New York Advisory Opinion TSB-H-81(15)I: Are pension benefits payable to a retired Long Island Rail Road employee exempt from New York personal income tax as a state or municipal pension?

Plain-English summary

Edward Yule, Jr. asked whether his pension benefits, payable under the Long Island Rail Road Company Pension Plan and the LIRR Plan for Additional Pensions, would be exempt from New York personal income tax once he retired (he expected to become eligible on June 1, 1986).

New York's Constitution (Article XVI, section 5) exempts "pensions" of state and municipal officers and employees from taxation, and Article V, section 7 protects pension/retirement-system membership as a contractual right. Tax Law section 612(c)(3), and the implementing regulation at 20 NYCRR 116.3, embody this by allowing a subtraction for pensions payable to officers and employees of New York State, its subdivisions, or agencies, or for other benefits from a State or municipal retirement system. The Department identified two prerequisites for the exemption: (1) the recipient must be a former officer or employee of New York or one of its subdivisions/agencies, and (2) the benefit must be payable from an actual state or municipal retirement system.

LIRR had been reincorporated in February 1980 as a public benefit subsidiary corporation of the Metropolitan Transportation Authority (MTA). Because a provision of the Public Authorities Law says only employees of a public benefit subsidiary corporation (as opposed to other MTA subsidiaries) count as public employees, the Department concluded Yule was now a "public employee," satisfying the first prerequisite. But the second prerequisite failed: the LIRR pension plans were privately trusteed, funded by LIRR (and sometimes by employees), and had existed since before LIRR's reincorporation as private, not statutory, retirement plans - a status the Department's own Counsel had confirmed in a 1972 memorandum. LIRR's employer had also chosen not to bring its employees into the New York State Employees Retirement System when it had the option to. Citing case law holding that public benefit corporations are legally distinct from the State itself, the Department concluded the LIRR plans never became a "state or municipal retirement system," so the pension payments remained fully taxable.

What this means for you

Retired employees of public benefit corporations (transit authorities, similar agencies)

Simply being reclassified as a "public employee" when your employer becomes a public benefit corporation doesn't automatically make your pension tax-exempt - the exemption also requires that the pension actually be payable from a genuine state or municipal retirement system, not a privately trusteed plan the employer happens to fund.

Anyone relying on an employer's public-benefit-corporation status for a pension exemption

Check whether your specific pension plan was created by legislative act or otherwise made exempt by law, and whether it's actually part of a system like the New York State Employees Retirement System - a private plan that predates the employer's public reorganization generally keeps its private character.

Accountants advising clients with LIRR or similar-agency pensions

This ruling and its same-day companion opinion (TSB-H-81(16)I) both confirm LIRR Pension Plan and Plan for Additional Pensions benefits are taxable; don't assume LIRR's public-benefit-corporation status extends a blanket pension exemption to its retirees.

Common questions

Q: Does becoming a "public employee" automatically make my pension tax-exempt in New York?
A: No - the exemption requires both that you're a state/municipal employee AND that the pension is payable from an actual state or municipal retirement system; satisfying only the employment prong isn't enough.

Q: Why weren't the LIRR pension plans treated as a state or municipal retirement system?
A: They were privately trusteed and privately funded plans that predated LIRR's reincorporation as a public benefit subsidiary corporation, were never created by legislative act, and were never made exempt from New York income tax by any law.

Q: Could LIRR have made its employees' pensions exempt?
A: The ruling notes LIRR's employer could have opted to bring employees into the New York State Employees Retirement System as a "participating employer," but chose not to, continuing to use its pre-existing private plans instead.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/h81_15i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81 (15)I
Income Tax
April 14, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I801121B

On November 21, 1980 a Petition for Advisory Opinion was received from Edward Yule,
Jr., 4 Laurel Court, Northport, New York 11768.
The issue raised by Petitioner is whether pension benefits payable to retired employees of the
Long Island Rail Road Company pursuant to the Long Island Rail Road Company Pension Plan and
the Long Island Rail Road Company Plan for additional pensions would be exempt from the
Personal Income Tax imposed under Article 22 of the Tax Law.
Article XVI,§5 of the Constitution of the State of New York provides as follows: "All
salaries, wages and other compensation, except pension, paid to officers and employees of the state
and its subdivisions and agencies shall be subject to taxation." Article V, §7 provides that "After July
first, nineteen hundred forty, membership in any pension or retirement system of the state or of a
civil division thereof shall be a contractual relationship, the benefits of which shall not be diminished
or impaired."
These constitutional provisions exempting certain pensions from taxation are embodied in
section 612(cX3) of the Tax Law. In effect, this provision exempts from the Personal Income Tax
imposed under Article 22 of the Tax Law "Pensions of officers and employees of this state, its
subdivisions and agencies "This statutory language is elucidated in the Personal Income Tax
Regulations, as follows:
"The following items are to be subtracted from Federal adjusted gross income in order to
properly compute the New York adjusted gross income of a resident individual:
...
(c)
Pensions to New York State and municipal officers and employees and other benefits
payable by State and municipal retirement systems. If a taxpayer's Federal adjusted
gross income includes any amount on account of a pension payable to him as an
officer or employee of this State or of any of its subdivisions or agencies, or as the
beneficiary of a deceased officer or employee, this should be subtracted in computing
his New York adjusted gross income. The same is true of any other benefit to the
taxpayer by a New York State or municipal retirement system created under a law
which provides that all rights therein shall be exempt from New York income tax."
20 NYCRR 116.3.
It follows from the foregoing that two pre-requisites must be met in order for a pension
payment to qualify for the exemption. First, it must be received by a former officer or employee of
New York or one of its subdivisions or agencies. Second, the benefit must be payable from a state
or municipal retirement system. See, in regard to this second criteron, Matter of Noone, State Tax
Commission Decision of September 7, 1979, TSB-H-79-(180)-I. In the present instance as will be
demonstrated below, only the first of the two criteria is met. Consequently, the pension payments
in question are subject to the Personal Income Tax imposed under Article 22 of the Tax Law.

