Charles E. Rockey, a retired employee of the Federal Reserve Bank of New York, asked whether the pension payments he received in 1989 from the Federal Reserve Retirement Plan are exempt from New York income tax under Tax Law § 612(c)(3)(ii).

Plain-English summary

Charles E. Rockey, a retired employee of the Federal Reserve Bank of New York, asked the Department whether the pension payments he received in 1989 from the Federal Reserve Retirement Plan are exempt from New York income tax under Tax Law § 612(c)(3)(ii). The Federal Reserve Bank of New York is one of twelve regional banks making up the Federal Reserve System, a body created by Act of Congress and governed by the Board of Governors of the Federal Reserve System, whose members are appointed by the President with Senate consent. The Federal Reserve Retirement Plan, which paid Rockey's pension, is administered by the Office of the Federal Reserve Employee Benefits System under the direction and control of the Board of Governors and the individual reserve banks.

Section 612(c)(3)(ii) of the Tax Law, added in 1989, lets a taxpayer subtract from federal adjusted gross income any pension paid to an officer or employee of the United States, or of any agency or instrumentality of the United States, to the extent that pension is includible in federal gross income. The Department explained that this provision was added specifically in response to the US Supreme Court's decision in Davis v. Michigan Department of the Treasury, 489 US 803 (1989), which held that a state that exempts the pensions of its own employees from income tax must give the same exemption to pensions of federal employees. The Davis Court relied on 4 USC § 111, under which the United States consents to state taxation of federal pay only if that taxation doesn't discriminate against federal employees based on the source of their compensation; New York's response to Davis is documented in TSB-M-89(9)I.

The remaining question was whether a Federal Reserve Bank counts as a United States "agency or instrumentality" for this purpose. The Department worked through several strands of authority to answer yes. Section 7 of the Federal Reserve Act (12 USC § 531) already exempts Federal Reserve Bank capital, surplus, and income from federal, state, and local taxation (except real estate taxes). Under IRC § 501(a) and (c)(1), a corporation organized under an Act of Congress that is a US instrumentality and tax-exempt under that Act is treated as an exempt organization, and federal reserve banks have already been held to be federal instrumentalities for state-tax-immunity purposes in Lewis v. United States, 680 F2d 1239 (1982), and Federal Reserve Bank of Boston v. Commissioner of Corporations & Taxation, 499 F2d 60 (1974), after remand, 520 F2d 221 (1975). Separately, IRC § 414(d) defines a "governmental plan" to include one established by the US government or any federal agency or instrumentality, and a March 23, 1976 IRS private letter ruling had already concluded that the Federal Reserve System is a US instrumentality for section 414(d) purposes, and that its retirement plans are governmental plans exempt from ERISA Title II - a conclusion the Department of Labor's Office of Employee Benefits Security had concurred with.

Putting these pieces together, the Department concluded that Rockey's 1989 pension payments from the Federal Reserve Retirement Plan were pension payments made to an employee of a United States instrumentality, and were therefore exempt from New York tax under section 612(c)(3)(ii) of the Tax Law.

What this means for you

Retired Federal Reserve Bank employees living in New York

If you're a retired employee of a Federal Reserve Bank receiving pension payments from the Federal Reserve Retirement Plan, this opinion supports treating those payments as exempt from New York income tax under section 612(c)(3)(ii), to the extent they're included in your federal adjusted gross income. The exemption rests on the Federal Reserve System being treated as a United States instrumentality, not on any special status of your particular reserve bank, so the reasoning should apply regardless of which of the twelve regional banks you worked for.

Tax preparers handling federal-instrumentality pensions

When a client reports a pension from an entity that isn't literally "the United States government" - such as a Federal Reserve Bank, or another federal agency or instrumentality - check whether that entity has been recognized elsewhere (by the IRS, by federal courts, or in prior advisory opinions) as a US instrumentality before assuming the section 612(c)(3)(ii) subtraction applies. This opinion's reasoning chain (Act-of-Congress creation, Board of Governors oversight and control, prior IRS and judicial instrumentality determinations) is a useful template for evaluating similar pensions from other quasi-governmental bodies.

Anyone relying on the post-Davis 612(c)(3)(ii) exemption generally

This opinion is a good illustration of why section 612(c)(3)(ii) exists at all: it was New York's legislative fix to bring the state into compliance with Davis v. Michigan Department of the Treasury, which barred states from favoring their own retirees' pensions over federal retirees' pensions. If you're unsure whether your pension source counts as "the United States, or any agency or instrumentality of the United States," the underlying question is always whether the paying entity is a genuine arm of the federal government - a fact-specific inquiry the Department resolves case by case.

Common questions

Q: Why does it matter that the Federal Reserve Bank of New York is a "United States instrumentality" rather than just a private employer?
A: Section 612(c)(3)(ii) only exempts pensions paid to officers or employees "of the United States, or any agency or instrumentality of the United States." If the Federal Reserve Bank were treated as an ordinary private employer, Rockey's pension wouldn't qualify for the subtraction at all. The Department had to establish, through the Federal Reserve Act, prior court decisions, and an IRS private letter ruling, that the Federal Reserve System counts as a federal instrumentality before it could apply the exemption.

Q: What was the Davis v. Michigan decision, and why does this opinion mention it?
A: In Davis v. Michigan Department of the Treasury, 489 US 803 (1989), the US Supreme Court held that a state which exempts its own employees' pensions from state income tax must extend the same exemption to pensions of federal employees, based on the nondiscrimination requirement in 4 USC § 111. New York added section 612(c)(3)(ii) in 1989 specifically to comply with Davis, so this opinion traces its legal authority directly back to that decision (documented in TSB-M-89(9)I).

Q: Does this exemption cover Rockey's entire pension, or only part of it?
A: The subtraction under section 612(c)(3)(ii) applies "to the extent includible in gross income for federal income tax purposes." In other words, the New York exemption tracks whatever portion of the pension is taxed federally - it doesn't create a bigger exemption than what shows up in the taxpayer's federal adjusted gross income.

Q: Would this same reasoning apply to other Federal Reserve employees, or only to Rockey personally?
A: This is an Advisory Opinion, so by its own terms it's binding only on the Department with respect to Rockey and only based on the facts he described. That said, the opinion's reasoning doesn't depend on any fact unique to Rockey - it turns entirely on the status of the Federal Reserve System and the Federal Reserve Retirement Plan as US instrumentalities, so the same analysis would logically extend to other retired Federal Reserve Bank employees in the same plan.

Q: What made the Federal Reserve System qualify as a "United States instrumentality" here?
A: The Department pointed to several supporting threads: the Federal Reserve System was created by Act of Congress and is governed by a Board of Governors appointed by the President with Senate consent; IRC § 501(a)/(c)(1) treats a congressionally-organized, tax-exempt corporate instrumentality as an exempt organization; federal courts in Lewis v. United States and Federal Reserve Bank of Boston v. Commissioner of Corporations & Taxation had already held federal reserve banks to be federal instrumentalities for state-tax-immunity purposes; and a 1976 IRS private letter ruling had already found the Federal Reserve System to be a US instrumentality for IRC § 414(d) governmental-plan purposes, with the Department of Labor concurring that its retirement plans are exempt from ERISA Title II.

Citations and references

• Tax Law § 612(c)(3)(ii) - subtracts from federal adjusted gross income pensions paid to officers/employees of the United States or any federal agency or instrumentality, to the extent includible in federal gross income
• 4 USC § 111 - the United States consents to state taxation of federal pay/compensation only if the taxation does not discriminate based on the source of the pay
• Davis v. Michigan Dept. of Treasury, 489 US 803, 109 S Ct 1500, 103 L Ed 2d 891 (1989) - a state exempting its own employees' pensions from income tax must give the same exemption to federal employees' pensions
• TSB-M-89(9)I - Department memorandum explaining the 1989 addition of section 612(c)(3)(ii) in response to Davis
• 12 USC § 531 (Federal Reserve Act § 7) - exempts Federal Reserve Bank capital, surplus, and income from federal, state, and local taxation, except real estate taxes
• IRC § 501(a) and (c)(1) - a corporation organized under an Act of Congress that is a US instrumentality and tax-exempt under that Act is an exempt organization
• IRC § 414(d) - defines a "governmental plan" to include one established by the US government or any federal agency or instrumentality
• Lewis v. United States, 680 F2d 1239 (2d Cir 1982) - federal reserve banks are federal instrumentalities for purposes of state-tax immunity
• Federal Reserve Bank of Boston v. Commissioner of Corporations & Taxation, 499 F2d 60 (1st Cir 1974), after remand, 520 F2d 221 (1975) - federal reserve banks are federal instrumentalities for purposes of state-tax immunity
• IRS private letter ruling, March 23, 1976 - concluded the Federal Reserve System is a US instrumentality under IRC § 414(d) and that its retirement plans are governmental plans exempt from ERISA Title II

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_8i.pdf

Original ruling text

New York State Department of Taxation -1and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90 (8) I
Income Tax
June 29, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I900110C

On January 10, 1990, a Petition for Advisory Opinion was received from Charles E. Rockey,
41-40 Union Street, Flushing, New York 11355.
The issue raised by Petitioner, Charles E. Rockey, is whether pension payments received in
1989 from the Federal Reserve Retirement Plan is exempt from taxation under section 612(c)(3)(ii)
of the Tax Law.
Petitioner is a retired employee of the Federal Reserve Bank of New York and in 1989
received pension payments from the Federal Reserve Retirement Plan. The Federal Reserve Bank
of New York is one of 12 federal reserve banks that comprise the Federal Reserve System that was
created by an Act of Congress. The Federal Reserve System reports to and is governed by the Board
of Governors of the Federal Reserve System. The members of the Board are appointed by the
President of the United States with the consent of the Senate.
The Office of the Federal Reserve Employee Benefits System administers the retirement and
certain other employee benefit plans and programs established by the Board of Governors and the
federal reserve banks for the eligible employees of the Federal Reserve System. One of the plans
administered is the Federal Reserve Retirement Plan that provides retirement and ancillary benefits
for eligible retired employees of the federal reserve banks. The Federal Reserve Retirement Plan is
subject to the direction and control of the Board of Governors and the federal reserve banks.
Section 612(c)(3)(ii) of the Tax Law provides that there shall be subtracted from federal
adjusted gross income, pensions to officers and employees of the United States, or any agency or
instrumentality of the United States, to the extent includible in gross income for federal income tax
purposes.
Such provision was added in 1989 in response to the United States Supreme Court decision
in Davis v Michigan Department of the Treasury, 109 S CT 1500, 103 L Ed 2d 891, (1989), which
held that States such as New York that exempt pensions of their own employees from income taxes
must provide a similar exemption to employees of the federal government. (TSB-M-89(9)I) The
Court relies on 4 USC 111 which provides as follows: "[t]he United States consents to the taxation
of pay or compensation for personal service as an officer or employee of the United States . . . by a
duly constituted taxing authority having jurisdiction, if the taxation does not discriminate against the
officer or employee because of the source of the pay or compensation."
Section 7 of the Federal Reserve Act provides that "[f]ederal reserve banks, including the
capital stock and surplus therein, and the income derived therefrom shall be exempt from Federal,
State, and local taxation, except taxes upon real estate. " 12 USC § 531
TP-9 (9/88)

-2­
TSB-A-90 (8) I
Income Tax
June 29, 1990
Section 501(a) and (c)(1) of the Internal Revenue Code (hereinafter "IRC") provide that any
corporation organized under an Act of Congress which is an instrumentality of the United States and
is exempt from federal income taxes under such Act is an exempt organization. To qualify for
exemption under section 501(c)(1) of the IRC, a corporation must be an instrumentality of the United
States.
The federal reserve banks have been deemed to be federal instrumentalities for purposes of
immunity from state taxation. (Lewis v United States, 680 F2d 1239 (1982) and Federal Reserve
Bank of Boston v Commissioner of Corporations & Taxation, 499 F2d 60 (1974), after remand, 520
F2d 221 (1975))
In addition, section 414(d) of the IRC defines a "governmental plan" for purposes of the IRC
pension rules as "a plan established and maintained for its employees by the Government of the
United States...or by any agency or instrumentality of...the forgoing."
On March 23, 1976, the Internal Revenue Service issued a private letter ruling to the
representative of the Federal Reserve Employee Benefits System. The Internal Revenue Service
concluded that the Federal Reserve System is an instrumentality of the United States for purposes
of section 414(d) of the IRC and that the employee's deferred compensation plans established and
maintained by the Board of Governors of the Federal Reserve System, the federal reserve banks and
the Office of the Federal Reserve Employees Benefit System, constitute governmental plans within
the meaning of section 414(d) of the IRC and are exempt from the provision of Title II of ERISA
[Employee Retirement Income Security Act of 1974] to the extent that governmental plans are
exempt. The Internal Revenue Service discussed this issue with the Office of Employee Benefits
Security, Department of Labor, and that Office concurred.
Accordingly, Petitioner's 1989 pension payments from the Federal Reserve Retirement Plan
are pension payments paid to an employee of an instrumentality of the United States, and therefore
are exempt from tax pursuant to section 612(c)(3)(ii) of the Tax Law.

DATED: June 29, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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