New York Advisory Opinion TSB-H-81(4)I: Must a New York resident beneficiary add his share of income taxes a nonresident trust paid to another state back into his New York adjusted gross income?

Plain-English summary

Roger C. and Ann Z. Avery asked the Department about a nonresident simple trust of which Mr. Avery was a beneficiary. The trust distributed all its income to beneficiaries but allocated capital gains to corpus (principal), and it had paid Massachusetts income tax on those capital gains in 1977, 1978, and 1979. Mr. Avery received revised federal Schedule K-1 forms for those years reflecting his share of the Massachusetts taxes the trust paid, and the Averys wanted to know whether that amount had to be added back into their New York adjusted gross income.

The Department explained the mechanics: a New York resident's taxable income starts from federal adjusted gross income, adjusted by specified modifications (Tax Law section 612), one of which is the taxpayer's share, as a trust beneficiary, of the "New York fiduciary adjustment" computed under section 619. The theory is that a trust is a mere conduit - income, gains, losses, deductions, and required tax modifications pass through to the beneficiary and keep their character in the beneficiary's hands. One of the required modifications, under section 615(c)(1), is adding back federally deductible "income taxes imposed by this State or any other taxing jurisdiction." Since the trust's Massachusetts capital-gains tax was a federally deductible tax paid to another jurisdiction, it was includible in the fiduciary adjustment, and Mr. Avery's proportional share of that adjustment (based on his share of the trust's federal distributable net income) had to be added to his federal adjusted gross income in arriving at his New York adjusted gross income - reportable on Schedule 5 of Form IT-205.

What this means for you

Beneficiaries of trusts that pay income tax to other states

If a trust you're a beneficiary of pays income tax to a state other than New York (for example, on capital gains allocated to corpus), expect your K-1 to reflect your proportional share of that tax, and expect to add that share back into your New York adjusted gross income through the fiduciary adjustment - even though the trust itself, not you personally, paid the tax.

Accountants preparing New York returns for trust beneficiaries

Compute the beneficiary's share of the New York fiduciary adjustment on Schedule 5 of Form IT-205, and make sure any federally deductible out-of-state income tax paid by the trust is captured as an addback under section 615(c)(1), allocated in proportion to the beneficiary's share of the trust's federal distributable net income.

Trustees administering multi-state trusts

Because add-back items flow through to beneficiaries via the fiduciary adjustment, keep clear records of any income tax the trust pays to other states so beneficiaries can accurately compute their New York add-back.

Common questions

Q: Why would a beneficiary have to add back tax the trust itself paid to another state?
A: Because New York treats a trust as a pass-through conduit - its income and required tax modifications, including add-backs for federally deductible out-of-state income taxes, flow through and keep their character in the beneficiary's hands via the fiduciary adjustment.

Q: Does this apply even though the trust allocated the capital gains (and the related tax) to corpus rather than distributing them?
A: Yes under this ruling's facts - the add-back requirement is tied to the trust having paid a federally deductible out-of-state income tax, not to whether the underlying gain was distributed or retained as corpus.

Q: Where does a beneficiary report this add-back on a New York return?
A: The fiduciary adjustment and the beneficiary's proportional share of it are computed on Schedule 5 of Form IT-205.

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_4i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81-(4)-I
Income Tax
March 6, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I800916A

On September 16, 1980, a Petition for Advisory Opinion was received from
Roger C. Avery and Ann Z. Avery, 65 Sunset West Circle, Ithaca, New York 14850.
The issue raised is whether a resident beneficiary's share of income taxes
paid by a nonresident trust (of which he is a beneficiary) to another state must
be added to such beneficiary's Federal adjusted gross income in arriving at his
New York adjusted gross income under the Personal Income Tax imposed under
Article 22 of the Tax Law.
Mr. Avery is a beneficiary of a nonresident simple trust. The trust is
required to distribute all income to its beneficiaries but allocates capital
gains to corpus. The trust paid income tax on capital gains to the State of
Massachusetts in 1977, 1978, and 1979. Mr. Avery has received revised Federal
Schedule K-l forms for 1977, 1978 and 1979 reflecting his share of such
Massachusetts income taxes paid by the trust.
For purposes of Article 22 of the Tax Law, the New York taxable income of
a resident individual is equal to his New York adjusted gross income less his New
York deduction and New York personal exemptions. Tax Law, §61l. The New York
adjusted gross income of a resident individual is equal to his Federal adjusted
gross income with specified modifications. Tax Law, §612. One of these
modifications is the taxpayer's share, as beneficiary of a trust, of the New York
fiduciary adjustment determined under section 619 of the Tax Law. Tax Law,
§612(d). Section 619(a) provides, in relevant part, that "An adjustment shall be
made in determining...New York adjusted gross income of a resident beneficiary
of any...trust under subsection (d) of section six hundred twelve, in the amount
of...[his] share...in the New York fiduciary adjustment as determined in this
section." Subsection (b) of section 619 defines New York fiduciary adjustment as
the net amount of certain modifications described in specified provisions of
Article 22. The theory behind this requirement is that a trust acts as a mere
conduit of income, gain, loss, deduction (and modifications required under
Article 22 of the Tax Law) to a beneficiary such that the beneficiary's share of
each of such items retains its character in the hands of such beneficiary. One
of these required modifications is that described in section 615(c)(l) of the Tax
Law, which requires an addition in the amount of federally deductible "income
taxes imposed by this State or any other taxing jurisdiction...," with an
exception not applicable herein. A resident beneficiary's share of such fiduciary
adjustment is stated to be an amount "...in proportion to...[his share] of
federal distributable net income of the...trust." Tax Law, §619(c). The fiduciary
adjustment and the resident beneficiary's share thereof may be computed on
Schedule 5 of Form IT-205.

TP-8 (4/80)

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

2
TSB-H-81-(4)-I
Income Tax
March 6, 1981

In the present instance, Petitioner's share of the Massachusetts capital
gains taxes paid by the trust constitutes federally deductible income taxes
imposed by "another jurisdiction" and hence would be includible in the
Petitioner's share of the applicable fiduciary adjustment. Assuming that to
represent the only item so includible in Petitioner's share of the applicable
fiduciary adjustment, Petitioner is required to add such amount to his Federal
adjusted gross income in computing his New York adjusted gross income.

DATED: February 17,1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau