[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]


 
TO AMEND TITLE 4 OF THE UNITED STATES CODE TO CLARIFY THE TREATMENT OF 
  SELF-EMPLOYMENT FOR PURPOSES OF THE LIMITATION ON STATE TAXATION OF 
                           RETIREMENT INCOME

=======================================================================



                               deg.HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                                   ON

                               H.R. 4019

                               __________

                           DECEMBER 13, 2005

                               __________

                           Serial No. 109-72

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov


                                 ______

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                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California        ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee        SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah                   MAXINE WATERS, California
SPENCER BACHUS, Alabama              MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina           WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana          ROBERT WEXLER, Florida
MARK GREEN, Wisconsin                ANTHONY D. WEINER, New York
RIC KELLER, Florida                  ADAM B. SCHIFF, California
DARRELL ISSA, California             LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona                  CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana                  DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas

             Philip G. Kiko, Chief of Staff-General Counsel
               Perry H. Apelbaum, Minority Chief Counsel
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                      CHRIS CANNON, Utah Chairman

HOWARD COBLE, North Carolina         MELVIN L. WATT, North Carolina
TRENT FRANKS, Arizona                WILLIAM D. DELAHUNT, Massachusetts
STEVE CHABOT, Ohio                   CHRIS VAN HOLLEN, Maryland
MARK GREEN, Wisconsin                JERROLD NADLER, New York
RANDY J. FORBES, Virginia            DEBBIE WASSERMAN SCHULTZ, Florida
LOUIE GOHMERT, Texas

                  Raymond V. Smietanka, Chief Counsel

                        Susan A. Jensen, Counsel

                   Mike Lenn, Full Committee Counsel

                        Brenda Hankins, Counsel

                   Stephanie Moore, Minority Counsel


                            C O N T E N T S

                              ----------                              

                           DECEMBER 13, 2005

                           OPENING STATEMENT

                                                                   Page
The Honorable Chris Cannon, a Representative in Congress from the 
  State of Utah, and Chairman, Subcommittee on Commercial and 
  Administrative Law.............................................     1
The Honorable Melvin L. Watt, a Representative in Congress from 
  the State of North Carolina, and Ranking Member, Subcommittee 
  on Commercial and Administrative Law...........................     2

                               WITNESSES

The Honorable George W. Gekas, former United States 
  Representative, former Chairman of the Subcommittee on 
  Commercial and Administrative Law, Committee on the Judiciary
  Oral Testimony.................................................     3
  Prepared Statement.............................................     4
Mr. Lawrence F. Portnoy, LLP, retired partner, 
  PricewaterhouseCoopers
  Oral Testimony.................................................     6
  Prepared Statement.............................................     8
Mr. Harley T. Duncan, Executive Director, Federation of Tax 
  Administrators
  Oral Testimony.................................................    12
  Prepared Statement.............................................    14
Mr. Stanley R. Arnold, CPA, former Commissioner of New 
  Hampshire's Department of Revenue Administration and former 
  President of the Federation of Tax Administrators
  Oral Testimony.................................................    18
  Prepared Statement.............................................    19

                                APPENDIX
               Material Submitted for the Hearing Record

Biography of the Honorable George W. Gekas, former United States 
  Representative, former Chairman of the Subcommittee on 
  Commercial and Administrative Law, Committee on the Judiciary..    25
Biography of Lawrence F. Portnoy, LLP, retired partner, 
  PricewaterhouseCoopers.........................................    26
Biography of Harley T. Duncan, Executive Director, Federation of 
  Tax Administrators.............................................    27
Biography of Stanley R. Arnold, CPA, former Commissioner of New 
  Hampshire's Department of Revenue Administration and former 
  President of the Federation of Tax Administrators..............    29


TO AMEND TITLE 4 OF THE UNITED STATES CODE TO CLARIFY THE TREATMENT OF 
  SELF-EMPLOYMENT FOR PURPOSES OF THE LIMITATION ON STATE TAXATION OF 
                           RETIREMENT INCOME

                              ----------                              


                       TUESDAY, DECEMBER 13, 2005

                  House of Representatives,
                         Subcommittee on Commercial
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 4:04 p.m., in 
Room 2141, Rayburn House Office Building, the Honorable Chris 
Cannon [Chairman of the Subcommittee] presiding.
    Mr. Cannon. This hearing of the Subcommittee on Commercial 
and Administrative Law will now come to order.
    Today we will consider H.R. 4019, a bill I introduced 
earlier this year to clarify the treatment of self-employment 
in regard to the taxation of retirement income and, to ensure 
fairness across the board for all retirees. This bill is 
intended to place all retirees on equal footing regarding the 
taxation of their retirement benefits, whether they worked for 
a company as an employee, were self-employed or were a partner 
prior to retirement.
    In the 104th Congress this Subcommittee passed the Senate 
Taxation of Pension Income Act of 1995, which subsequently 
became Public Law 104-95. The purpose of this act was to 
prohibit the State taxation of certain retirement income of 
nonresidents. The act did not allow all retirement income to be 
removed from taxation by a State where the retirees were no 
longer residents. It specifically set certain standards under 
which a retiree's income could not be taxed by State where that 
person was no longer living.
    No matter how clear and precise Congress thought it was 
when it originally passed the bill to prevent States from 
taxing the retirement incomes of retirees who no longer live in 
those States, it seems that the language and principle in 
Public Law 104-95 is being circumvented, or at least an attempt 
is being made.
    Congress made it so very clear in 1995 in determining that 
States should not tax the retirement income of people who are 
not in the State. The determination was regarding all retirees. 
This bill is not trying to change the intent of the original 
law or increase the bounds. It is to make sure that, as it 
should be, all retirees are treated the same, regardless of 
whether they worked for someone else or themselves prior to 
retirement.
    The bill clarifies that Public Law 104-95 was intended to 
cover all retirees with regard to the described plans, 
specifically the non-qualified types of plans and the 
restrictions in it.
    I look forward to the testimony of the panel.
    Without objection, the Chair will be authorized to declare 
recesses of the hearing at any point.
    Hearing none, so ordered.
    I further ask unanimous consent that Members have 5 
legislative days to submit written statements and statements by 
interested parties for inclusion in today's record.
    I now yield to Mr. Watt, the Ranking Member of the 
Subcommittee, for an opening statement.
    Mr. Watt. Thank you, Mr. Chairman. And thank you for 
convening the hearing so that we can get some clarification 
about what we may be doing subsequently in the markup.
    This bill amends, as I understand it, Public Law 104-95, to 
which some of us objected when it came before the Committee in 
1996.
    A review of the record from 1996 indicates that at that 
time I, along with several of my colleagues, including Ranking 
Member Conyers, had three principal concerns about the bill: 
that it failed exclude non-qualified deferred compensation 
plan; that it failed to impose a monetary cap on exempting 
funds; and that it was not made subject to the Unfunded Mandate 
Reform Act.
    These concerns have really not gone away and were this a 
new bill that presented the same issues that were presented by 
Public Law 104-95 that we were marking up in 1996, no doubt 
we'd probably be having the same debate with the same concerns 
being raised.
    As I understand H.R. 4019, however, we do not today revisit 
the policy choices implemented by the underlying bill. Instead, 
H.R. 4019 represents a technical correction designed to preempt 
at least one State from implementing an interpretation that's 
clearly at odds with the intent of the original bill, and one 
which would create a situation under which a specific group of 
retirees--that is partners and principals--would be treated 
differently from all other groups of retirees.
    I will be interested in hearing Mr. Duncan's testimony 
since he suggests that bill may be more than simply a technical 
correction. So I'll be listening carefully to what he has to 
say about that.
    However, if H.R. 4019 is truly only a technical correction, 
I see no reason to oppose it. In addition, even if the bill 
does not--does more than merely clarify the original intent of 
the underlying law, there is nonetheless some basis upon which 
to support it. And that is presumably most States have, over 
the nearly 10 years since the law first passed, structured or 
enforced their tax systems in accordance with the law and 
they've made the necessary adjustments to this bill already.
    Absent a persuasive objection from the States, therefore I 
see no reason to deviate from that policy because one State 
revenue department has found a potential loophole in the 
original language.
    I'll listen intently to the testimony, particularly Mr. 
Duncan's testimony, and look forward to the hearing and perhaps 
look forward to the subsequent markup.
    Mr. Cannon. The gentleman yields back.
    Mr. Watt. I yield back.
    Mr. Cannon. Thank you.
    I'm going to dispense, just to meet the needs of a couple 
of our Members, I'm going to dispense with introductions if you 
don't mind. We'll include those for the record and we'll just 
go right directly to your testimony.
    [The information referred to is available in the Appendix.]
    So Mr. Gekas, would you honor us with your testimony? 
Welcome back before--I feel really awkward sitting up here with 
the chairman sitting at the table.
    Mr. Watt. Mr. Chairman, I'm almost constraint to introduce 
the Honorable George Gekas myself, just to give him an adequate 
introduction. But I'll restrain myself.
    Mr. Cannon. A man who otherwise needs no introduction and 
who used to chair this Committee. We appreciate your coming 
back Mr. Gekas, and look forward to your testimony.

