that same look-back window (computed under the day-count and compensation methods of Regs §§ 131.17-131.19).

Applying that default four-ish-year window to Hoffman's facts produced a stark result: because his last 8 years and 9 months of service were performed 100% within New York, that entire look-back period was 100% New York-source, meaning the default rule would make his whole Financial Assistance Payment taxable by New York. But Regs § 131.20 also lets a taxpayer elect to use a longer look-back period instead - here, his entire 29-year-3-month career - if he can establish to the Commissioner's satisfaction his total yearly compensation and the New York-allocable share of it for every one of those years, following the same §§ 131.17-131.19 methodology. Since roughly two-thirds of Hoffman's career (20 years, 6 months) was spent entirely outside New York, electing the full-career look-back would sharply shrink the taxable fraction of his payment compared to the 100%-taxable result under the default four-year rule. The Department's answer was therefore conditional: absent adequate substantiation, 100% of the payment is New York-source; with it, Hoffman can instead allocate based on his whole career.

What this means for you

Nonresidents who worked in New York for only part of a multi-decade career

If your most recent years of service happen to have been spent entirely (or mostly) in New York, the default four-year look-back in Regs § 131.20 can make a non-annuity retirement or severance payment 100% New York-taxable even though most of your career was performed elsewhere. Don't assume the default result is final - you have the option to elect a longer, full-career look-back period if it would produce a smaller New York-taxable share, but only if you can document your total and New York-allocable compensation for every year of that longer period to the Commissioner's satisfaction.

Retiring executives negotiating severance or early-retirement packages

A lump-sum severance or early-retirement payment that doesn't meet the technical definition of an "annuity" under Regs § 131.4(d)(2) is not automatically exempt just because you've moved out of state or never lived in New York - it's treated as compensation for past services and allocated to New York based on where you actually worked. Before assuming a payment escapes New York tax, check whether it qualifies as an annuity, and if not, work through the § 131.20 allocation (and whether the default or elective look-back period is more favorable) before you finalize your retirement paperwork.

Accountants allocating multi-state retirement or severance pay for nonresident clients

When a non-annuity retirement payment is at issue, first apply the Regs § 131.20 default look-back (retirement-year portion plus the prior three taxable years) using the §§ 131.17-131.19 allocation methods. If that produces an unfavorable result because the client's recent years were concentrated in New York, evaluate whether electing the full-career look-back would help, and start gathering the year-by-year compensation and New York-allocation records needed to substantiate that election to the Commissioner - the election isn't available without that documentation.

Common questions

Q: Can I use my whole career instead of just the last four years to shrink my New York-taxable share?
A: Yes, potentially. Regs § 131.20 lets you base the allocation on a longer period than the default (portion of the retirement year plus the three preceding taxable years) if you can establish, to the satisfaction of the Commissioner of Taxation and Finance, your total yearly compensation and the New York-allocable portion of it for every year of that longer period, computed under Regs §§ 131.17-131.19. Hoffman's opinion confirms this election is available even for a look-back spanning his entire 29-year-3-month career.

Q: Why would the default rule make 100% of Hoffman's payment taxable when he spent most of his career outside New York?
A: The default look-back period under Regs § 131.20 only covers the portion of the retirement year plus the three immediately preceding taxable years. Hoffman's last 8 years and 9 months of service happened to be performed entirely in New York, so that whole default window was 100% New York-source - even though it represented only a fraction of his 29-year-3-month career, most of which (20 years, 6 months) was performed entirely outside the state.

Q: What made the Financial Assistance Payment ineligible for annuity treatment, and why does that matter?
A: The opinion states as a given fact that the payment did not qualify as an annuity under Regs § 131.4(d)(2); it doesn't detail why. That determination matters because annuities and non-annuity retirement benefits are taxed differently for nonresidents - a non-annuity payment is treated as ordinary compensation for services under Regs § 131.4(d)(1) and allocated under the source-of-services rules in § 131.20, rather than receiving whatever separate treatment applies to a qualifying annuity.

Q: What records does someone need to make the full-career election work?
A: To substantiate a look-back period longer than the default, you must be able to show the Commissioner your total compensation for each year of that period and the portion of it allocable to New York under Regs §§ 131.17-131.19 (for example, using working-day ratios under § 131.18(a)). Without year-by-year records for the entire elected period, the Department will fall back to the default four-year formula.

Q: Does it matter that Hoffman never lived in New York and did no further work after retiring?
A: Yes, in the sense that it confirms he's taxed purely as a nonresident on New York-source income, not on his full income as a resident would be. It doesn't change the source-allocation analysis itself - the Financial Assistance Payment is still allocated to New York based on where the underlying services were performed, whether under the default look-back or the elected full-career look-back.