TP-8 (4/80)

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TSB-H-81 (15)I
Income Tax
April 14, 1981

The Long Island Railroad Company (hereinafter "LIRR") is stated by Petitioner to be a public
benefit subsidiary corporation of the Metropolitan Transportation Authority (hereinafter "MTA"),
having been reincorporated as such on or about February 8, 1980. MTA is a public benefit
corporation created under Title 11 of Article 5 of the Public Authorities Law. Public authorities
generally are corporate instrumentalities of the State, created by the Legislature for the furtherance
of certain public purposes. Public benefit corporations are corporations "...organized to construct or
operate a public improvement wholly or partly within the state, the profits from which inure to the
benefit of this or other states, or to the people thereof." General Construction Law, §66.4
MTA is stated, in the Public Authorities Law, to be a "state agency" solely for the purposes
of sections 73 and 74 of the Public Officers Law. These provisions relate to such matters as conflict
of interest and ethical standards. However, section 1265.9(a) of the Public Authorities Law,
contained in Article 11, provide that "...no officer or employee of a subsidiary corporation of the
authority, other than a public benefit subsidiary corporation, shall be a public officer or a public
employee .... "(Emphasis supplied). It follows that Petitioner, an employee of a public benefit
subsidiary corporation (a form of public benefit corporation), is a "public employee." This may fairly
be construed to mean an employee falling within the Constitutional category of "employees of the
State and its subdivision and agencies."
Section 1265.9(b) of the Public Authorities Law provides that a public benefit subsidiary
corporation of the MTA may be a "participating employer" in the New York State Employees
Retirement System (hereinafter "ERS") with respect to one or more classes of officers and employees
of. . .such public benefit subsidiary corporation." Petitioner's employer, however, has not chosen to
so act to bring Petitioner within the coverage of ERS, opting instead to continue to utilize pension
plans in existence prior to its reincorporation as a public benefit subsidiary corporation.
The issue thus dispositive of the present matter is whether the pension plans in question
constitute "any pension or retirement system of the state or of a civil subdivision thereof," (N.Y.
Const. Art. V, §7), or a "State...[or] municipal retirement..." system. 20 NYCRR 116.3(e).
The pension plans at issue are privately trusteed and are contributed to by LIRR. Employee
contributions are also required under certain circumstances. The plans were established, prior to the
time LIRR became a public benefit subsidiary corporation, as private pension plans, privately
funded. Prior to the time LIRR became a public benefit subsidiary corporation benefits paid from
such plans were determined by the Counsel to the Department of Taxation and Finance not to be
exempt from the Personal Income Tax, based on a finding that "the Company's pension plans are
private plans making payments to private employees." Memorandum L-140, October 25, 1972.
While LIRR'S employees are now "public employees," the pension plans have not thereby become
state or municipal retirement systems. They were not created by legislative act nor, specifically,
"under a law which provides that all rights therein shall be exempt from New York income tax."
Further, pensions paid pursuant to such plans are not payable from funds contributed to by the State,
any of its subdivisions, municipalities, civil divisions or agencies. LIRR, which is presently a type
of public benefit corporation and which funds and operates the pension plans at issue, does not fall
under any of the foregoing rubrics. Thus, it has been said that "The very name, 'public benefit

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Income Tax
April 14, 1981

corporation', imparts a distinct connotation of separateness and judicial distinction from the state,
its political subdivisions and municipal corporations. Bell v. Manhattan and Bronx Surface Transit
Operating Authority, 81 Misc. 2d 162, 364 N.Y.S. 2d 274. See also Hyde Park Fire and Water v.
Dutchess County, 97 Misc. 2d 104, 410 NYS 2d 783. Also germane to the present matter is the
statement of the court in Smith v. Levitt, 37 A.D. 2d 418, 326 NYS 2d 335, that "Public benefit
corporations created by the State for the purpose of carrying out functions determined by the
Legislature to be governmental in nature are not identical with the State itself and enjoy a separate
and independent nature existence... Funds of the UDC cannot be considered moneys of the State
simply because the UDC is a public benefit corporation." Cf., Dormitory Authority of N.Y. v. Span
Electric Corp, 18 NY 2d 114, 271 NYS 2d 983.
Petitioner has indicated that he will be eligible to receive his pension benefits as of June 1,
1986. In accordance with the foregoing considerations such payments would be subject to the
Personal Income Tax imposed under Article 22 of the Tax Law, pursuant to the applicable provisions
of the Tax Law and the Constitution of the State of New York as presently constituted.

DATED: March 18, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau