Chapter 5 of the laws of 1999 amended the definition of "nonresident individual" in Tax Law § 1305(b) and General City Law § 25-m(1)(h) to exclude State residents. Thus, chapter 5 permitted the imposition of the commuter tax on out-of-State residents who worked in New York City, but prohibited taxing commuting residents who came to the City from other New York counties. Consistent with the July 1, 1999 effective date, the Repeal Bill provided:

For taxable years commencing on or before June 30, 1999, which include such date, a taxpayer no longer subject to the . . . [Commuter Tax] effective as of July 1, 1999, as a result of the enactment of section two of this act, shall compute such taxpayer's liability for such taxable year as if such taxpayer's taxable year for federal income tax purposes ended on June 30, 1999.

Chapter 5 also provided that if the changes to the definition of "nonresident individual" were held to be invalid or unconstitutional, the commuter tax would be retroactively repealed in its entirety as of July 1, 1999, and provided that a taxpayer no longer subject to the commuter tax as a result of an unconstitutional holding would compute such taxpayer's liability as if such taxpayer's taxable year for federal income tax purposes ended on June 30, 1999.

B. The New York State Court of Appeals, in The City of New York v. The State of New York (94 NY2d 577, 709 NYS2d 122 [2000]), held that the partial repeal of the New York City nonresident earnings tax (commuter tax), effective July 1, 1999 (L 1999, ch 5), whereby the commuter tax was effectively repealed for New York State residents who commute into New York City but not for out-of-state commuters, was a violation of the Privileges and Immunities and Commerce Clauses of the United States Constitution. The Court of Appeals further held that since the partial repeal was unconstitutional, the alternate provision in the statute repealing the entire commuter tax took effect.

The partnership, PwC, had a tax year end of September 30, 1999. The Repeal Bill states that the Included Partners are to compute their commuter tax liability as if their tax year ended on June 30, 1999. Pursuant to Internal Revenue Code § 706(a), the Included Partners must include their distributive shares of PwC income "for any taxable year of the partnership ending within or with the taxable year of the partner." It is the final day of the partnership year when partners are treated as receiving their distributive shares for purposes of determining which taxable year the distributions are to be included. It is clear that PwC's 1999 taxable year (September 30) does not end within the Included Partners' 1999 taxable year (June 30) as determined by the Repeal Bill. Therefore, when the Included Partners calculate their commuter tax liability for the year ended on June 30, 1999, they are not required to include their distributive shares of PwC income.

F. Initially, the Division of Taxation agreed with this interpretation of the Repeal Bill, issuing its Important Notice for Estimated Tax Filers (TSB-M-99[6]I). The notice stated, in part, that "[i]f the taxable year of your partnership ends on or after July 1, 1999, your entire share of net earnings from self-employment allocated to the city is exempt from the nonresidents earnings tax" (emphasis added). However, following the Tax Appeals Tribunal's decision in Matter of Greig (September 16, 1999), the Division altered its position, issuing Revised Notice for Partners Making Estimated Tax Payments of the New York City Nonresident Earnings Tax (TSB-M-99[6.1]I), dated December 23, 1999. The revised notice, based upon the proration concept presented in Greig, stated as follows:

If you are a full-year New York State resident who was not a resident of New York City for any part of 1999, one-half of your entire federal distributive share of net earnings from self-employment allocated to New York City for the partnership's taxable year ending in 1999 is subject to the nonresident earnings tax (since the New York City nonresident earnings tax applied to you only for the first six months of 1999). This is different than the rule set forth in TSB-M-99(6)I.

Following the Court of Appeals decision in The City of New York v. The State of New York (supra), the Division issued Important Notice N-00-10, dated February 1, 2000, entitled Partnerships Filing Group Returns for Nonresident Partners: Elimination of the New York City Nonresident Earnings Tax, which stated, in part, that "only one-half of a partner's federal distributive share of net earnings from self-employment allocated to New York City for the partnership's taxable year ending in 1999 is subject to the New York City nonresident earnings tax." Thus, the Division relied, and continues to rely, on the Greig decision which permitted a nonresident partner to prorate his income between his resident and nonresident periods for purposes of New York State income tax liability.

G. The taxpayer in Greig was a partner in a law firm located in New York City. On August 1, 1982, the taxpayer and his family moved from New York City to Hong Kong. In July 1987, the taxpayer and his family moved from Hong Kong to Japan, to work in the law firm's Tokyo office. On July 4, 1992, the year in issue, the taxpayer and his family returned from Japan to New York City, where he resumed work in the law firm's New York City office.

For the year 1992, the taxpayer apportioned his distributive share of partnership income to his resident and nonresident periods based upon the number of days he was in each such status during the year. In response, the Division allocated 100 percent of the taxpayer's distributive share of partnership income to the resident period, reasoning that as the partnership's taxable year ended during the period that the taxpayer was a resident of New York, the distributive share is to be included in its entirety as New York source income.

In its decision, the Tax Appeals Tribunal compared Tax Law former § 654 (in effect until December 31, 1987) with Tax Law former § 638 (applicable to tax year 1992) and the regulations enacted by the Division pertaining to each section. The Tribunal noted that the Court of Appeals, in Matter of McNulty v. New York State Tax Commn. (70 NY2d 788, 522 NYS2d 103 [1987]), had invalidated the Division's regulation pertaining to Tax Law former § 654 (20 NYCRR former 148.6). That regulation required taxpayers who moved in or out of New York State during the tax year to treat partnership gains or losses as having all accrued in the portion of the taxable year in which the partnership's own tax year ended. Taxpayers were prohibited from prorating gains and losses between their resident and nonresident periods. The Court concluded that this reporting methodology did not take into account when the income from the partnership was actually received. The Court found a clear legislative intent in Tax Law former § 654 that most forms of income, as well as exemptions and standard deductions, should be allocated between the taxpayer's resident and nonresident returns. Thus, the Court held that taxpayers had to be allowed to report partnership distributions in a manner that either reflected the date of receipt or encompassed a proportionate distribution.