   STATEMENT OF THE HONORABLE GEORGE W. GEKAS, FORMER UNITED 
 STATES REPRESENTATIVE, FORMER CHAIRMAN OF THE SUBCOMMITTEE ON 
 COMMERCIAL AND ADMINISTRATIVE LAW, COMMITTEE ON THE JUDICIARY

    Mr. Gekas. Thank you, Mr. Chairman, Mr. Watt----
    Mr. Cannon. Your microphone, please. First time on that 
side of the table.
    Mr. Gekas. I'm so nervous.
    In conjunction with the Chair's first offering, I'm going 
to offer this historic document as my written statement in this 
hearing for the record and proceed to outline some of the 
issues that already have been touched upon by both the Chair 
and Mr. Watt.
    My sole purpose in being here today is to testify to the 
legislative intent upon which you've both touched. And that 
legislative intent was so clear from the beginning that I was 
astounded when, very recently, I was called and asked if I 
would testify here as to that very same intent because the 
State of New York, I had learned, was eager to jump on what 
they considered to be a loophole for the purpose of reaching 
beyond its borders to attach a taxation vehicle.
    This first came to light, as some of you will remember--I 
remembered it very well--when Barbara Vucanovich, then 
Congresswoman Vucanovich, came to my office to explain that 
she, as a representative of our Congressional District in 
Nevada, was concerned, very concerned, about the great number 
of retirees who came to Nevada from the State of California, 
came to Nevada to establish permanent residence and then were 
affronted by the fact that California was reaching across the 
borders to tax their retirement income.
    Well, that one thing led to another. I, too, was mortified 
at that because what it had done was to rear the ugly head of 
double taxation, which was one of the first fears that I 
uncovered as a legislator, both in the Pennsylvania Legislature 
and in Congress.
    And indeed, this is a subject matter that arose in the 
context of double taxation, and therefore, Barbara's persuasion 
led to eventually the enactment of the--of the law which we're 
discussing here today.
    The pure legislative intent was to honor all retirees in 
all States and to keep them safe from the taxation of a 
neighboring or any State in the Union in reaching to their 
retirement income, now in their new retired residential status 
in another State. That is clear to me. I don't see how it can 
be argued any other way.
    Something that Mr. Watt mentioned also brings to mind that 
one of the chief proofs that we have about the intent to--not 
to exclude partners but to include partners in the whole 
context of retirees, was the fact that the opponents, those who 
voted against it back then, somewhere along the line in their 
documents, perhaps in the minority report, referred to the 
ugliness that would occur if that bill--if our bill would be 
passed, because you could see partners doing bailout contracts 
with their employers or their former bosses or colleagues. The 
very fact that they mentioned as a possibility means that 
they--that partners fit into the type of retiree that should be 
free from this taxation.
    And so I'm eager to have your record indicate that when we 
enacted this legislation there was no doubt about the inclusion 
of partners.
    As a matter of fact, we never dreamed at that time, except 
for that one reference in the minority report which came about 
after the hearings and after the deliberations and after the 
final vote, et cetera, that partners would be excluded. You'd 
have to search deeply--not search, but rather embed some kind 
of thoughts into the general language to bring about an 
exclusion for partners.
    So with all of that, I am gratified that we have, joining 
me on this panel, experts in this whole field on all sides of 
the issue and I'm urging them not to contradict me at all. And 
if they do, they will find that I will not be here. I have to 
leave immediately.
    With that, I yield the balance of my non-time and wish you 
all well. And as I'm wafting out of here, I hope to hear some 
lingering--shall I say--endorsement of my statement.
    Thank you very much.
    [The prepared statement of Mr. Gekas follows:]

            Prepared Statement of the Honorable George Gekas

    Mr. Chairman, Congressman Watt and distinguished Members of the 
Subcommittee:
    Thank you for the opportunity to testify on H.R. 4019, a bill that 
would make it clear that existing federal law prohibits States from 
taxing the retirement income of any non-residents retirees. Congress 
needs to take action quickly to prevent States from undermining the 
common-sense legislation that was enacted in 1996 to prevent unfair and 
burdensome taxation. I commend you, Mr. Chairman, for introducing H.R. 
4019 and for holding this hearing.
    I understand that at least one large State is attempting to exploit 
an ambiguity in the 1996 law to argue that some non-resident retirees, 
namely non-resident retired partners, are not covered by the current-
law prohibition on State taxation of non-resident retirees. As Chairman 
of the Subcommittee on Commercial and Administrative Law when Congress 
originally considered this issue, I can tell you this is simply not the 
case. The purpose of my testimony today is to provide some legislative 
background and history that will make this abundantly clear.
    This issue first arose in the 1990s because some States, such 
California and New York, were imposing an income tax on retirement 
income of retired, non-resident individuals who worked in those States 
for part or all of their careers. At the time, several other States 
were discussing so-called ``State source'' taxes. There was no question 
that States had the Constitutional authority to impose such taxes, but 
Congress intervened because of the risks of double taxation and the 
complexity of multi-state compliance.
    Largely due to the efforts of Congresswoman Barbara Vucanovich of 
Nevada, Congress ultimately passed the State Taxation of Pension Income 
Act of 1995 (Public Law 104-95). Public Law 104-95 is very 
straightforward. It provides that a State may not tax the retirement 
income of non-residents. The definition of retirement income includes 
income from a qualified retirement or annuity plan, such as an IRA or 
401(k) plan, and income from a nonqualified deferred compensation plan. 
As Congresswoman Vucanovich noted when she introduced the legislation, 
it was purposefully designed to apply to all retirement income in order 
to be fair and treat all retirees equally.\1\
---------------------------------------------------------------------------
    \1\ Congressional Record, Extension of Remarks, January 5, 1995, p. 
E42.
---------------------------------------------------------------------------
    Although I believe that current law prohibits any State taxation of 
non-resident retirement income, I also understand that at least one 
State is arguing that there is a ``loophole'' in the statute that 
allows them to tax some non-resident retirees and not others, simply 
because they are non-resident retired partners rather than non-resident 
retired employees. I disagree. Therefore, it is important that Congress 
remove any doubt by enacting H.R. 4019. Otherwise, certain non-resident 
retirees could face costly litigation to fight aggressive taxation by 
some States--a fight retirees would clearly win in court. In addition, 
if Congress does not act now, this issue could develop into a 
significant problem with other States.
    The issue we are considering today stems from the definition of 
nonqualified deferred compensation plan contained in Public Law 104-95. 
When the decision was made during the legislative process to include 
nonqualified retirement plans, we referred to the definition of 
``nonqualified deferred compensation plan'' found in the employment 
tax. At least one State has used this reference to argue that Public 
Law 104-95 only applies to nonqualified deferred compensation received 
by retired, non-resident employees and does not protect retired, non-
resident partners. In reality, we used the reference to employment tax 
because, unlike qualified retirement plans, there is no reference to 
nonqualified retirement plans in the income tax code. The employment 
tax reference was meant to serve as a general, non-technical 
description of nonqualified deferred compensation plans. Had we fully 
understood the potential tax implications of including a FICA tax 
reference, we most certainly would have drafted the legislation 
differently.
    Congress never intended to arbitrarily carve out certain groups of 
individuals from the protection of Public Law 104-95 even though the 
retirement income that they receive is in all other respects identical 
to the retirement income received by individuals enjoying the 
protection of Public Law 104-95. For example, Congress never intended 
to prohibit source State taxation of nonqualified retirement income of 
all employees, including highly compensated executives, but not of 
self-employed individuals, such as partners. Moreover, Congress never 
intended for self-employed retirees to receive protection from source 
State taxation on their qualified retirement income (which Public Law 
104-95 clearly covers) but not their nonqualified retirement income, 
while highly compensated executive retirees enjoy protection under 
Public Law 104-95 with regard to both types of retirement income. It is 
also difficult to see any policy reason for such a distinction.
    In fact, Members of Congress who opposed Public Law 104-95 clearly 
believed the statute would apply to partners. The Dissenting Views 
section of the Committee report complains that ``[b]y including 
nonqualified plans in the legislation, Congress will open broad new 
loopholes for lucrative compensation arrangements, such as golden 
parachutes, partnership buy-outs, and large severance packages.'' \2\
---------------------------------------------------------------------------
    \2\ H. Rep. No. 104-389 at 16.
---------------------------------------------------------------------------
    I believe it is clear from the statutory language, legislative 
history and purpose of the statute that Public Law 104-95 protects all 
non-resident retirees, regardless of whether they are a retired 
employee or a retired partner. However, because at least one large 
State is unwilling to recognize this, I strongly support enactment of 
H.R. 4019, which would shut down any possibility that States might be 
able to unfairly tax the retirement income of certain non-resident 
retirees, effective as of the date of enactment of Public Law 104-95 
because it is consistent with Congressional intent.
    Thank you again for the opportunity to testify today. I would be 
happy to answer any questions you may have.

    Mr. Cannon. If you leave quickly, I think Mr. Portnoy is 
probably going to be very supportive of your statement.
    Thank you for being here. And just for everyone's 
recollection, you were the Chairman at the time this bill was 
passed.
    Mr. Gekas. That's correct.
    Mr. Cannon. You chaired this Committee. And so we 
appreciate your expertise and your knowledge on the subject.
    I recognize----
    Mr. Watt. Mr. Chairman, can I just thank the gentleman for 
being here?
    Mr. Cannon. Certainly.
    Mr. Watt. George was always one of my favorite people to 
get into debates with. But he's a great guy and no doubt when 
he leaves we're going to hear sleigh bells ring. That's what 
we're likely to hear.
    Mr. Gekas. Bill, glad to see you.
    Mr. Delahunt. Good to see you, George, and welcome back. I 
would echo all of the kudos and sentiments that were expressed 
by Mr. Watt.
    I haven't read the bill yet, but I am sure I'll support it 
with vigor, if you leave now.
    Mr. Gekas. Thank you very much.
    Mr. Cannon. Thank you, George.
    Mr. Portnoy, I will recognize you for 5 minutes and feel 
free to summarize your testimony because we do have your 
written record in the record. Thank you very much.

