April 2000


By Chaim Kofinas, CPA/PFS Wiss & Co., LLP

New York State issued Technical Service Bulletin TSB-M-99(6)I to provide guidance to taxpayers affected by changes in 1999 to the New York State "commuter tax" (.45% of wages and .6% of self-employment income). Affected taxpayers include 1) sole proprietors that are New York City nonresidents and 2) nonresident partners of partnerships operating or conducting a trade or business in New York City.

The TSB assumes that the courts will ultimately uphold as constitutional the partial repeal of the commuter tax last year. The final outcome in the courts is still to be determined, and as a result taxpayers and their advisors are between a rock and a hard place.

The TSB advises sole proprietors to compute their self-employment income on a Federal tax basis for the period beginning January 1, 1999, through June 30, 1999 (a "closing" of the books). New York City nonresidents that are New York State residents are to include only this amount as subject to the commuter tax. New York City commuters that are nonresidents of New York State can omit this computation, because they are subject to the nonresident tax for the full year. Special rules apply to part-year New York City residents and New York City nonresidents that either move in or move out of New York State.

A different rule applies to partners in a New York City business. For New York City nonresidents that are New York State residents, if the partnership's tax year ends on or before June 30, 1999, all of the partnership's self-employment income allocable to New York City is included and subject to the nonresident tax. If the partnership's tax year ends after June 30, 1999, then none of the New York City­sourced self-employment income is subject to the tax. New York City nonresidents that are also New York State nonresidents are unaffected, because the entire amount of self-employment income allocated to New York City is subject to the commuter tax.

Once again, special rules apply to part-year New York City residents and New York City nonresidents that either move in or move out of New York State.

All of this could be rendered moot: If the courts ultimately declare the partial repeal of the commuter tax to be unconstitutional, all New York City nonresidents would enjoy the same exclusion.

Status of Court Proceedings

The politicians that wrote the repeal knew it would be controversial and possibly unconstitutional. As a result, it contains the provision that if the partial repeal was found unconstitutional the entire tax is retroactively repealed.

With the signing of the legislation came a flurry of lawsuits. No less than five cases were filed, including one by the state of Connecticut. All five cases were consolidated under the lead case, Igoe v. Pataki. The plaintiffs argued that the partial repeal is unconstitutional and asked for summary judgment to that effect. Connecticut further sued for an injunction to prevent further nonresident income tax withholding while awaiting the decision by the courts.

In a show of celerity and compassion for the taxpayer public, the lower courts moved the case quickly through the clogged calendar. By June 25, 1999, the New York Supreme Court declared the partial repeal to be a violation of the Commerce Clause, Due Process Clause, Equal Protection Clause, and Privileges and Immunities Clause of the U.S. Constitution. The Appellate Division affirmed in its decision published October 5, 1999. However, neither court would satisfy Connecticut's request for an injunction preventing withholding of nonresident earnings tax while the litigation continues. The case is now in the Court of Appeals. It is hoped, but not expected, that the case will be decided before the tax-filing deadline of April 15, 2000, arrives.

As the New York statutes are now written, the nonresident tax is still enforceable until the last appeal is exhausted or the state forgoes such an appeal. Therefore, the tax is still applicable to New York State nonresidents. Simply ignoring the calculation of the tax will definitely result in a tax due notice. Worse yet, a negligence penalty could be assessed on a number of theories, especially if nonfiling and nonpayment can be shown to be deliberate. Preparers run the risk of preparer penalties--or worse--for advising the filing of an incomplete return. A way around is to attach a disclosure statement to the tax return that states the taxpayer is following the Igoe decision and has not computed the nonresident earnings tax for the second half of the year.

An alternative is to pay the tax and immediately file a refund claim citing the Igoe decision of the lower courts. The cost benefit of this approach has to be weighed. Are the additional fees to prepare the refund claim justified by the tax savings? A related issue is the position to take with respect to the New York State return.

A third approach is to put the matter aside to a later date by filing an extension request. The quandary remains for those clients that owe tax on the New York return.

In sum, there is no easy answer to the commuter tax question, but communication here is key. Tax advisors will want to inform clients about the alternatives to paying the commuter tax for this year's tax filing. *

State and Local Editor:
Barry H. Horowitz, CPA
Eisner & Lubin LLP

Interstate Editor:
Nicholas Nesi, CPA
BDO Seidman LLP

Contributing Editors:
Henry Goldwasser, CPA
M.R. Weiser & Co. LLP

Steven M. Kaplan, CPA
Kahn, Hoffman, Nonenmacher & Hochman, LLP

John J. Fielding, CPA
PricewaterhouseCoopers LLP

Warren Weinstock, CPA
Marks Paneth & Shron LLP

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