Citations and references

• Personal Income Tax Regs § 131.4(d)(1) - a non-annuity pension or retirement benefit is compensation for personal services, taxable to a nonresident to the extent the underlying services were performed in New York, expressly including amounts received upon early retirement in consideration of past services
• Personal Income Tax Regs § 131.4(d)(2) - defines when a retirement benefit qualifies as an "annuity"; Hoffman's Financial Assistance Payment did not meet this test
• Personal Income Tax Regs § 131.20 - sets the default allocation formula (portion of the retirement year plus the three immediately preceding taxable years, by ratio of New York to total salary) and allows electing a longer substantiated look-back period instead
• Personal Income Tax Regs § 131.17 - one of the allocation methods referenced for computing New York-source compensation within the § 131.20 look-back period
• Personal Income Tax Regs § 131.18(a) - allocates a nonresident employee's compensation by the ratio of New York working days to total working days
• Personal Income Tax Regs § 131.19 - another allocation method referenced for computing New York-source compensation within the § 131.20 look-back period

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a90_2i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90 (2) I
Income Tax
January 11, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

Petition No. I891031B

On October 31, 1989, a Petition for Advisory Opinion was received from Robert L. Hoffman,
111 Little Brook Road, New Canaan, Connecticut 06840.
The issue raised is what portion of a Financial Assistance Payment received by Petitioner,
Robert L. Hoffman, a nonresident of New York State, from his employer in connection with his early
retirement is subject to New York State personal income tax.
Petitioner was employed by IBM for 29 years and 3 months before retirement. During his
first 20 years and six months, since employment on January 11, 1960, he performed his duties as an
IBM employee wholly outside of New York State. From July l, 1980 to his retirement on April 1,
1989, he performed his duties in New York State. He has not performed any personal services or
engaged in any business occupation or profession since the date of his retirement and none is
anticipated in the future. He has never been a resident of New York State and other than his
employment by IBM has never performed any other business, occupation or profession in New York
State.
IBM gave Petitioner a Financial Assistance Payment of two years' salary in connection with
his early retirement on April 1, 1989. This was a one-time lump-sum payment based on four weeks'
pay, at the 1989 final salary rate, for each year of service, up to a maximum of two years' salary. The
Financial Assistance Payment did not qualify as an annuity pursuant to Section 131.4(d)(2) of the
Personal Income Tax Regulations.
Section 131.4(d)(1) of the Personal Income Tax Regulations provides in part that:
...Where a pension or other retirement benefit does not constitute an
annuity, it is compensation for personal services and, if the
individual receiving it is a nonresident, it is taxable for York State
personal income tax purposes to the extent that the services were
performed in New York State. The term compensation for personal
services as used in the foregoing sentence includes, but is not
limited to, amounts received in connection with ... amounts
received upon early retirement in consideration of past services
rendered,... For allocation rules, see section 131.20 of this Part.
Section 131.20 of the Personal Income Tax Regulations provides that:
If a pension or other retirement benefit does not qualify as
an annuity under subdivision (d) of section 131.4 of this
Part, and is attributable to services performed wholly within
New York State, the entire amount included in the

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TSB-A-90 (2) I
Income Tax
January 11, 1990
individual's Federal adjusted gross income is likewise includible in
his New York adjusted gross income. If the pension or other
retirement benefit is attributable to services performed wholly
outside New York State, no part of the amount received is
includible in the individual's New York adjusted gross income.
Where the employee's services were performed partly within and
partly without New York State, the amount includible in the
individual's New York adjusted gross income is the proportion of
the amount included in the individual's Federal adjusted gross
income which the total compensation, received from the employer
for the services performed in New York State during a period
consisting of the portion of the taxable year prior to retirement and
the three taxable years immediately preceding the retirement, bears
to the total compensation received from the employer during such
period for services performed both within and without New York
State. For purposes of this section, the compensation for services
performed within New York State must be determined separately
for each taxable year or portion of a year in accordance with the
applicable provisions of section 131.17, 131.18 or 131.19 of this
Part. A determination of the portion of a pension or other form of
deferred compensation attributable to New York State on the basis
of a period of time greater than the period referred to above may be
made if the individual establishes, to the satisfaction of the Tax
Commission, the amount of his total yearly compensation for a
longer period of time and the amount allocable to New York State
in each year in accordance with the applicable provisions of
sections 131.17 through 131.19 of this Part. (For taxability of
pensions and other retirement benefits in general, see subdivision
[d] of section 131.4 of this Part.)
Section 131.18(a) of the Personal Income Tax Regulations provides in part that:
If a nonresident employee (including corporate officers, but
excluding employees provided for in section 131.17 of this Part)
performs services for his employer both within and without New
York State, his income derived from New York State sources
includes that proportion of his total compensation for services
rendered as an employee which the total number of working days
employed within New York State bears to the total number of
working days employed both within and without New York State ....
In accordance with Section 131.4(d)(1) of the Regulations the Financial Assistance Payment
received by Petitioner from IBM constitutes compensation for personal services received upon early
retirement in consideration for past services rendered. Therefore, the payment is subject to the
allocation rules set forth in Section 131.20 of the Regulations.

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TSB-A-90 (2) I
Income Tax
January 11, 1990
Section 131.20 of the Regulations first provides that payments, such as the Financial
Assistance Payment received by the Petitioner, are deemed attributable to services performed in New
York during the portion of the year of retirement and the three years prior to retirement and are
allocated according to the ratio of all New York source salary to total salary everywhere for the
period. Since Petitioner had worked exclusively in New York for eight years and nine months prior
to his retirement, under this formula his entire Financial Assistance Payment would be subject to
New York State personal income tax.
However, under Section 131.20 the Petitioner may also base his allocation of the Financial
Assistance Payment on the basis of 20 years and six months worked outside of New York State out
of a total of 29 years and three months worked, if he can establish to the satisfaction of the
Commissioner of Taxation and Finance the amount of his total yearly compensation over the 29 year
and three month period and the amount attributable to New York State in each year in accordance
with the formula set forth in Section 131.18(a) of the Regulations.

DATED: January 11, 1990

PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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