    STATEMENT OF LAWRENCE F. PORTNOY, LLP, RETIRED PARTNER, 
                     PRICEWATERHOUSECOOPERS

    Mr. Portnoy. Thank you, Mr. Chairman.
    I'm Lawrence Portnoy, a retired partner of 
PricewaterhouseCoopers, LLP. From 1992 until my retirement in 
2001, I served as the tax matters partner for my firm. During 
this period, among other things, I supervised the firm's 
implementation of the procedure to account for income earned by 
staff working in nonresident States, withholding and reporting 
procedures, preparation of the resident tax returns for staff 
claiming credit for tax paid to the nonresident States, and 
calculating any amounts to be paid by the firm to those staff 
to assure that their total tax cost was no greater than if they 
did not work temporarily in a nonresident State.
    For example, if you send someone out of town to work on a 
job for 6 months, and because of that he's got an incremental 
tax cost, this was a process to take care of all of that and to 
make that person whole.
    As a result of my work in this area, I'm very familiar with 
the laws regarding the taxation, both federally and at the 
State level, of individuals and other taxable entities. In this 
regard, I wish to express my concerns with the States' 
misinterpretation in the State Taxation and Pension Act of 
1995, P.L. 104-95, often referred to as H.R. 394.
    The purpose behind passage of the act was simple, to 
prohibit State taxation of certain pension income by States in 
which the recipient was neither resident nor domiciled at the 
time of receipt.
    According to the December 7, 1995 report of the Committee 
on the Judiciary of the House of Representatives, the bill was 
needed because the system permitting both the individual State 
of residence and the States in which the individual had 
previously earned income to tax that retirement income would 
produce a burden on retirees that would ``be, all too often, 
simply unreasonable.''
    The act defines retirement income broadly. The reason for 
exempting income from both qualified and nonqualified plans was 
best expressed by Representative Vucanovich during the hearing 
before the Subcommittee on Commercial and Administrative Law of 
the Committee on the Judiciary in June 1995. She stated that 
``it is a question of fairness to make the law apply equally to 
all retirees.''
    I would particularly like to point out that after the 
enactment of P.L. 104-95, all of the States respected the 
exemption of nonqualified deferred compensation, as defined in 
the act, from nonresident taxation to all retirees, 
irrespective of whether he or she was formerly an employee or a 
self-employed individual.
    This was the case until the past year or so. Now the 
question of whether the law applies equally to all retirees is 
being questioned by one State. And there's no doubt that other 
States will follow. This State is asserting that the exemption 
does not apply to retired partners, only to retired employees. 
Any disparity in the treatment of retired partners would raise 
a major issue with regard to fairness in that, unlike 
employees, partners of large accounting and law firms pay tax 
in as many as 30 or more States because that's where the 
partnerships did business rather than where the individual 
partner performed services. These partners did not reside in 
these States where they paid tax and, in many instances, 
performed no services in the vast majority of these States. 
They were taxed under State partnership rules and received no 
benefits from the State either as a resident or as an income 
earner.
    Congress clearly understood the issue of burden, which is 
one of the major reasons for the original legislation. And the 
same burden applies to retired partners as well. And, in fact, 
the burden is even greater on retired partners than it is on 
retired employees. As a result of the original legislation, 
retired partners correctly concluded that they were covered by 
P.L. 104-95 and thus, did not file any returns outside their 
State of residence.
    It's been 10 years since P.L. 104-95 has been enacted and, 
up until last year, the States agreed with that position. If 
the States were now to adopt a different position, the States 
could require nonresident returns to be filed for all prior 
years with the payment of tax and interest.
    Let me emphasize that the burden on retired partners also 
involves determining how much of their income is taxable by a 
particular nonresident State. We could easily be looking at 30 
or more States for which data would have to be gathered and the 
proper formula applied. This is precisely the type of burden--
--
    Mr. Cannon. Mr. Portnoy, could I just ask how much more do 
you have left in your testimony?
    Mr. Portnoy. Quarter of a page.
    Mr. Cannon. Go ahead.
    Mr. Portnoy. Sorry.
    This is precisely the type of burden the act was designed 
to avoid. This bill clarifies P.L. 104-95 by specifically 
stating that retired partners are included. The bill further 
clarifies the type of income Congress intended to cover because 
one State is trying to tax certain types of nonqualified 
retirement income. These changes are intended to provide 
clarity and precision to the types of income intended to be 
covered.
    Most importantly, since it is a clarification of existing 
law rather than a change in the law, H.R. 4019 will be 
effective as of the date that P.L. 104-95 was effective. With 
the passage of H.R. 4019, Congress will have assured that the 
problems that necessitated the enactment of P.L. 104-95 are 
solved for all retirees.
    Thank you for your time and consideration of this important 
issue.
    [The prepared statement of Mr. Portnoy follows:]

