Important Tax Information For Retiring Partners

A February 2006 decision of the New York State Division of Tax Appeals may have a significant impact on taxes paid by retired partners living outside of the State of New York.  The decision on the petition of John E. McDermott, Jr. for redetermination held that New York State is precluded from imposing personal income tax on income received from the partnership, where the income is based on the profits of the partnership, and Mr. McDermott is a non-resident of New York State.  Mr. McDermott is a retired Courdert Brothers partner, who resided in Connecticut and now resides in Florida.  According to the Courdert Brothers agreement, Mr. McDermott was entitled to profit shares based upon his productivity and years of service with the firm.

In 1996, a federal law was passed, barring states from taxing retirement income paid to non-residents.  However, in the past 10 years, it has been unclear whether the law included income based on partnership profits as well as income from designated retirement accounts.  The state argued that since the retired partner maintained a capital account and was receiving a distributive share of partnership income, that income could not be considered retirement income. 

According to the decision, Section 114 of Title 4 of the U.S. Code provides, in part, that retirement income includes any plan in which the income is paid in substantially equal periodic payments, made no less than annually, for the life expectancy of the recipient (and beneficiaries, if applicable), for not less than 10 years.

Administrative Law Judge Thomas Sacca determined that the Courdert Brothers plan met the criteria under the federal law, and that New York State was precluded from taxing the profit shares Mr. McDermott received under the Courdert plan.