Matter of Steuer v. New York State Tax Commission, 46 N.Y.2d 534 (1979)
For the purpose of calculating New York State income tax for nonresidents, an exclusion from federal adjusted gross income is also excluded from New York adjusted gross income, unless specific state law requires an add-back.
Summary
This case concerns whether a $25,000 federal exclusion from a nonresident’s earned income should be included in the calculation of their New York State income tax. The taxpayer, a nonresident partner, argued that because the $25,000 was excluded from their federal adjusted gross income, it should also be excluded from their New York adjusted gross income. The New York State Tax Commission argued that the exclusion should be added back for state tax purposes. The Court of Appeals held that the exclusion should be excluded from New York adjusted gross income because the relevant state statutes defined New York adjusted gross income by reference to federal adjusted gross income and did not provide for an add-back of the $25,000 exclusion.
Facts
The taxpayer was a nonresident of New York State. The taxpayer received income from a partnership that operated in New York. Federal tax law allowed the taxpayer to exclude $25,000 from their gross income when calculating federal adjusted gross income. The New York State Tax Commission sought to include the $25,000 exclusion in the taxpayer’s New York adjusted gross income for state tax purposes.
Procedural History
The case was initially heard by an administrative law judge within the New York State Tax Commission, who ruled in favor of the Tax Commission. This decision was appealed to the full Tax Commission, which affirmed the administrative law judge’s determination. The taxpayer then appealed to the Appellate Division, which reversed the Tax Commission’s decision. The New York State Tax Commission then appealed to the New York Court of Appeals.
Issue(s)
Whether, for the purpose of calculating New York State income tax for a nonresident, a $25,000 exclusion from federal adjusted gross income should be included in the calculation of New York adjusted gross income when New York tax law defines adjusted gross income with reference to its federal counterpart.
Holding
No, because the New York Tax Law defines adjusted gross income by reference to federal adjusted gross income, which already excludes the $25,000. Further, state law does not mandate adding back in the $25,000 exclusion.
Court’s Reasoning
The Court of Appeals based its decision on the plain language of the New York Tax Law. Section 632(a)(1) defines the adjusted gross income of a nonresident individual by reference to their federal adjusted gross income. It specifically includes income “entering into his [the taxpayer’s] federal adjusted gross income.” Because the $25,000 was excluded from federal adjusted gross income, it did not “enter into” it. The court emphasized that Section 637(a) also refers to items “entering into his federal adjusted gross income.”
The court also noted that Section 637(c) recognizes the necessity for add-backs to overcome the effect of federal exclusions but that Section 612(b), which provides detailed instructions for such add-backs, does not mention the $25,000 federal exclusion. The court stated, “subdivision (b) of section 612, which meticulously provides in some 22 separate paragraphs… for such add-backs, says nothing about the $25,000 Federal exclusion from a nonresident’s earned income.”
The court rejected the Tax Commission’s argument that Section 617(b) and Section 637(b)(2) authorized the add-back. These provisions address situations where a partnership agreement concerning treatment of income conflicts with federal law, which was not the case here. The $25,000 exclusion was a product of federal tax law itself.
The court acknowledged that the Tax Commission’s position might be “the fairer or more reasonable way to tax nonresident partnership income” but that the commission lacked the authority to impose it without a specific amendment to Section 612 requiring the $25,000 exclusion to be added back or a change in the language of Sections 632 and 637 to use a phrase other than “entering into.” The Court held that, as written, the statute did not permit the commission’s interpretation.