               Prepared Statement of Lawrence F. Portnoy

    Mr. Chairman, Congressman Watt and distinguished Members of the 
Subcommittee: Thank you for the opportunity to testify on H.R. 4019.
    I am Lawrence Portnoy, a retired partner of PricewaterhouseCoopers, 
LLP. I joined the tax department of Price Waterhouse (now 
PricewaterhouseCoopers) in 1964 and was admitted to the partnership in 
1975.
    During my years with the firm I served as a tax consultant for many 
large multinational clients and later was responsible for representing 
clients before the National Office of the Internal Revenue Service on 
accounting method change requests, accounting period change requests, 
ruling requests and requests for technical advice. I represented the 
firm when making comments to IRS and Treasury Department on proposed 
regulations.
    From 1992 until my retirement in 2001 I served as Tax Matters 
Partner and Senior Tax Technical Partner. This involved setting policy 
for the firm on major client tax matters and having responsibility for 
planning and compliance (the filing of all required tax returns) for 
the firm's federal, state, local, and international tax matters. During 
this period I supervised the firm's implementation of the procedure to 
account for income earned by staff in nonresident states, withholding 
and reporting procedures, preparation of resident tax returns for staff 
claiming credit for tax paid to nonresident states, and calculating any 
amounts to be paid by the firm to staff to assure that their tax cost 
is no greater than if they did not work temporarily in nonresident 
states.
    As a result of my work in this area, I am very familiar with the 
laws regarding the taxation, both federally and at the state level, of 
individuals and other taxable entities. In this regard, I wish to 
express my concerns with the misunderstanding in the State Taxation of 
Pension Income Act of 1995, (P.L. 104-95), often referred to as HR 394. 
The purpose behind passage of the Act was simple: to prohibit state 
taxation of certain pension income by states in which the recipient was 
neither resident nor domiciled at the time of receipt. According to the 
December 7, 1995 Report of the Committee on the Judiciary of the House 
of Representatives, the bill was needed because a system permitting 
both the individual's state of residence and the states in which the 
individual had previously earned income to tax retirement income, would 
produce a burden on retirees that would be ``all too often simply 
unreasonable.''
    The Act defines retirement income broadly and exempts all income 
from ``qualified'' pension plans as defined in the Internal Revenue 
Code, as well as income received under deferred compensation plans that 
are ``non-qualified'' retirement plans under the Code, but that meet 
additional requirements. While HR 394 as originally proposed did not 
exempt income from non-qualified plans, it was amended prior to passage 
to add the exemption (with certain caveats) to distributions from such 
non-qualified plans. The reason for including income from non-qualified 
plans was best expressed by Representative Vucanovich during the 
Hearing before the Subcommittee on Commercial and Administrative Law of 
the Committee on the Judiciary in June of 1995. She stated that ``it is 
a question of fairness to make the law apply equally to all retirees.''
    After the enactment of HR 394, all of the states respected the 
exemption of non-qualified deferred compensation (as defined under the 
Act) from nonresident taxation to all retirees, irrespective of whether 
he/she was formerly an employee or a self-employed individual-until the 
past year or so. Now, the question of whether the law applies equally 
to all retirees is being questioned by the states, ``unreasonable'' 
burdens are surfacing, and double taxation of such income is again 
likely. The major factor accounting for the lack of equal application 
is that some states are asserting that the exemption does not apply to 
retired partners, only to retired employees. These states are also 
asserting that, even if retired partners are eligible for the exemption 
from nonresident taxation, an additional requirement applies to non-
qualified deferred compensation received by them. Specifically, they 
assert that, if a partnership plan has a formulary cap or a provision 
for a cost of living adjustment, it does not qualify for the exemption, 
since the payments do not meet the Act's definition of ``substantially 
equal periodic payments.''
    Why do we now have a problem? While the law was intended to apply 
to all retirees, due to what I believe is a misreading of the section 
of HR 394 exempting non-qualified plan benefits only where such 
benefits are paid pursuant to Section 3121 (v)(2)(C) of the Internal 
Revenue Code, some state taxing authorities maintain that the exemption 
is only available to employees. This section is a part of the Code 
relating to the Social Security and Medicare tax payments that 
employers and employees make under FICA. Partners, as self-employed 
individuals, make their payments of Social Security and Medicare taxes 
under a different section of the Code. However, nowhere does HR 394 use 
the word ``employee.'' All references are to individuals and a 
reasonable interpretation would be that the reference to Section 3121 
(v)(2)(C) was meant only to generally describe the type of non-
qualified plan subject to the exemption - not to restrict the exemption 
to employees and allow the taxation of those who were self-employed.
    This disparity in the treatment of retired partners raises a major 
issue with regard to ``fairness'' in that, unlike employees, partners 
of large accounting and law firms paid tax in as many as thirty or more 
states because that is where the partnership did business rather than 
where the individual performed services. These partners did not reside 
in these states and, in many instances, performed no services in the 
vast majority of these states. They were taxed under state partnership 
rules and received no benefits from the states either as residents or 
as income earners. In most cases, the partnership filed both a 
partnership return and a composite return that included all partners 
who elected to be part of the return. The firm determined the income 
allocable to the state based on the firm's federal taxable income and 
the specific state apportionment formula. That total was then allocated 
to each partner. The composite return was filed for non-resident 
partners in lieu of individual returns filed by each nonresident 
partner and was based on the partner's distributive share of the firm's 
income earned in the state - whether the individual partner had worked 
in the state or had never stepped foot in it. In contrast, employees 
generally worked in only a few states during their active careers and 
actually earned income in such states and enjoyed the benefits as 
income earners in the states.
    With regard to the issue of burden, it is clear that a system that 
would require retired partners, particularly those who were members of 
large partnerships, to determine how much of their income was taxable 
in every state in which the partnership earned income is difficult at 
best, impossible at worst. Add to this the fact that most retired 
partners reasonably believed that they were covered by HR 394 and never 
filed returns outside of their state of residence. These retired 
partners have no statute of limitations protection. It is ten years 
since HR 394 was enacted, and states could require nonresident returns 
to be filed for all prior years, creating a substantial compliance 
burden in terms of tax and interest, and the cost of preparing 
nonresident tax returns. The statute of limitations trap is exacerbated 
by the fact that retired partners who reside in a state that imposes an 
income tax can only claim a refund for nonresident taxes paid within 
the resident state's statute of limitations, generally three years. 
Nonresident taxes that are assessed outside of this period will provide 
no resident state tax relief, resulting in double taxation for the 
entire amount of nonresident tax assessed. This is a burden that had 
not even been contemplated when the law was passed.
    Another burden involves determining how much of the retired 
partner's pension income is allocable to a particular state. One state 
is presently considering employing two alternative methods, depending 
on whether the retired partner's interest in the partnership is totally 
liquidated. If the interest is not totally liquidated, then the state 
intends to allocate the retirement income by the allocation percentage 
of the partnership itself for the current year. If the interest is 
liquidated, then the amount allocated to the state is based on where 
the partner performed his or her services prior to retirement, using 
the ratio derived from dividing the number of days services were 
performed in the state during the portion of the retirement year plus 
the prior three years, by the total number of days services were 
performed everywhere during the same period.
    Neither of these methods is reasonable. In the first instance, 
since the retired partner performed no work for the partnership during 
the taxable year, how can the partnership's allocation percentage be 
relevant? Under the second method the problem of finding and defending 
the number of days worked years in the past is virtually an 
insurmountable burden. Worst of all, each state that determines that 
partners are not exempt individuals may devise its own allocation 
formula. We could easily be looking at 30 or more states for which data 
would have to be gathered and the proper formula applied. This is 
precisely the type of burden the Act was designed to avoid.
    As to double taxation, it is clear that retired partners who may 
have earned income in as many as thirty states during their active 
tenure could be responsible for taxes in all of these states. This 
raises the possibility they will pay state taxes on more than one 
hundred percent of their retirement income.
    State administrators point to the fact that the states generally 
allow a credit for taxes paid to non-domiciliary states. They must also 
agree, however, that this does not eliminate the problem. Most states, 
if not all, allow the credit only up the amount that would be subject 
to tax under their laws. For example, if I am a resident of a state 
that imposes its tax at the rate of five percent, and a state that 
imposes its tax at the rate of ten percent also taxes my retirement 
income, I will pay ten percent to that non-resident state, but only 
receive a credit by my resident state equal to five percent of that 
amount. Also, some states will not allow a credit to its residents for 
a tax that they do not impose on its nonresidents, or do not believe is 
valid. And, of course, retirees who live in states that do not impose 
an income tax will receive no relief from paying tax to other states 
when there is no offset to be had. Finally, there may be little or no 
concomitant federal tax relief for these multiple payments due to the 
Alternative Minimum Tax.
    . An example of the difficulties of calculating the amounts owed is 
attached to this testimony. It would be necessary to estimate the 
amount a state could assess on audit for each open year and the maximum 
credit available to be claimed against the tax in the resident state. 
Further, the schedule would need to be updated periodically as the 
states assess and collect the tax. In the attached schedule, a retired 
partner resident in New Jersey had, in the 2001 tax year, a total of 
$18,826.06 of state taxable income attributable to 34 different states. 
His state tax would total $1,192.49 but based on state rules, only 
$1,040.58 would be creditable. It is clear that the credit mechanism 
does not solve the problem of double taxation. Further, retired 
partners who, in 2001 were residents of Pennsylvania, Illinois, 
Mississippi or Hawaii would receive no credit since those states did 
not tax pension income.
    How can these problems be solved? The answer is to enact HR 4019. 
This bill clarifies HR 394 by specifically stating that retired 
partners are included. Further, it makes it clear that the language 
requiring that payments from non-qualified plans must be ``part of a 
series of substantially equal periodic payments (not less frequently 
than annually)'' does not preclude such plans from the exemption based 
merely upon caps or limits based on a predetermined formula or on 
adjustments such as cost of living increases. Most importantly, since 
it is a clarification of existing law, rather than a change in the law, 
HR 4019 is applied retroactively to the December 31, 1995 date that HR 
394 was enacted. With the passage of HR 4019, Congress will have 
assured that the problems that necessitated the enactment of HR 394 are 
solved for all retirees.
    Thank you for your time and consideration of this important issue.

                               ATTACHMENT


    Mr. Cannon. Thank you, Mr. Portnoy.
    Mr. Duncan, we look forward to your testimony now.

  STATEMENT OF HARLEY T. DUNCAN, HARLEY T. DUNCAN, EXECUTIVE 
           DIRECTOR, FEDERATION OF TAX ADMINISTRATORS

    Mr. Duncan. Thank you, Mr. Chairman. My name is Harley 
Duncan. I'm the Executive Director of the Federation of Tax 
Administrators, which is an association of the principal tax 
administration agencies in the 50 States, D.C., and New York 
City. We appreciate the opportunity to present our position on 
H.R. 4019.
    That position can be summarized, I think, as follows, that 
if the Subcommittee determines that it is appropriate to move 
forward with the bill, we would encourage you to take steps to 
improve the clarity and precision of the bill in order that we 
can avoid conflict in interpretations and confusion for 
taxpayers, make the act administrable by the States, and 
prevent the bill from creating opportunities for substantial 
tax avoidance.
    The Federation was an active participant in the discussion 
surrounding the passage of Public Law 104-95, and we worked 
closely with Mr. Gekas and the Members of this Subcommittee to 
define--develop the final legislation.
    Then, as now, we recognize that the source principle of 
taxation must be balanced with the administrative difficulties 
and burdens that might be imposed on taxpayers and their 
employers in maintaining sufficient records over a lifetime of 
earning to ensure an appropriate allocation of the deferred 
income among all States in which it might be taxed.
    At the same time, the proponents of 104-95 and this 
Subcommittee recognized that limitations that were going to be 
imposed on State and local taxing authority needed to be 
narrowly and clearly drawn so that they accomplished their 
intended purposes, did not create unintended consequences and 
open up the States to substantial taxable avoidance. We think 
the same considerations are appropriate for 4019.
    Public Law 104-95 substantially achieved those principles 
and goals because every item of income that's subject to the 
act is defined with reference to the Internal Revenue Code so 
that the taxpayer knows and the tax agency knows what type of 
income we're talking about.
    In the one area where that's not possible, with the 
nonqualified deferred comp plans, there were two provisions 
inserted by the Subcommittee to make sure that distributions 
from those nonqualified plans looked like the rest of the 
retirement income that was being--that was covered by the bill, 
namely that it was paid out over a substantial period of years 
or the length of life of the individual, and that it came out 
in substantially equal installments to take then the 
differential nonqualified deferred comp and make it look like 
the rest of the retirement income, but again with specific 
reference to the Internal Revenue Code so that it both defined 
it specifically and prevented abuses.
    Those two things do not occur in H.R. 4019. First of all, 
the term retirement benefits, which are then to be subject to 
the limitation, is fully undefined in the bill. There's no 
reference to the Code, there's no reference to anything that we 
could find that we would then be able to say this constitutes 
the retirement benefit that's subject to the limitation.
    Second, the term retired partner is defined by a 
parenthetical that says defined as such in appropriate tax 
laws. But that's not a meaningful statement. It doesn't help 
you determine who is eligible for the limitation and when 
they're eligible for the limitation.
    Finally, there are some qualifications then added to the 
two limitations that this Subcommittee put in in 1995, about 
the length of the pay out and the substantially equal 
installments. And those are accompanied by undefined terms such 
as a predetermined formula that might be used to deviate from 
those limits, similar alterations or similar formula to alter 
those pay outs again, without respect to any definition that we 
could find.
    The end result then is that you've got an ability to 
recharacterize virtually any income as a retirement benefit and 
try to qualify for the limitation. We don't know who it applies 
to. And the predetermined formula and qualifications on the 
length of pay out and substantially equal payments can be used 
to effectively negate those limitations.
    If you move forward, we would make several suggestions. 
First, tie the income to some part of the Code. We'd throw out 
1402(a)(10) as a starter for working away from it. At least it 
talks about the types of income that makes for non--for retired 
partners.
    Specifically include an exclusion for retirement--from the 
definition of retirement benefits for gains on the sale of a 
partnership interest in a trade or business so that we don't 
have that converted into retirement benefits.
    Delete the modifications on the length of the pay out and 
the substantially equal test or put them in some form so that 
they are meaningful limits and can't be used to negate those 
two principles.
    If those don't work for you, consider tying the amount of 
income that's exempt to some prior level so that we know what 
we're looking at. Those are the types of things that we think 
need to be done so that A, the taxpayer knows what he or she 
can do; B, the State can administer it and we don't open 
ourselves up to avoidance.
    One minute, 15 seconds on the effective date, if I may.
    We would argue that it ought to be January 2006. It may be 
that this is retirement income that is similar to that in 104-
95. I think it is fair to say that retired partners were not 
excluded by choice from 104-95. Equally, I think it's an 
overstatement to say that they are included in 104-95. The 
language tying to all those references in the Code doesn't deal 
with partners. They simply aren't addressed in the bill as it 
was passed.
    So I think it's an overstatement to say clarification. 
That, if you extend it, if you take the effective date back to 
1995, that implies a misapplication in some fashion by the 
States. I don't think that's the case. If a taxpayer feels 
that's the case, he or she should contest that in a State tax 
administration appeals system.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Duncan follows:]

