If a nonresident's former-New-York-employer pension is paid out on a declining-balance schedule, a mortgage-style amortization schedule, or with interest that varies with the Consumer Price Index, does it still qualify as a non-taxable 'annuity' rather than taxable New York-source compensation?

Plain-English summary

KPMG Peat Marwick asked the Department to evaluate four hypothetical pension payout schedules for a nonresident who had worked in New York, retired on December 31, 1993, and began receiving payments from a $300,000 pension fund on January 1, 1994. Under Tax Law § 631(b)(2) and 20 NYCRR § 132.4(d), a pension attributable to a nonresident's former New York employment is not taxable by New York if it qualifies as an "annuity" as specially defined in the regulations. If it doesn't qualify, it is instead treated as ordinary compensation for services and remains taxable to the extent the underlying work was performed in New York.

To count as a qualifying annuity, a benefit must satisfy four conditions in § 132.4(d)(2): it must be paid only in money; it must be paid at regular intervals at least annually for life (or at least half of life expectancy); its rate must satisfy a specific test described below; and the right to receive it must be evidenced by a written instrument or employer plan. In all four scenarios, the petition stipulated that the first, second, and fourth conditions were already met (each retiree had a 10-year payout period against a 12-year life expectancy, paid in money, under a written plan). The only question was whether each payout schedule satisfied the third condition, § 132.4(d)(2)(iii) - the rate test.

That rate test can be satisfied three different ways: (a) the rate stays uniform; (b) the rate varies only with the market value of the funding assets, a recognized cost-of-living index, or the start of social security; or (c) the total amount payable is determinable at the outset, either directly from the contract's terms or through standard mortality-table or compound-interest computations. The Department walked through four structurally different payment schedules and found that each one independently satisfied this test:

• Scenario 1 (Taxpayer A): Equal $30,000 annual principal payments plus simple interest at a fixed 3% rate on the declining outstanding balance (each year's interest is paid along with the next year's principal). This qualified under § 132.4(d)(2)(iii)(c) because the total 10-year payout is determinable at the annuity starting date directly from the contract's fixed terms.
• Scenario 2 (Taxpayer B): The same declining-balance principal structure, but the interest rate varies annually with the Consumer Price Index instead of staying fixed. This qualified under § 132.4(d)(2)(iii)(b)(2) because the rate varies only with a recognized cost-of-living index.
• Scenario 3 (Taxpayer C): A mortgage-style, level-payment amortization schedule at a fixed 3% rate (equal annual payments of $34,144.81 blending principal and interest). This qualified under § 132.4(d)(2)(iii)(c) because the total 10-year payout is determinable at the outset using standard compound-interest amortization math.
• Scenario 4 (Taxpayer D): Equal $30,000 annual principal payments plus interest at a rate equal to a fixed 3% base rate plus the prior year's CPI increase (so the blended rate itself fluctuates year to year). This still qualified under § 132.4(d)(2)(iii)(b)(2); the Department treated the 3% component as a fixed floor rather than an independent second variable, so the rate as a whole was treated as varying "only with" the CPI.

The Department concluded that all four payout schedules - despite being genuinely different in mechanics and dollar pattern - qualified as tax-exempt annuities. None was disqualified simply because the payment amount changed from year to year; the point of § 132.4(d)(2)(iii) is that a fluctuating payment can still qualify as long as it fits one of the three alternative tests.

What this means for you

Nonresident retirees receiving former-NY-employer pensions with nonstandard payout schedules

If you left New York employment and now receive a pension or retirement benefit that isn't a simple level annuity - for example, a declining-balance schedule, a mortgage-style amortization, or a payout with a cost-of-living adjustment - this ruling shows that New York's "annuity" exemption is more flexible than it may first appear. A payout schedule can still qualify as tax-exempt to a nonresident even though the dollar amount changes every year, as long as it meets one of the three alternative rate tests: a uniform rate, a rate that varies only with a permitted source like the CPI, or a total payout that's determinable up front from the contract's own terms.