In 1987, following the Court of Appeals decision in McNulty, the Tax Law was amended to provide for a single return for part-year residents. In Greig, the Division argued that since part-year residents were no longer required to prorate exemptions and deductions, the problem addressed by McNulty no longer existed, and proration of partnership income should no longer be allowed. The Tax Appeals Tribunal rejected the Division's argument, concluding that there was nothing in McNulty which would limit its holding to situations where only mismatching of exemptions and deductions is present. According to the Tribunal, the statutory scheme present in McNulty is similar to that found in the Greig case, and the statutory exceptions found in Tax Law § 637 and former § 638(c) indicate that it continued to be the intent of the Legislature that most forms of income should be allocated between the taxpayer's resident and nonresident periods to reflect the actual date of receipt or expenditure or encompass an annual amount distributed on a proportionate basis. The Tribunal concluded that the taxpayer should be permitted to prorate the annual amount of the partnership distributions and allocate the amount proportionately between the resident and nonresident periods.

The Tribunal also rejected the Division's argument that its position conformed with the federal principle embodied in section 706 of the Internal Revenue Code that partnership items are recognized by a partner at the time the partnership taxable year ends. The Tribunal reviewed principles of partnership taxation contained in the Internal Revenue Code and concluded that section 706(a) of the Code does not mean that the partner's distributive share of the partnership's gain or loss was earned or sustained by the partner on the last day of the taxable year of the partnership ending with or within the partner's tax year. Rather, the language merely describes in which taxable year the partnership items should be included in the taxable income of the partner. Section 706(a) is compatible with the concept that the partner is deemed to have earned the income at the same date it is earned by the partnership. The Tribunal concluded that, under such circumstances, section 706(a) does not support the Division's position and, in fact, complements the position of the taxpayer that the partnership income received by the taxpayer be reported ratably throughout the year.

H. The Division appears to rest its position in the present matter on that portion of Greig which held that a partner is deemed to have earned the income at the same date as it is earned by the partnership, and as the income is earned throughout the taxable year, a partner is properly allowed to report such partnership income ratably throughout the year. It appears to be the position of the Division that as the income is earned throughout the year, a partner with a year ending date of June 30, 1999 (as stated in the Repeal Bill) is required to report partnership income earned up to such date when computing the commuter tax.

I. Unfortunately for the Division, the Greig case is both factually and legally distinguishable from the present matter. The taxpayer in Greig was a part-year resident, having spent the first half of the year in Tokyo, Japan, and the second half in New York. The issue of the proration of the taxpayer's distributive share of partnership income arose as a result of the taxpayer's changing his residence during the year. In contrast, the Included Partners were full-year nonresidents during the year 1999. Additionally, in Greig, both the partnership and the taxpayer were calendar year taxpayers, whereas in the present case the Repeal Bill created a different year end date for the Included Partners from that of the partnership. The Tribunal addressed only the issue of whether the taxpayer could prorate his distributive share of partnership income, as it was not necessary to consider the circumstances that arise in the present case where the partner's tax year does not match up with the partnership's tax year.

J. The issue in Greig involved an issue of sourcing of partnership income, while the present case concerns the timing of the inclusion of partnership income in the income of a partner. Pursuant to Internal Revenue Code § 706, a partner includes his distributive share of partnership income for any taxable year of the partnership ending within or with the partner's taxable year. The partner applies section 706 to determine the appropriate year in which to include the partnership distributions. In Greig, the taxpayer's tax year matched the tax year of the partnership, rendering it unnecessary for the Tribunal to consider the appropriate timing of the inclusion of the partnership's distributive share. As the tax years of the partnership and partner were the same, section 706 directed that all of the distribution of partnership income was to be included in the partner's tax year; the only issue to be resolved was what portion of the distribution was to be included in the taxpayer's resident and nonresident periods. The Tribunal addressed only the issue of the sourcing of the distributive share and not its timing, which is the issue in the present matter.

K. The proration method applied in Greig involved an analysis of how to source the partnership distribution. There was no analysis necessary of the timing of the distributive share as the tax years of both the partnership and the taxpayer partner were the same, and thus no question as to which taxable year of the partner to include the distributive share of the partnership income. The Tribunal did address the issue of whether to apply the proration method to source the taxpayer partner's distributive share of partnership income between his resident and nonresident periods. Thus, the Tribunal never addressed the timing issue present in this matter, and the Division cannot rely upon such decision in support of its position.

L. In the present matter, the partnership, PwC, had a tax year end of September 30, 1999. The Repeal Bill states that the Included Partners are to compute their commuter tax liability as if their tax year ended on June 30, 1999. Pursuant to Internal Revenue Code § 706(a), as PwC's 1999 taxable year (September 30) does not end within the Included Partners' 1999 taxable year (June 30) as determined by the Repeal Bill, the Included Partners are not required to include their distributive shares of PwC income when calculating any commuter tax liability for the year ended on June 30, 1999.

M. The petition of PricewaterhouseCoopers, LLP is granted, and the Division of Taxation is directed to issue to petitioner a refund in the amount of $108,797.00, plus interest.