                 Prepared Statement of Harley T. Duncan

    Chairman Cannon, Congressman Watt and Members of the Subcommittee:
    Thank you for the opportunity to appear before the Subcommittee on 
H.R. 4019 relating to state and local taxation of certain payments to 
retired members of partnerships. My name is Harley Duncan, and I am the 
Executive Director of the Federation of Tax Administrators. The 
Federation is an association of the principal tax administration 
agencies in the 50 states, the District of Columbia and New York City. 
My purpose today is twofold: (1) to request that the Subcommittee 
require the proponents of the bill to demonstrate with clear and 
convincing evidence that the source principle of taxation should be 
overridden because of concerns regarding the administrative and 
recordkeeping burden associated with taxing retirement income paid to 
retired partners in the source state; and (2) to request that, if the 
Subcommittee determines it is appropriate to move forward with this 
bill, that it take steps to improve the clarity and precision of the 
bill in order to prevent the bill from creating opportunities for 
substantial avoidance.
    H.R. 4019 would amend P.L. 104-95 by including in the list of 
specific distributions from specific types of retirement plans that may 
be taxed only by the state in which an individual resides or is a 
domiciliary a new category of income characterized as ``any plan, 
program or arrangement providing for retirement benefits to a retired 
partner (treated as such under applicable tax laws). . . .'' It would 
also liberalize the requirement that distributions from nonqualified 
deferred compensation plans (and the newly included partnership 
retirement benefits) be made not less frequently than annually and that 
the distributions be made in substantially equal amounts.

                              INTRODUCTION

    As a preliminary matter, it should be stated that to this point, 
there has been no discussion with the Federation or its staff as to the 
need for H.R. 4019. We understand there is a desire to bring parity to 
the tax treatment of various streams of income that some consider 
``identical,'' and that there are issues of administrative burden that 
have been raised. These, however, have not been explained to or 
discussed with us. We believe that the Subcommittee as a first order of 
business should require the proponents of the bill to demonstrate 
clearly that the administrative and recordkeeping burden associated 
with taxing the retirement income in question is so onerous as to 
require a modification of the source principle of taxation, which would 
hold that the income in question should be taxed where the services 
giving rise to the income were performed even if the taxation is 
deferred until the income is actually received. Simply saying that the 
income in question is the ``same as that covered by an earlier act of 
Congress'' (P.L. 104-95) is insufficient without further evidence.
    The Federation was an active participant in the discussions 
surrounding the passage of P.L. 104-95 and worked closely with this 
Subcommittee in developing the final shape of the legislation. Then, as 
now, we recognize that the source principle of taxation must be 
balanced with administrative difficulties and burdens that might be 
imposed on taxpayers and their employers in maintaining sufficient 
records over a lifetime of income to ensure an appropriate allocation 
of the deferred income among all states in which it might have been 
earned. At the same time, proponents of P.L. 104-95 and Members of this 
Subcommittee recognized that any limitations imposed on state and local 
taxing authority should be narrowly and clearly drawn so as to 
accomplish their intended purpose, but not to create unintended 
consequences and open up opportunities for substantial tax avoidance. 
We think the same considerations are appropriate in deliberations 
regarding H.R. 4019.
    During testimony before this Subcommittee on legislation that 
ultimately became P.L. 104-95, FTA offered the following statement:

        As a general matter, the Federation urges the Congress to move 
        cautiously in considering legislation to restrict the ability 
        of states to tax retirement income paid to former residents. 
        Any such legislation should: (1) preserve to the maximum extent 
        possible the source taxation principle under-girding state 
        income tax systems; (2) not create opportunities for 
        substantial tax avoidance; (3) be designed carefully to address 
        the issues present in today's environment and not a series of 
        hypothetical situations which someone might conjure; and (4) be 
        capable of being administered by being precisely drawn and 
        based upon references to current laws or understood concepts 
        where possible.\1\
---------------------------------------------------------------------------
    \1\ Testimony of Harley T. Duncan before the Commercial and 
Administrative Law Subcommittee of the House Committee on the 
Judiciary, ``State Taxation of Nonresident Pension Income,'' June 28, 
1995.

P.L. 104-95 substantially follows these principles in that it 
specifically identifies the types of retirement income that are taxable 
only in the state of residence by defining them with respect to 
specific sections of the Internal Revenue Code. As to non-qualified 
deferred compensation plans, which are by definition variegated 
arrangements, the legislation imposed standards for the length and 
amount of distributions so as to avoid potentially abusive situations 
where an individual could defer substantial amounts in the latter part 
of a career, move to a non-tax state and avoid substantial taxes to the 
state in which the income was earned. P.L. 104-95 provides a good model 
to follow should the Subcommittee determine that the administrative 
burdens associated with continuing to tax the income in question at the 
source are too onerous. Any limitation should be clear and unambiguous.

                          SOURCE TAX PRINCIPLE

    There should be no question regarding the legal authority of states 
to tax the retirement income of nonresident partners where the services 
giving rise to the income were performed in the state.\2\ The basis of 
current state income tax systems is that a state may tax income that is 
derived from sources within the state, regardless of whether it is 
earned by a resident of the state or a nonresident engaging in income-
producing activities within the state. In-state sources are generally 
defined to include the performance of services in the state, the 
conduct of a trade, business or occupation in the state, or the receipt 
of income from property owned within the state.
---------------------------------------------------------------------------
    \2\ Throughout the testimony, references to nonresident pension or 
retirement income should be read to refer to that portion of any 
deferred compensation arrangement that is attributable to services 
performed in the state at an earlier point in time. A state would not 
have authority to tax pension income of a nonresident if it did not 
arise from services or other activities performed in the state.
---------------------------------------------------------------------------
    State authority to tax nonresident income from in-state sources was 
validated by the U.S. Supreme Court over 70 years ago in Shaffer v. 
Carter 252 U.S. 37 (1920) when it wrote:

        . . .we deem it clear, upon principle as well as authority, 
        that just as a State may impose general income taxes upon its 
        own citizens and residents . . . , it may, as a necessary 
        consequence, levy a duty of like character, and not more 
        onerous in its effect, upon incomes accruing to non-residents 
        from their property or business within the State, or their 
        occupations carried on therein. . . .

As the Shaffer court noted, and as has been developed in subsequent 
cases, the essential constraint on the states in the taxation of 
nonresident income is that the nonresident may not be taxed to a 
greater degree than a similarly situated resident of the state and may 
not be discriminated against by virtue of the nonresident status.\3\ It 
is also clear that states have authority to tax all income received by 
a resident, regardless of the source of that income.\4\ To avoid double 
taxation, however, all states with a broad-based income tax \5\ provide 
a tax credit to residents for income taxes paid to another state on 
income which is also included in the tax base of the state of 
residence.\6\ This system of reciprocal credits generally prevents 
retirement (and other) income from being taxed in both the state in 
which it is earned and in the state of residence.\7\
---------------------------------------------------------------------------
    \3\ With respect to nonresident pension income in particular, 
states take the position that the pension income is simply deferred 
income or compensation for services performed at an earlier point in 
time. This issue has not been addressed directly by the Supreme Court. 
The Court's ruling in Davis v. Michigan Department of Treasury 109 
S.Ct. 1500 (1989) (intergovernmental tax immunity and 4 U.S.C. 111 
prevent a state from taxing federal pensions to a greater degree than 
they do state and local pensions), however, certainly supports the 
state interpretation that pensions are deferred income paid for 
services performed previously.
    \4\ New York ex. rel. Cohn v. Graves, 300 U.S. 308 (1937) and 
Lawrence v. State Tax Commission, 286 U.S. 276 (1932).
    \5\ Forty-one states and the District of Columbia levy a broad-
based personal income tax. New Hampshire and Tennessee levy an income 
tax on limited types of interest, dividend and capital gains income. 
Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming do 
not levy a personal income tax.
    \6\ Maine and Virginia do not grant such a credit on retirement 
income. Neither state, however, includes retirement income from non-
state sources in the tax base of the resident.
    \7\ Certain groups of states do not use such a system of credits. 
Instead, they have reciprocal agreements under which all income is 
taxed by the state of residence rather than the state in which it is 
earned. (This also avoids taxation by two states.) These agreements are 
most prevalent in the Virginia-D.C.-Maryland, Pennsylvania-New Jersey, 
and Ohio-Indiana-Illinois areas.
---------------------------------------------------------------------------
    As noted, the principle of source taxation must be balanced with 
issues concerning the administrative and compliance burden that may be 
imposed on individual taxpayers and their employers in maintaining the 
records necessary to appropriately allocate income among states and 
filing the requisite returns. For example, Congress has limited the 
taxation of individuals engaged in most interstate transportation 
industries to the state of residence or where the taxpayer spends a 
majority of his/her time in recognition of this type of burden. It was 
these sorts of concerns that also were the genesis for P.L. 104-95. As 
Congress has recognized in its earlier deliberations, if limits are to 
be imposed on state taxation, care must be taken to ensure that the 
limits are clear and precise and that they do not create opportunities 
for unwarranted tax avoidance.