Benefits/plan administrators and accountants designing or evaluating retirement payout structures

When drafting or reviewing a nonqualified or informal pension arrangement that will pay benefits to a New York nonresident, this opinion is a useful checklist for the § 132.4(d)(2)(iii) rate test specifically. A declining-balance principal-plus-interest schedule, a level-payment amortization, a pure CPI-adjusted rate, and even a blended fixed-floor-plus-CPI rate all independently qualify. The key drafting takeaway is to make sure the total payout is either computable at the annuity starting date from the contract's own fixed formula (fixed rates, fixed schedules) or tied only to one of the named permitted variables (market value of plan assets, a recognized cost-of-living index, or the start of social security) - and to avoid tying the rate to some other, unlisted variable that isn't uniform and isn't determinable up front, which would put the qualification at risk.

Common questions

Q: Why did Scenario 1's declining-balance schedule qualify even though the payment amount is different every year?
A: Because although the dollar amount isn't level, it satisfies § 132.4(d)(2)(iii)(c): with a fixed $30,000-per-year principal schedule and a fixed 3% interest rate, the total amount payable over the 10 years can be calculated in advance, directly from the contract's own terms, as of the annuity starting date.

Q: Why did Scenario 2's CPI-linked interest rate qualify?
A: Because § 132.4(d)(2)(iii)(b)(2) specifically allows a rate that varies only with "the fluctuation in a specified and generally recognized cost-of-living index." Taxpayer B's interest rate tracked the CPI and nothing else, so it fell squarely within that permitted category, even though the exact future payments couldn't be known in advance.

Q: How is Scenario 3 different from Scenario 1, and why does it also qualify?
A: Scenario 3 uses a mortgage-style amortization schedule with equal (rather than declining) total annual payments blending principal and interest. It qualifies under the same subsection, (iii)(c), but through the "indirect" route: the total 10-year payout of $341,448 is determinable at the annuity starting date using standard compound-interest computations, rather than being readable directly off a simple fixed schedule.

Q: Scenario 4's rate is "3% plus the prior year's CPI increase" - isn't that a second variable on top of CPI, and shouldn't that disqualify it?
A: The Department treated the 3% component as a fixed floor rather than a true second variable, so the rate as a whole was considered to vary "only with" the cost-of-living index for purposes of § 132.4(d)(2)(iii)(b)(2). The opinion doesn't extend this reasoning to combinations of two genuinely independent variables (for example, a rate tied to both CPI and market value fluctuations that could move independently in ways not reducible to a single named factor).

Q: What would happen to a pension payout that did NOT meet the § 132.4(d)(2)(iii) rate test - for instance, one whose rate varied with some other, unlisted factor and also couldn't be determined at the outset?
A: Under 20 NYCRR § 132.4(d)(1), a pension or retirement benefit that fails any part of the four-part annuity definition is not treated as an annuity at all - it is instead treated as ordinary compensation for personal services. For a nonresident, that means it becomes taxable by New York to the extent the underlying services were performed in New York, rather than being exempt.

Q: Does the $20,000 pension and annuity exclusion under Tax Law § 612(c)(3-a) apply here?
A: The opinion expressly disregards that separate $20,000 exclusion "for ease of analysis." It addresses a distinct question - whether the source income is New York-source at all under § 631(b)(2) because it fails to qualify as an annuity - not the separate subtraction modification available to qualifying resident and nonresident pension recipients under § 612(c)(3-a).

Citations and references

• Tax Law § 631(b)(2) - income from intangible personal property, including annuities, is New York-source income only to the extent derived from property employed in a business, trade, profession, or occupation carried on in New York
• 20 NYCRR § 132.4(d)(1) - a pension or retirement benefit attributable to former New York employment is not taxable to a nonresident if it constitutes an "annuity" as defined in paragraph (2); if it doesn't, it is compensation for services taxable to the extent services were performed in New York
• 20 NYCRR § 132.4(d)(2)(i) - a qualifying annuity must be paid in money only, not in securities or other property
• 20 NYCRR § 132.4(d)(2)(ii) - a qualifying annuity must be paid at regular intervals, at least annually, for life or at least half of life expectancy
• 20 NYCRR § 132.4(d)(2)(iii)(a)-(c) - a qualifying annuity's rate must be uniform, vary only with market value/CPI/social security commencement, or be determinable at the annuity starting date from the contract's terms or actuarial computations
• 20 NYCRR § 132.4(d)(2)(iv) - the right to receive the annuity must be evidenced by a written instrument or employer plan
• Tax Law § 612(c)(3-a) - the separate $20,000 pension and annuity income exclusion, expressly disregarded in this analysis

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a94_13i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-94 (13) I
Income Tax
October 19, 1994

