NY Cannot Tax Law Firm Income Received by Retired Tax Partner Living in Florida

Interesting article in today's New York Law Journal on the case of Matter of McDermott, No. 820099 (N.Y. Div. of Tax Appeals, 2/2/06), holding that New York State cannot tax the share of law firm income received by a retired New York City tax partner now living in Florida.  The case has nationwide implications, as it applies the limitation in 4 U.S.C. § 114 on state income taxation of pension income.

The article is Ruling Forecloses State Taxes on Ex-Partner's Profits; Decision Could Have Broad Implications for Professionals Whose Retirement Income Is Hedged to Partnership's Future Profits, by John Caher:

A retired Coudert Brothers partner living in Florida has convinced an administrative law judge that New York state has no right to collect personal income tax on the retirement monies he receives from firm profits.

John E. McDermott's pro se case before the state Division of Tax Appeals has potentially broad implications for retired lawyers, doctors and other professionals whose retirement income is hedged to the future profits of a partnership.

The ruling established for the first time in New York, and perhaps the first time anywhere, that a 1996 federal law barring state taxation of retirement income paid to nonresidents applies not only to accounts set aside for retirees but also to those linked to partnership profitability. The state has yet to determined whether to appeal the determination, which, ultimately, rests on federal law....

McDermott, now 74, joined Coudert Brothers as a tax associate in 1965 and became a general partner five years later. After 33 years with the firm, McDermott, who resided in Connecticut for virtually all of his working years, retired at the end of 1997.