                      ISSUES RELATIVE TO H.R. 4019

    The Federation believes that H.R. 4019, as drafted, falls short of 
this goal and the criteria outlined earlier in this testimony. 
Specifically, we have three concerns with H.R. 4019: (1) Certain terms 
and phrases used in H.R. 4019 are unclear and require further specific 
definitions; (2) Without greater clarification and precision, H.R. 4019 
creates opportunities for substantial, unwarranted tax avoidance; and 
(3) The effective date in H.R. 4019 should be changed.
    Lack of precision. In subsection 1(a)(1) of H.R. 4019, the term 
``retirement benefits'' is used, but not defined in any way.\8\ By 
contrast, P.L. 104-95 goes to great length to define the term 
``retirement income'' with specific reference to sections of the 
Internal Revenue Code. This not only provides specificity for 
administrative purposes, but ensures that the income is actually 
retirement income in the normal sense of the term, where income has 
been systematically set aside in a trust arrangement to be paid out 
when one ceases work. Without any definition, H.R. 4019 would 
potentially allow nearly any stream of post-employment income to be 
characterized as ``retirement income'' and made free of tax if one 
resided in a non-tax state. We would suggest that the Subcommittee 
consider IRC section 1402(a) as a potential definition for ``retirement 
benefits.'' The section defines income of former partners that are not 
subject to self-employment tax and may be a model for H.R. 4019.\9\
---------------------------------------------------------------------------
    \8\ Other than, we presume, by the current law's limits regarding 
the length of payouts and the ``substantially equal'' requirement that 
govern distributions from nonqualified deferred compensation 
arrangements.
    \9\ This reference is provided as a possibility for further 
analysis. It has not been reviewed widely by states to determine if it 
would be suitable. It is an example, however, of the benefits of tying 
the definition in H.R. 4019 to other sections of the Internal Revenue 
Code.
---------------------------------------------------------------------------
    The phrase ``retired partner (treated as such under applicable tax 
laws)'' [Section 1(a)(1)] is presumably designed to define the types of 
individuals that qualify for the limitation. Without further 
specificity, however, it is simply a phrase without meaning. It will 
become a point of contention and litigation and creates opportunities 
for recipients to try to avoid tax by characterizing themselves as 
``retired partners.'' The phrase must be defined with reference to the 
specific tax laws that help define ``retired partner'' or otherwise 
provide a statement of the qualifications that define one as a retired 
partner if it is to be administrable and enable taxpayers and states 
alike to determine who qualifies for the special treatment.
    The meaning and intent of Section 1(a)(2) is unclear and requires 
explanation. On its face, it modifies the ``substantially equal 
periodic payments'' test imposed on distributions from nonqualified 
deferred compensation plans to enable what are being touted as 
``retirement benefits'' to be paid under some non-normal schedule. This 
would seem to open up the bill to gaming by allowing the partnership 
benefits to be paid on some other basis. If the purpose of H.R. 4019 is 
to replicate P.L. 104-95, this modification should be deleted. The 
effort in P.L. 104-95 was to place a limit on what all considered to be 
``normal'' retirement plans. The ``substantially equal'' requirement 
was designed to ensure that nonqualified plans could not easily be used 
to avoid tax liabilities.\10\
---------------------------------------------------------------------------
    \10\ Note also that the term ``period'' in page 2, lines 13 and 14 
of the bill should be changed to ``periodic.''
---------------------------------------------------------------------------
    The phrases ``predetermined formula'' and ``similar adjustments'' 
in Section 1(a)(3) also need to be defined, if indeed the terms are 
even necessary. If those terms remains undefined, they become points of 
potential conflict and litigation. Also, such adjustments could be 
structured so as to effectively negate the ten-year/life-expectancy 
requirement and the ``substantially equal'' requirement, both of which 
are critical to limiting the use of nonqualified deferred compensation 
programs as tax avoidance techniques. While it is unclear why the 
language is necessary, such adjustments should be limited in some 
fashion, e.g., as a proportion of the total amount, not more than some 
percentage annually or the like.
    Tax Avoidance. As noted, without precise and specific definitions 
of such terms as ``retirement benefits'' and ``retired partner,'' there 
is a significant potential that income that is simply deferred 
(regardless of the reason) could be characterized as retirement income 
and thus be subject to the limitation in the bill. Depending on the 
state in which the individual lives at the time the income is received, 
it could turn a tax deferral into a tax exemption.
    The greatest concern is that, given the lack of precision in the 
language, an individual that was a partner in a trade or business could 
sell the partnership interest and structure the pay-out so that it met 
the time period and ``substantially equal'' tests and argue that the 
income is retirement income subject to the limitation. In actuality, 
the income is gain on the sale of assets associated with the trade or 
business and is subject to tax in the state(s) in which the trade or 
business operated. However, without specific definitions of 
``retirement benefits'' in the bill, there is a potential for the gain 
to be characterized as retirement income.
    In addition to precisely defining what constitutes ``retirement 
benefits,'' we would offer several additional suggestions of ways to 
avoid potential abuse of the limitation contained in H.R. 4019.

          The bill should be amended to state that proceeds 
        from the sale of a partnership interest in a trade or business 
        shall not be considered a retirement benefit subject to the 
        limitation.

          The amount of retirement income subject to the 
        limitation could be defined with reference to a particular 
        level of income earned by the partner prior to retirement, 
        e.g., income in excess of 110 percent of the average annual 
        wages subject to wage withholding paid to the recipient by the 
        partnership in the three years prior to retirement of the 
        partner would not be considered retirement income.

          The limitation could be limited to income paid from 
        plans or programs that existed for some time period (e.g., 
        three years) prior to the time the partner retired.

          The term ``retirement benefit'' could be left to 
        determination under state law, thus allowing the states to 
        distinguish between retirement payments and proceeds from the 
        sale of partnership interests.

                             EFFECTIVE DATE

    As introduced, H.R. 4019 provides that the amendments shall be 
applied to income received after December 31, 1995. The effect is to 
retroactively apply the law change against the states. It would 
arguably allow those taxpayers that have voluntarily complied with 
those laws currently imposing tax on the affected income to file claims 
for refund. It would also negate any assessments states may have made. 
The change should be applied only to tax year 2006 and forward.
    The implication of the retroactive date is that the states have in 
some fashion misapplied P.L. 104-95 and that P.L. 104-95 was intended 
to cover the types of income that is the subject of H.R. 4019. That is 
simply not true in my estimation. As an active participant in the 
discussion surrounding P.L. 104-95, it is true that retirement payments 
to retired partners were not considered when P.L. 104-95 was approved. 
It is incorrect to say that such income would be included within the 
terms of P.L. 104-95. If a taxpayer was assessed on tax that is 
considered to be within the terms of P.L. 104-95, she/he should contest 
the assessment through administrative appeals processes as opposed to 
pursuing federal legislation.

                               CONCLUSION

    In conclusion, Mr. Chairman and Members of the Subcommittee, the 
Federation is committed to working with you further on this legislation 
if the proponents demonstrate to you the need for the legislation. We 
believe that H.R. 4019 as drafted is ambiguous and imprecise. It is 
likely to result in conflict and litigation regarding its 
interpretation and application Further work to clearly define what 
constitutes ``retirement benefits,'' who is a ``retired partner,'' and 
to avoid situations in which income could be re-characterized to take 
advantage of the limitations is necessary and we are willing to assist 
in this effort.

    Mr. Cannon. Thank you, Mr. Duncan.
    As always, your comments are very constructive. We 
appreciate them and we'll take them into account and hopefully 
you'll be available to work with us as we refine this bill 
before it goes to the floor.
    Mr. Duncan. We would be more than glad to work with you, 
and the Committee and the proponents of the bill.
    Mr. Cannon. Thank you, very much.
    Mr. Arnold, you may have noticed by now that we have a 
little clock up there that goes red--or from green to yellow to 
red. Thank you. Obviously, we're not pounding on the red, but 
if you could draw your comments to a close when we get there, 
we'd appreciate that.
    Thank you.