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I940422A

On April 22, 1994, a Petition for Advisory Opinion was received from KPMG
Peat Marwick, 345 Park Avenue, New York, New York 10154.
The issue raised by Petitioner, KPMG Peat Marwick, is whether under the
scenarios presented herein, the described pension or other retirement benefits
qualify as non-taxable "annuity" payments under section 631(b)(2) of the Tax Law
and section 132.4(d) of the Personal Income Tax Regulations ("Regulations").
For purposes of each of the following hypothetical scenarios, it should be
assumed that the described pension or other retirement benefit meets the
following definitional criteria of non-taxable "annuities" under section
132.4(d)(2)(i), (ii), and (iv) of the Regulations:
-

it is paid in money only, not in securities of the employer or other
property;

-

it is payable at regular annual intervals, for the life of the
individual receiving it, or over a period not less than half of such
individual's life expectancy as of the date payments begin [in all
cases, assume that such period will be 10 years in duration, and
that such life expectancy is twelve years]; and

-

the individual's right to receive it is evidenced by a written
instrument executed by his or her employer, or by a plan established
and maintained by the employer in the form of a definite written
program communicated to the employees of such employer.

It should also be assumed that in each hypothetical scenario, the
individual involved is a living nonresident of New York who is receiving a
pension or other retirement benefit (as described above) attributable to his or
her former services as an employee in New York.
The retirement date for each hypothetical scenario should be assumed to be
December 31, 1993, with each annual pension or other retirement payment to be
made on January 1. Thus, in each hypothetical scenario, the first pension or
other retirement payment will be made on January 1, 1994.
In each hypothetical scenario, the fund (i.e., corpus) for the pension or
other retirement benefit is $300,000. For ease of analysis, no effect should be
given to the maximum annual $20,000 pension and annuity exclusion provided by
section 612(c)(3-a) of the Tax Law.

TP-9 (9/88)

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TSB-A-94 (13) I
Income Tax
October 19, 1994

In each hypothetical scenario, the question to be resolved is whether the
requirement of section 132.4(d)(2)(iii) of the Regulations has been met.
Scenario 1
Taxpayer A will receive equal annual principal payments plus simple
interest payments at a fixed rate of 3% on the outstanding balance,
with all interest earned during a year paid out with the next year's
principal payment.
Thus, for example, on January 1, 1994, A will
receive $30,000 (i.e., $300,000 ÷ 10), all of which constitutes a
payment of principal. On January 1, 1995 (year two), A will receive
$38,100, consisting of $30,000 of principal (i.e., [$300,000 ­
$30,000] ÷ 9) plus all $8,100 of interest earned during 1994 (i.e.,
[$300,000 $30,000] x 3%).
Scenario 2
Taxpayer B will receive equal annual principal payments plus simple
interest payments at a variable rate (tied to the Consumer Price
Index - "CPI" rate) on the outstanding balance, with all interest
earned during a year paid out with the next year's principal
payment. (Assume the respective annual variable interest rates to be
as follows: 3% during 1994 (i.e., the 1993 CPI rate of 3% is used as
the variable interest rate for 1994), 2% during 1995, 3% during
1996, 2% during 1997, and so on.) Thus, for example, on January 1,
1994, B will receive $30,000, all of which constitutes a payment of
principal. On January 1, 1995 (year two), B will receive $38,100,
comprised of $30,000 of principal plus $8,100 of interest (see
Scenario 1, above). On January 1, 1996 (year three), B will receive
$34,800, consisting of $30,000 of principal (i.e.,[$300,000 ­
$30,000
$30,000] ÷8 ) plus all $4,800 of interest earned during
1995 (i.e., [$300,000 - $30,000 - $30,000] x 2%).
Scenario 3
Taxpayer C will receive equal annual payments of principal and fixed
simple interest (at a rate of 3%), per a mortgage-type amortization
schedule with payment on the first day of each year. Thus, at the
outset, it can definitely be determined that the 10 year total of
interest will be $41,448. The 10 year total of principal and
interest payments will, therefore, be $341,448 (i.e., $300,000 of
principal plus $41,448 of interest). Each annual payment will be
$34,144.81 (i.e., $341,448 ÷ 10).
Scenario 4
Taxpayer D will receive equal principal payments of $30,000 plus
interest on the outstanding balance for the prior years. The
interest will be based on a simple interest rate of 3% plus an
amount equal to the increase in the CPI for the prior year.

