TAXATION

State & Local Taxation

Section 1127 Payments May Not Offset Tax Liability

By Mark H. Levin

In a recent decision, the New York State Tax Appeals Tribunal ruled that payments made by a New York City employee pursuant to section 1127 of the Charter of the City of New York in any year may not offset that employee’s New York City personal income tax for the same year.

Section 1127 of the charter requires New York City municipal employees that are New York City nonresidents to pay, as a condition of employment, the excess of the New York City personal income tax that would be due had the employee been a resident of New York City over any New York City nonresident earnings tax plus any New York City personal income tax actually due. This payment is required for all nonresident employees of New York City hired on or after January 4, 1973.

The tribunal reversed a determination of an administrative law judge to the extent that a taxpayer’s payments pursuant to section 1127 during any year cannot be used to offset the taxpayer’s New York City personal income tax liability for that same year (in re Eisenstein, N.Y. Tax App. Trib., DTA No. 818439, 3/27/03).

In Eisenstein, the facts as stated in the Tribunal’s decision are as follows:

The taxpayer became a New York City municipal employee in 1973 when he was a New Jersey resident, and as such, the City through the years has retained from his wages an amount equal to what his City income tax liability would have been if he had been a resident.

In the early 1990s, ... he changed his New Jersey residency to an apartment in the Coney Island section of Brooklyn, where he lived during the year at issue and continues to reside. When the taxpayer first moved to Brooklyn [he] did not fill out a change of address form with the Office of Personnel Services of the City of New York. It was not until the year 2000 that he updated his address with the City’s personnel office. His wage and tax statement from New York City for the year at issue shows a South Orange, New Jersey address.

[The taxpayer] was obligated as a condition of his employment to make payments pursuant to section 1127 so long as he was a nonresident of the City of New York. It was [the taxpayer’s] failure to advise his employer of his change of address from New Jersey to Brooklyn that has caused the taxpayer’s dilemma. Had [the taxpayer] notified his employer of his change of address in the year it occurred, it would seem that his current problem might have been avoided. As a result of his failure to so advise his employer, the City of New York continued to deduct money from [the taxpayer’s] wages in an amount sufficient to meet his section 1127 obligation.

In its opinion, the tribunal reiterated, “it has been determined by the Court of Appeals that section 1127 is not a tax statute (Legum v. Goldin, 550NY2d 104, 447 NYS2d 900). Therefore, the money paid by nonresident employees to the City of New York pursuant to that statute does not constitute payment of taxes.”

The administrative law judge, in his determination, relied on an equitable approach. He stated that “it would be inequitable to ... impose New York City resident income tax ... for 1996 when [the taxpayer] has already paid an equivalent amount to the City in the form of section 1127 payments.” According to the administrative law judge, “to do so … would contravene the mandate of the Division of Tax Appeals to provide the public with a just system of resolving [tax] controversies.”

While the tribunal, in its opinion, acknowledged that the administrative law judge’s determination provided an equitable and rational solution to the taxpayer’s dilemma, it also stated that it is not within the tribunal’s jurisdiction to resolve matters outside of taxation [Tax Law section 2006(12)] and that it has “no authority to offset [the taxpayer’s] tax liability by the amount of his contractual obligations.”

Based on the tribunal’s opinion, the Division of Taxation may reduce the amount of tax withheld as shown on the return to the amount (other than under section 1127) actually withheld; the taxpayer would be liable for any deficiency that would thus be created. It would seem that the taxpayer might be eligible for a refund of the contractually based section 1127 payments he made subsequent to his becoming a resident of New York City.

While this decision may appear harsh, it emphasizes the need for New York City municipal employees to promptly report any change of their residency status to the New York City Office of Personnel Management.