Sec. 124.1. Computation of separate tax on the ordinary income portion of lump sum distributions received by resident individuals, estates and trusts

Tax Law, § 624

(a) General.

(1) The amount of New York State separate tax imposed on the ordinary income portion of a lump sum distribution received by a resident individual, estate or trust on or after January 1, 1977 (see section 601-C of the Tax Law) is determined in accordance with the provisions of subdivision (b) of this section. This separate tax must be computed on form IT-230, New York State Separate Tax on Lump Sum Distributions (Special 10-Year Averaging Method), except in cases where there is more than one recipient of the lump sum distribution. In such cases, the separate tax must be computed on form IT-230.1, New York State Separate Tax on Lump Sum Distributions (Multiple Recipient Special 10-Year Averaging Method).

(2) Married individuals who file separate New York State personal income tax returns, whether on one form or on separate forms, must compute their New York State separate tax on the ordinary income portion of lump sum distributions on separate form IT-230 or IT-230.1. The New York State separate tax on the ordinary income portion of lump sum distributions must be computed using the tax rates applicable for the taxable year provided in section 602 of the Tax Law. The completed form IT-230 or IT-230.1 must be attached to the taxpayer's New York State personal or fiduciary income tax return filed for the taxable year.

(b) Amount of separate tax.

The amount of New York State separate tax on the ordinary income portion of lump sum distributions for any taxable year is an amount equal to the amount of initial separate tax (see subdivision [c] of this section) for such taxable year multiplied by a fraction, the numerator of which is the ordinary income portion of the lump sum distribution for the taxable year and the denominator of which is the total taxable amount of such distribution for such year.

(c) Initial separate tax.

The initial separate tax for any taxable year is an amount equal to 10 times the tax which would be imposed by section 601 of the Tax Law if the New York taxable income referred to in such section were an amount equal to one tenth of the excess of:

(1) the total taxable amount of the lump sum distribution for the taxable year (see subdivision [d] of this section for allocation of the death benefit exclusion where the total taxable amount for New York State purposes is less than the total taxable amount for Federal purposes); over

(2) the minimum distribution allowance (see subdivision [e] of this section).

(d) Allocation of death benefit exclusion in certain cases.

Where (1) an amount constituting a death benefit exclusion is claimed as a subtraction from the sum of the aggregate of the capital gain portions and/or the aggregate of the ordinary income portions of two or more lump sum distributions (or multiple distributions) in determining the total taxable amount under section 402(e) of the Internal Revenue Code, and (2) any portion of any lump sum distribution included for Federal purposes is exempt from taxation under New York State law, the amount of the death benefit exclusion claimed in computing the total taxable amount for Federal purposes must be allocated in determining the total taxable amount for purposes of this section. The portion of such death benefit exclusion to be reported on form IT-230 or IT-230.1 (as the case may be) is determined by multiplying the amount of the death benefit exclusion subtracted in determining the total taxable amount for Federal purposes by a fraction, the numerator of which is the sum of the capital gain portion and/or the ordinary income portion of the lump sum distribution(s) includible for New York State purposes, and the denominator of which is the sum of the capital gain portion and/or the ordinary income portion of the lump sum distributions includible in determining the total taxable amount for Federal purposes. See section 112.3(c)(2) of this Article for the modification required with respect to the capital gain portion of such lump sum distributions included in Federal adjusted gross income in cases where an allocation of the death benefit exclusion is required under this subdivision and the taxpayer did not elect to treat the capital gain portion of the lump sum distributions as ordinary income under section 402(e) of the Internal Revenue Code. The following example illustrates the application of the provisions of this subdivision.

Example:

Prior to his death on April 1, 1979, taxpayer B, a resident of New York State, was employed by the City of New York and by the M Corporation. These employers covered B under separate qualified pension plans. As a result of B's death, his beneficiary, taxpayer C (also a resident of New York State), received a lump sum distribution from the New York City Retirement System on September 1, 1979 and a lump sum distribution from the M Corporation's plan on October 2, 1979. The distribution from the New York City Retirement System consisted of a capital gain portion of $25,000 and an ordinary income portion of $5,000. The distribution from the M Corporation's pension plan consisted of a capital gain portion of $50,000 and an ordinary income portion of $20,000. These lump sum distributions included death benefits for which C was entitled to a death benefit exclusion of $5,000 for Federal purposes.

C filed a 1979 Federal income tax return on a calendar-year basis, together with all schedules required to be filed. On Federal form 4972, C elected the special 10-year averaging method with respect to only the ordinary income portion of the lump sum distributions, subtracted a $5,000 death benefit exclusion from the sum of the capital gain portion and the ordinary income portion of the lump sum distributions of $100,000, and computed a total taxable amount of $95,000. C properly included the capital gain portions of the lump sum distributions in Federal adjusted gross income.

For purposes of this section, the capital gain portion and the ordinary income portion of the lump sum distribution which C received from the New York City Retirement System are not required to be included in the total taxable amount under New York State law. On form IT-230 for the calendar year 1979, C is required to include only the capital gain portion and the ordinary income portion of the lump sum distribution received from M Corporation's plan. The sum of such amounts must then be reduced by the amount of the death benefit exclusion allocated in accordance with this subdivision in computing the total taxable amount. (See the example in section 112.3[c][2] of this Article for the modification required with respect to the capital gain portion of the lump sum distributions included in C's Federal adjusted gross income for the taxable year.)

Based on the foregoing facts, C's total taxable amount for the taxable year 1979 is $66,500, determined as follows:

Capital gain portion	$50,000
Ordinary income portion	20,000
Total	$70,000
Less death benefit exclusion
($5,000 × $70,000 = $100,000)	3,500
Total taxable amount	$66,500

(e) Minimum distribution allowance.

For purposes of this section, the minimum distribution allowance must be computed in accordance with the provisions of subparagraph (D) of paragraph (1) of subsection (e) of section 402 of the Internal Revenue Code.

(f) Multiple distributions and distributions of annuity contracts.

For purposes of this section, the rules concerning multiple distributions and distributions of annuity contracts as set forth in paragraph (2) of subsection (e) of section 402 of the Internal Revenue Code are applicable, except that:

(1) references therein to “paragraph (1)(A)” are deemed to be references to this section;

(2) reference therein to the “Secretary” are deemed to be references to the Tax Commission; and

(3) only lump sum distributions (or portions thereof) and distributions of annuity contracts subject to tax under section 601-C of the Tax Law (i.e., lump sum distributions, or portions thereof, and distributions of annuity contracts received by resident taxpayers on or after January 1, 1977) are to be included.

(g) Definitions and special rules.

For purposes of this section, the definitions and special rules as set forth in paragraph (4) of subsection (e) of section 402 of the Internal Revenue Code are applicable, except that, for purposes of this section, the total taxable amount does not include any portion of a lump sum distribution received from a New York State, municipal or local retirement system which is exempt from taxation under New York State law.