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By Roy Whitehead, JD, LLM, University of Central Arkansas and Brenda Yelvington, doctoral student University of Mississippi

New York allows a full deduction from gross income of alimony paid by a resident of the state [Tax Law, section 631 (b)(6)]. The State denies residents of other states any deduction for alimony from gross income earned in New York. A lawyer who lived in Connecticut, and earned substantial income in New York, challenged the law complaining that the disparate tax treatment of nonresidents violated the privileges and immunities clause of the U.S. Constitution. The privileges and immunities clause simply provides that "The citizens of each state shall be entitled to all privileges and immunities of citizens in the several states." The U.S. Supreme Court, when considering the privileges and immunities clause in tax cases, has established a rule of substantial equality of treatment for citizens of the taxing state and nonresidents. The court allows different treatment of nonresidents when a state can show a substantial reason related to a legitimate state objective (Austin v. New Hampshire, 420 U.S. 656).

The trial court found that the disparate tax treatment New York imposed on nonresidents failed the rule of substantial equality of treatment and violated the privileges and immunities clause because 1) the legislative history of the statute presented no legitimate rationale for the different treatment, and 2) the sole basis for denying the alimony deduction was whether the taxpayer was a resident or nonresident. The Court of Appeals reversed stating that New York had substantial reasons to justify the different deduction rules for nonresidents [Lunding v. Commissioner of Taxation, No. 260 (December 18, 1996)].

In Lunding, the court related two substantial reasons for the disparity in the tax treatment of residents and nonresidents that were apparent on the face of the statute. The reasons were 1) that denying an alimony deduction for nonresidents actually advanced the rule of substantial equality of treatment of citizens of both states by protecting residents of New York from disparate tax treatment. The court said, "it is clear that the advantage granted residents is offset by the additional burden of being taxed on all sources of income," and 2) "the disallowance is substantially justified by the fact that petitioners' alimony payments are wholly linked to personal activities outside the state." The court cited Goodwin v. State Tax Commissioner, 1 NY2d 680, for the two controlling propositions 1) that a deduction for residents is justified because they are taxed on worldwide income, and 2) that New York has no compelling interest in benefiting the out-of-state personal activities of a nonresident. *

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