STATEMENT OF STANLEY R. ARNOLD, CPA, FORMER COMMISSIONER OF NEW 
  HAMPSHIRE'S DEPARTMENT OF REVENUE ADMINISTRATION AND FORMER 
       PRESIDENT OF THE FEDERATION OF TAX ADMINISTRATORS

    Mr. Arnold. Thank you, Mr. Chairman, Members of the 
Committee.
    My name is Stan Arnold and I served as the Commissioner of 
the New Hampshire Department of Revenue Administration for 14 
years, spanning the administration of four governors, both 
Republican and Democrat, from 1988 to 2002. I also was 
President of the Federation of Tax Administrators and served on 
a number of joint business and Government task forces 
attempting to resolve tax administration issues.
    In fact, Harvey became Executive Director of the FTA the 
same year that I was appointed, first appointed, commissioner. 
Several years later, I became President of FTA and had the 
pleasure of working closely with Harley during that time.
    Currently, I'm the Senior Tax Policy Adviser at the law 
firm of Rath, Young & Pignatelli on Concord, New Hampshire. I 
have a total of 30 years of experience in State and Federal 
taxes, both in the private sector and in Government. I have 
prepared tax returns for individuals and businesses, I've 
audited business tax returns as a State auditor, I developed 
audit policies as an assistant director of an audit division, 
and I developed new tax laws as commissioner.
    I appear before the Committee in support of H.R. 4019 and 
to present the viewpoint of a former State tax administrator as 
why it's appropriate for Congress to take action on this issue.
    In the United States, both of the Federal and State tax 
systems are voluntary compliance systems built on an unwritten 
agreement between the citizens being taxed and the taxing 
authorities. Citizens are willing to put up with some 
administrative burden because they understand the need for 
compliance. But at the same time they expect administrators and 
their elected officials to keep that administrative burden to a 
minimum.
    Administrative burden is reduced when there is stability 
and predictability in the law. It's my experience that citizens 
and businesses value that stability in tax law above all else. 
They want to be able to plan their affairs. They want to be 
able to comply with the law. Most of all, they don't want the 
rules to be changed after they believe that they have honestly 
complied with the law.
    H.R. 4019 is not a State's rights issue. Congress decided, 
back in 1995, that it was appropriate for it to assert its 
Commerce Clause authority. We're now asking that Congress 
clarify its intention to prevent States from taxing all 
nonresidents, including partners, on their retirement income.
    This is an issue of whether or not citizens should be able 
to rely the actions of Congress once it decides to resolve a 
State tax issue. This is about stability of the tax system and 
the unwritten agreement between citizens and Government to 
minimize compliance burden. This is a matter of all retirees 
being treated equally and fairly.
    Congress has only rarely involved itself in State tax 
matters. And because Congressional action to resolve the State 
tax issue is extraordinary, the rule of law created by 
Congressional action must be respected.
    For 10 years following the passage of Public Law 104-95, 
the taxation of nonresident income has been settled law. In 
fact, until recently the law as passed in 1995 has guided and 
been respected by taxpayers and individual States alike.
    In passing the original law, Congress took an important and 
difficult action to resolve what was becoming a possible 
impediment to interstate commerce. Public Law 104-95's purpose 
was to make sure that States could not reach and tax the 
retirement income of nonresidents.
    Today you are being asked to clarify that retirement 
benefits to a retired partner are included for the purposes of 
that previous limitation on State taxation.
    Once Congress entered the field in '95 and asserted its 
authority under the Commerce Clause, States have not attempted 
to tax these retirement payments. Congress broadly restricted 
the source taxation of retirement income whether from qualified 
or nonqualified plans.
    However, one State at least has issued a technical bulletin 
deciding retirement benefits paid to nonresident partners are 
not included in the Congressional limitation. There is no 
rational distinction to treat nonqualified plans for employees 
different from nonqualified plans for partners. Therefore, 
Congress should adopt H.R. 4019 to clarify its intent to ensure 
consistent application of those principles established in 1995.
    Thank you for the opportunity to testify. I'm prepared to 
answer any questions you may have.
    [The prepared statement of Mr. Arnold follows:]

                Prepared Statement of Stanley R. Arnold

                            I. INTRODUCTION

A. Personal Information.
    My name is Stanley R. Arnold, CPA, MBA and I served as the 
Commissioner of the New Hampshire Department of Revenue Administration 
for 14 years spanning the administration of four governors both 
Republican and Democrat from 1988 to 2002. I also served as President 
of the Federation of Tax Administrators and served on a number of joint 
business and government task forces attempting to resolve tax 
administration issues. Currently, I am the Senior Tax Policy Advisor at 
the law firm of Rath, Young & Pignatelli, P.A. in Concord, NH. I have a 
total of 30 years of experience in state and federal taxes. My 30 years 
of experience has included work in both the private sector and in 
government. I have prepared tax returns for individuals and businesses; 
audited business tax returns as a state auditor; developed audit 
policies as an assistant director of an audit division; developed new 
tax laws as Commissioner and now represent clients on tax matters. I 
also advise clients and teach classes on the how and why the state tax 
system works the way it does work--or doesn't work.

B. Overview of Testimony.
    I appear before the committee to support H.R. 4019 and to present 
the viewpoint of a former state tax administrator as to why it is 
appropriate for Congress to take action on this issue. In the United 
States both the federal and state tax systems are voluntary compliance 
systems built on an unwritten agreement between the citizens being 
taxed and the taxing authorities. Citizens are willing to put up with 
some administrative burden to increase compliance, but at the same 
time, expect administrators and their elected officials to keep that 
administrative burden to a minimum. One way to minimize the 
administrative burden is stability and predictability in tax law. It is 
my experience that citizens and businesses value stability in tax law 
above all else. They want to be able to plan their affairs and they 
want to be able to comply with the law. Most of all, they don't want 
the rules to be changed after they believe they have honestly complied 
with the law.
    Congress has only rarely involved itself in State Tax matters. 
Because Congressional action to resolve a state tax issue is an 
extraordinary step, the rule of law created by Congressional action 
must be respected. For ten years following the passage of Public Law 
104-95, codified at 4 U.S.C. 114, the taxation of non-resident 
retirement income has been settled law. In fact, until recently, the 
law as passed in 1995 has guided and been respected by taxpayers and 
the individual States alike.
    In passing the original law, Congress took an important and 
difficult action to resolve what was becoming a possible impediment to 
interstate commerce. Public Law 104-95's purpose was to make sure that 
states could not reach out and tax the retirement income of 
nonresidents. Today you are being asked to clarify that retirement 
benefits to a retired partner are included for the purposes of the 
previous limitation on state taxation of retirement income. Once 
Congress entered the field in 1995 and asserted its authority under the 
Commerce Clause, States have not attempted to tax these retirement 
payments. Congress broadly restricted the source taxation of retirement 
income whether from qualified or non-qualified retirement plans. 
However, at least one state recently issued a draft Technical Services 
Division Bulletin deciding that retirement benefits paid to nonresident 
and part-year resident partners was not included in the congressional 
limitation. There is no rational distinction to treat non-qualified 
plans for ``employees'' different from non-qualified plans for 
``partners.'' Therefore, Congress should adopt H.R. 4019 to clarify 
their intent to insure consistent application of the principles 
established in 1995.
    At the time of previous Congressional action, expert testimony 
before this committee discussed two courses of probable action that a 
state could take if it wished to continue to tax retirement income 
after the passage of P.L.104-95. First, an individual state could tax 
deferred retirement income on a current basis by decoupling from the 
federal deferral provisions. While various states, including New 
Hampshire, have decoupled from recent federal tax law changes, no state 
has chosen to decouple on this issue. Second, a state could seek to tax 
the deferred income in the year a resident changed residence to another 
state. To the best of my knowledge, no state has passed this type of 
``exit toll'' provision either. In my opinion, State Legislatures have 
not taken action to enact such provisions because they are keeping 
faith with the underlying principle established by Congress that States 
should not tax the retirement income of nonresidents.

              II. 1995 CONGRESSIONAL ACTION (P.L. 104-95)

    When I was the New Hampshire Commissioner, I supported annual 
resolutions adopted by the Federation of Tax Administrators (FTA) 
asking Congress not to pass legislation restricting a state's authority 
to design its own tax system. I continue to believe that Congress' 
power to restrict States taxing power should be used with restraint. At 
the same time, the States are not always right when they develop their 
tax policy and Congress has stepped in several times in the past when 
Congress believed it was necessary to prevent inappropriate actions 
which would affect individual and business taxapayers. The most well 
known example of Congressional action was the passage of Public Law 86-
272 (15.U.S.C. 381) which permits companies to engage in certain sales 
solicitation activities in states without being subject to state 
corporate income tax. While not popular with tax administrators, the 
core of that law has been respected by the states. Tax administrators 
have tested it around the edges, but the core principle embodied in 
that law continues to be observed.
    In 1995, this Committee and Congress enacted P.L. 104-95 to limit 
state taxation of retirement income when a resident retired and moved 
from one state to retire in another state. Congress understood that 
when individuals retire to a different state they no longer vote in 
that state, they no longer receive benefits from that state, and 
therefore, they should not be taxed in their former state. Congress 
acknowledged that the States had a right to tax non-resident retirement 
income under the so called ``source rule.'' Congress also made clear 
that it wished to restrict that right because of the (1) administrative 
burden imposed on a citizen in complying with such a demand and (2) the 
unfairness, whether perceived or actual, of a state continuing to tax 
retirement income once a citizen had moved from the state.
    There are several elements included in the testimony presented on 
H.R. 394 that are relevant to the need for H.R. 4019. In testimony to 
this committee on H.R. 394, several members of Congress expressed 
concern that H.R. 394 could lead to abusive tax planning by wealthy 
individuals using tax planning to defer income while in a high tax 
state and then receive that income after retiring to a non-income tax 
state. An amendment to the original bill addressed that concern by 
requiring that payments from non-qualified plans be in the form of 
periodic payments under federal rules. It appears to me that the debate 
on the original legislation and subsequent amendment clearly shows 
Congress was broadly defining retirement benefits from non-qualified 
plans in the protected category.

