State Taxation of Compensation and Benefits (Portfolio 1750)

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The State Taxation of Compensation and Benefits Portfoliodiscusses how a state's ability to assert jurisdiction to tax individuals who earn money in connection with the performance of services is based on the individual's domicile or residence in the state, or because the individual, although a nonresident, has earned money in the state through the performance of services attributed to the state.




Readers will gain a better understanding of the federal law that prohibits any state from imposing an income tax on “any retirement income” of an individual who is not a “resident” or “domiciliary” of the taxing state, as the determination of an individual's residence or domicile for this purpose is made in accordance with the laws of the taxing state.



Richard Reichler, Esq.

Richard Reichler, Esq., is of Counsel with Meltzer, Lippe, Goldstein & Breitstone, LLP. His practice areas involve federal taxation, state taxation, executive compensation, employee benefits, financial restructuring, and real estate. Richard has been a member of the adjunct faculty at Baruch College, the City University of New York and Hofstra University Law School. He was an Attorney Advisor, Office of the Chief Counsel, Internal Revenue Service in Washington, D.C. and Vice President, Tax Planning and Services and Deputy General Counsel, of the Long Island Lighting Company. He also acted as the National Director of Executive Compensation Planning while a Senior Tax Partner at Ernst & Young, P.C.'s New York office.




Credentials / Graduate of Columbia College; J.D., Columbia University Law School. He is a member of the New York State Bar Association (Tax Section), and has been a member of the BNA Tax Management Advisory Board.


Table of Contents

Detailed Analysis

1750.01. Background

A. Introduction

B. State Taxing Authority In General

1. Nexus

2. Residence/Domicile

3. Funding in Trusts

4. Allocation of Income

5. Federal Limitations

1750.02. The State Income Tax Base – Conformity to Federal Base

A. General Rule

B. Other Conformity Issues

1. Joint Returns

2. Determination of Income

3. Determination of Tax Rate

C. Tax Credits

D. Exemptions

E. Itemized and Standard Deductions

1750.03. Residence or Domicile

A. In General

B. State Definitions of “Resident”

1. In General

2. Domicile

3. New York Audit Guidelines

C. Changing to a Foreign Domicile

D. Statutory Nonresidents

E. Statutory Residents

F. Residence Controversies

G. Areas of Practitioner Concern

H. Relief from Multiple Taxation

1. In General

2. Constitutionality of Taxation of the Entire Income of a Statutory Resident

3. Taxation in the Case of a Change in Residence

4. Income Earned Before, But Received After a Change of Residence

5. Change of Residence and the Accrual of Income

6. Determination of Income Accruing In Connection with a Change in Residence

7. The Economic Benefit Doctrine

1750.04. State Law Considerations in Securing Deferred Compensation

A. In General

1. Contract Protections Used in Pay–As–You–Go Arrangements

2. Creditor Rights and Employer Security

a. Present Creditors

b. Potential Subsequent Creditors

c. Bankruptcy

3. Funding Deferred Obligations

a. Rabbi Trusts

b. Secular Trusts

B. Impact of State Law Priorities on Funded Plans

C. Foreign Trusts

D. ERISA Coverage and Funding

E. State Income Tax Treatment of Non–Qualified Trust Income

F. State Taxation of Undistributed Subchapter J Earnings

1750.05. Source Taxation of Nonresidents

A. Allocation of Business Income Generally

B. Allocation of Employee Source Income

C. Employee v. Independent Contractor

D. Allocation of Nonresident Employee Source Compensation

E. Source Allocation Rules Applicable to Compensatory Payments

1. Deferred Compensation

2. Stock Options

3. Inconsistent Allocation Rules

4. Ballplayers and Artists – Special Rules

F. Income from Intangible Property Not Source Income

G. Deemed Intangibles

H. Intangible v. Source Income

I. Appreciation in Nonresident Compensatory Income – Intangible Income or Compensatory Income

1. Exposition of the Issue

2. Precedents with Respect to the Issue

1750.06. Source Issues With Respect To Other Compensatory Payments to Nonresidents

A. Bonus Payments

B. Severance Payments

C. Phantom Stock Plans

D. Non–Statutory Stock Options – What about the Bells and Whistles?

1750.07. Withholding and Special Accruals

1750.08. Congressional Action under the Commerce Clause

Introductory Material

A. Public Law No. 86-272

B. Public Law No. 104-95

1. In General

2. Committee Report

3. “Retirement Income” Described

4. Tax-Deferred Funding Vehicles Listed in Public Law No. 104-95

a. Qualified Plans Under I.R.C. 401(a) that are Exempt under 501(a)

b. Simplified Employee Pensions under I.R.C. 408(k)

c. Annuity Contract Plans under I.R.C. 403(a)

d. Annuity Contract Plans under I.R.C. 403(b)

e. Individual Retirement Plans under I.R.C. 7701(a)(37)

f. Deferred Compensation Plans under I.R.C. 457

g. Governmental Plans under I.R.C. 414(d)

h. Trusts under I.R.C. 501(c)(18)

i. I.R.C. 3121(v)(2) Payments

(1) In General

(2) Section 3121(v)(2)

(3). Stock Option Bells and Whistles

(4) Exclusion of Severance and Other Welfare Benefits

(5) When a Plan is Established

(6) Time and Rate of Payment

(7) Ratable Payment

(8) Excess Benefit Plans

5. Constitutionality of Pub. L. No. 104-95

1750.09. Interests in Limited Liability Companies and Partnerships

1750.10. Constitutional Issues Relating to State Taxation

A. In General

B. Equal Protection

C. Privileges and Immunities

D. Due Process Clause

E. Commerce Clause

F. Taxes Discriminating Against the Federal Government

1750.11. Collection of Tax

A. In General

B. Minimum State Contacts to Establish a Withholding Obligation

Working Papers

Working Papers

Item Description Sheet

Worksheet 1 State of New York - Department of Taxation and Finance Income Tax - District Office Audit Manual Nonresident Allocation 5/4/98

Worksheet 2 [Reserved.]

Worksheet 3 [Reserved]

Worksheet 4 Pub. L. No. 104-95

Worksheet 5 H.R. No. 104-389 (Dec. 7, 1995) - Committee Report To Accompany Pub. L. No. 104-95

Worksheet 6 State Comparison Chart Taxation of Deferrals to Section 401(k) Plans

Worksheet 7 State-by-State Residency Requirements