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TSB-A-94 (13) I
Income Tax
October 19, 1994

Therefore, if the CPI for 1993 was 2%, the interest earned in 1994
will be 5%. Thus, for example, on January 1, 1994, D will receive
$30,000 which consists entirely of principal. On January 1, 1995, he
will receive $43,500 which consists of $30,000 of principal plus
interest of $13,500. This interest was earned in 1994 and is paid
with the 1995 principal payment. It is calculated using a 5%
interest rate (3% base rate plus 2% CPI for 1993) on the outstanding
principal balance for 1994 of $270,000.
On January 1, 1999, he will receive $40,500 consisting of $30,000 of
principal (out of the outstanding principal balance for 1998 of
$150,000) plus interest of $10,500. The interest is calculated at
7%, which is the 3% floor plus a 4% CPI inflation adjustment for
1997.
The principal portion of these payments will remain constant while
the interest portion will change as the remaining principal balance
declines and as the CPI fluctuates.
Section 631(b)(2) of the Tax Law provides that "[i]ncome from intangible
personal property, including annuities, dividends, interest, and gains from the
disposition of intangible personal property, shall constitute income derived from
New York sources only to the extent that such income is from property employed
in a business, trade, profession, or occupation carried on in this state."
Section 132.4(d) of the Regulations provides that:
Pensions or other retirement benefits constituting annnuity. (1)
General. Where an individual formerly employed in New York State is
retired from service and thereafter receives a pension or other
retirement benefit attributable to his former services, the pension
or retirement benefit is not taxable for New York State personal
income tax purposes if the individual receiving it is a nonresident
and if it constitutes an annuity as defined in paragraph (2) of this
subdivision. 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
New York State personal income tax purposes to the extent that the
services were performed in New York State...
(2) Definition. To qualify as an annuity, a pension or other
retirement benefit must meet the following retirements:
(i) It must be paid in money only, not in securities of the
employer or other property.
(ii) It must be payable at regular intervals, at least
annually, for the life of the individual receiving it, or over a
period not less than half of such individual's life expectancy as of
the date payments begin...

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TSB-A-94 (13) I
Income Tax
October 19, 1994

(iii) It must be payable:
(a) at a rate which remains uniform during such
life or period; or
(b) at a rate which varies only with:
(1) the fluctuation in the market value of the
assets from which such benefits are payable;
(2) the fluctuation in a specified and generally
recognized cost-of-living index; or
(3) the commencement of social security benefits;
or
(c) in such a manner that the total of the amounts
payable is determinable at the annuity starting date
either directly from the terms of the contract or
indirectly by the use of either mortality tables or
compound interest computations, or both, in conjunction
with such terms and in accordance with sound actuarial
theory. The term -nnuity starting date in the case of
any contract or plan is the first day of the first
period for which an amount is received as an annuity by
the individual under the contract or plan.
(iv) The individual's right to receive it must be evidenced by
a written instrument executed by his employer, or by a plan
established and maintained by the employer in the form of a definite
written program communicated to his employees.
Herein, in Scenario 1, Taxpayer A's pension or other retirement benefit
meets the requirements of section 132.4(d)(2)(iii)(c) of the Regulations because
it is payable in a manner whereby the total of the amount payable is determinable
at the annuity starting date directly from the terms of the contract.
In Scenario 2, Taxpayer B's pension or other retirement benefit meets the
requirements of section 132.4(d)(2)(iii)(b)(2) of the Regulations because it is
payable at a rate that will vary only with the fluctuation in the Consumer Price
Index, which is a recognized cost-of-living index.
In Scenario 3, Taxpayer C's pension or other retirement benefit meets the
requirements of section 132.4(d)(2)(iii)(c) of the Regulations because it is
payable in a manner that the total of the amounts payable is determinable at the
annuity starting date by the use of compound interest computations.
In Scenario 4, Taxpayer D's pension or other retirement benefit meets the
requirements of section 132.4(d)(2)(iii)(b)(2) of Regulations because it is
payable at a rate that will vary only with the fluctuation in the Consumer Price
Index, which is a recognized cost-of-living index.

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TSB-A-94 (13) I
Income Tax
October 19, 1994

Accordingly, in Scenarios 1, 2, 3 and 4, the pension or other retirement
benefit meets all of the requirements of section 132.4(d) of the Regulations and
qualifies as an annuity under such section.

DATED:

October 19, 1994

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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