                     III. DYNAMICS OF A TAX SYSTEM

    Questions from individuals, businesses, tax professionals and 
internal staff of the agency may always be raised about how to apply 
tax laws after they are passed. Many questions are answered on an ad 
hoc basis or through letters, Technical Information Releases and 
Declaratory Rulings. There are two ``waves'' of questions; those raised 
during the implementation phase of a law and those raised several years 
later when taxpayers are audited.
    Auditors are always looking backwards. They are often auditing 
returns that report transactions conducted two or three years 
previously. Conflicts sometimes arise between taxpayers and auditors 
because the law has changed and the interpretations of that law were 
developed after the returns were filed. Good administrators will make 
these adjustments prospective to maintain the stability and 
predictability principles, but sometimes that does not occur.
    Once the state auditors join in the fray, they will raise questions 
based on their audit experience. Auditors are generally not concerned 
with the policy behind the law; they simply want 100 percent compliance 
regardless of any administrative burden. Administrative burden is the 
responsibility of the policy makers. In the immediate issue at hand, 
the draft technical bulletin addresses retirement payments to 
nonresident partners. It is important to note, that the dynamics of the 
system will cause the expansion of the enforcement beyond the initial 
group. At some point, an administrator will point out that ``everyone 
needs to be treated the same.'' So it is likely that the current audit 
interpretation will expand to anyone the audit division can classify as 
non-employees, such as proprietorships and self-employed individuals. 
H.R. 4019 addresses this issue directly by clearly including the 
retirement payments to partners and self-employed individuals.
    States struggle every budget cycle on how best to finance the 
services they provide fueled in part by balanced budget requirements. 
In 2005, I served as a co-chair of Governor Lynch's transition team 
with responsibility for developing the biennial budget. I have also 
worked closely with four governors, both Republican and Democrat in 
developing budgets and have never experienced an ``easy'' budget. The 
state budget process is difficult and requires both financial and 
political skills to achieve a balance between required services and 
available revenue.
    The ``no new taxes'' position has become a standard of American 
politics and made it even more difficult for any eventual winner of an 
election to develop a budget. The result is politicians have had to 
become very imaginative in how to pay for state services. Aggressive 
tax policy administration frequently raises revenue. And, all too often 
states look to nonvoters to raise revenue without regard to the 
administrative burdens imposed.
    Audit division interpretations and informal rule making can raise 
revenue directly or indirectly. Unfortunately, each of these methods 
increases administrative costs to companies and individuals paying 
lawyers and accountants to defend their rights. Often, aggressive audit 
actions are reinforced by administrations trumpeting the ``success'' of 
some audit initiative. By embracing the principles established in 1995, 
H.R. 4019 will reduce administrative costs borne directly by taxpayers.

                             IV. CONCLUSION

    H.R. 4019 is not a ``states' rights'' issue. Congress decided back 
in 1995 that it was appropriate for it to assert its Commerce Clause 
authority. We are now asking that Congress clarify its intention to 
prevent states from taxing all nonresidents on their retirement income. 
This clarification would of course have the same effective date as the 
original legislation. This is an issue of whether or not citizens 
should be able to rely on the actions of Congress when it decides to 
resolve a state tax issue. This is about the stability of the tax 
system and the unwritten agreement between citizens and government to 
minimize compliance burdens.
    Litigation might eventually resolve this controversy, but 
litigation will take a number of years. Citizens should not have to 
comply with the tremendous administrative burden identified in 1995, 
nor pay expensive legal fees while waiting for the issue to work its 
way through the judicial system. It is also possible that Congressional 
inaction would encourage other states to adopt the same interpretation 
to raise additional revenue.

    Mr. Cannon. Thank you, Mr. Arnold.
    I appreciate the panel's very concise testimony and we may 
want to get to you as we move forward. I think we're going to 
mark this bill up today. That means we have still many places 
or several places where we can make adjustments to it. So we 
appreciate your input.
    Are there any Members of the panel that would like to ask 
some questions?
    Mr. Watt is recognized for 5 minutes.
    Mr. Watt. I won't take 5 minutes, Mr. Chairman. I want to 
do two things.
    Number one, I think I misstated in my opening statement 
that we acted on this bill in 1996. It was actually December of 
'95. I think the bill was actually signed by the President in 
'96. So I didn't want the record to be incorrect in that 
respect.
    I did want to ask Mr. Portnoy and Mr. Arnold whether they 
share the concerns that have been expressed by Mr. Duncan, and 
whether, in light of those concerns, we would be well advised 
between now and the time the full Committee acts on this bill, 
to address those concerns or what is your opinion on that?
    Mr. Arnold. Mr. Watt, I think in many ways that some of the 
issues that were brought up by Mr. Duncan were--resolved, at 
least the initial one, and I'm not speaking for him, but he 
makes an emphasis on the issue where--he used the term 
retirement benefit rather than retirement income, which had 
been the term that had been used in the original law. We agree 
that that could be easily changed to retirement income and 
would help in the clarity. It was not intended to establish a 
new category of income.
    Mr. Portnoy. May I add something, Mr. Watt?
    Mr. Watt. Yes, sir.
    Mr. Portnoy. The 4019 bill is not intended to make any of 
the changes that were being described. Many of the issues that 
he is articulating were issues when the original bill was 
enacted. You dealt with them or didn't deal with them as you 
saw fit. And our language does not change any of those issues.
    Mr. Watt. But at the same time, we don't want to open 
additional areas of dispute, whether they address concerns that 
were addressed before or not. If we're going to open another 
set of issues to be quibbled about or litigated about or vexed 
about by accountants or State revenue authorities, we need to 
clarify that, I would take it. Or would you disagree with that?
    Mr. Portnoy. I think that's an appropriate concept, Mr. 
Watt, but I don't think that any of that has occurred. For 
example, the 10-year rule of substantially equal payments was 
in the original legislation. But substantially equal was 
undefined.
    So there has always been a degree of question about what 
that meant.
    What our bill does is narrow that to a certain extent, 
possibly in a way Mr. Duncan is not in favor of, but 
nonetheless is just a clarification of the original bill with 
these issues that you dealt with previously.
    Mr. Watt. I appreciate it, Mr. Chairman. I yield back.
    Mr. Cannon. The gentleman yields back.
    The Chair hopes no one else is interested in asking 
questions. That being the case, we want to thank the panel for 
being here today.
    Mr. Delahunt. Can I just ask one question?
    Mr. Cannon. Absolutely, Mr. Delahunt. The gentleman is 
recognized for 5 minutes.
    Mr. Delahunt. Do you want your quorum? I figured you'd 
recognize, Mr. Chairman.
    I'm really confused and I wasn't here when the original 
bill came out. But let me just pursue what Mr. Watt was 
addressing.
    Is this a language problem, Mr. Duncan?
    Mr. Duncan. I thought perhaps it was. But now, after Mr. 
Portnoy's answer, I'm not so sure that it is.
    I guess we believe that the limits that are in the current 
law of 10 years on the pay out and substantially equal are 
important to avoid abusive situations with nonqualified 
deferred comp plans.
    The language that's being inserted here, we think can 
effectively negate those. And the answer of Mr. Portnoy was--
implies that they'd like to at least alter the substantially 
equal.
    We are fine with the current language, in terms of length 
of pay out and substantially equal.
    Mr. Delahunt. Mr. Portnoy?
    Mr. Portnoy. We have no changes to that language. It's 
still 10 years substantially equal.
    What we are saying is there are some standard provisions in 
these type of plans, such as COLA adjustments annually, that 
one State at the moment and others shortly are saying 
disqualifies that from meeting the 10 years substantially equal 
test.
    We're suggesting that this legislation doesn't change that 
definition of the 10 years substantially equal.
    Mr. Delahunt. If I'm incorrect, I think that there's a 
consensus that the issue should be addressed, but that there's 
a real disagreement among Members of the panel here as to 
whether, as Mr. Watt says, it opens up new areas of 
uncertainty, as opposed to clarification.
    Mr. Arnold. Mr. Delahunt, if I could, I think number one, 
one of the main issues was the definition of whether or not we 
were talking about retirement income or a new thing called 
retirement benefit. We agree with Mr. Duncan that should be 
changed.
    And again, as far as working with the language, the 
sponsors when this bill was drafted who were working on the 
drafting of this bill, there was no intent to change what 
Congress had done back in 1995.
    Now from the standpoint of the language and where it is, I 
think it's just a matter of maybe working with Mr. Duncan to 
ensure that he understands how it does not change that.
    Mr. Delahunt. That was going to be my recommendation 
because I don't think that we want to make something that is 
arcane and esoteric, really complicated because we don't like 
to deal with things that are any of those.
    So if you really have a desire to resolve this, I daresay 
that the three of you gentleman sit down and have discussions 
that prove to resolve that so you can reassure the Chairman and 
Members of the Committee and the Ranking Member that we're all 
on the same page.
    I yield back.
    Mr. Cannon. The gentleman yields back. Thank you.
    Let me just say that we're learning as we go. I think some 
very good ideas have come up here. We will be talking with 
particularly Mr. Duncan and others and will involve certainly 
the minority staff in this process so we can come up with a 
bill that is actually clarificatory and not one that creates 
more difficulty in the future.
    Other questions from the panel?
    If not, we thank you all for being here.
    This hearing is adjourned and now we're going to go into a 
markup, so gentleman, thanks for being here.
    [Whereupon, at 4:43 p.m., the subcommittee was adjourned.]


                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

   Biography of the Honorable George W. Gekas, former United States 
 Representative, former Chairman of the Subcommittee on Commercial and 
             Administrative Law, Committee on the Judiciary



        Biography of Lawrence F. Portnoy, LLP, retired partner, 
                         PricewaterhouseCoopers



          Biography of Harley T. Duncan, Executive Director, 
                    Federation of Tax Administrators




    Biography of Stanley R. Arnold, CPA, former Commissioner of New 
 Hampshire's Department of Revenue Administration and former President 
                of the Federation of Tax Administrators



                                 
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