[Congressional Record (Bound Edition), Volume 151 (2005), Part 17]
[Extensions of Remarks]
[Pages 22741-22742]
[From the U.S. Government Publishing Office, www.gpo.gov]




    LEGISLATION TO PROHIBIT STATES FROM TAXING RETIREMENT INCOME OF 
                              NONRESIDENTS

                                 ______
                                 

                           HON. CHRIS CANNON

                                of utah

                    in the house of representatives

                        Friday, October 7, 2005

  Mr. CANNON. Mr. Speaker, I am introducing today legislation to 
clarify Public Law 104-95, adopted by the Congress in 1995, prohibiting 
States from taxing the retirement income of nonresidents. Public Law 
104-95, enacted in 1996, precludes States, other than the State in 
which a retiree resides, from taxing certain retirement benefits. The 
law defines ``retirement income'' as any income from specified types of 
qualified pension plans or from a nonqualified deferred compensation 
plan that meets certain payment requirements. Nonqualified deferred 
compensation plans are defined by reference to section 3121(v)(2)(C) of 
the Internal Revenue Code (the ``Code''), which relates to employment 
taxes. Specifically, any income of an individual who is not a resident 
of the taxing State from any plan, program, or arrangement described in 
section 3121(v)(2)(C) is exempt from that State's income tax provided 
the income received from such plan is part of a series of substantially 
equal periodic payments made (not less frequently than annually) over 
the life expectancy of the recipient, or for a period of not less than 
10 years. Neither the statute nor the related committee reports provide 
guidance as to what constitutes a substantially equal periodic payment; 
they merely require that the payments be made for at least 10 years.
  Unfortunately, at least one State tax revenue department has taken 
the position that Public Law 104-95 does not preclude state taxation of 
nonqualified retirement benefits paid by a partnership to its retired 
nonresident partners. Specifically, the State has construed the 
reference to section 3121(v)(2)(C) of the Code to limit the exemption 
to payments made only to retired employees, i.e., those individuals 
subjected to FICA tax, since the provision is written in the context of 
employment taxation. Under this view, nonqualified retirement benefits 
paid by a partnership to its retired partners who are not residents of 
the State would not be exempt from nonresident State income taxation 
because there is no specific reference to retired partners in P.L. 104-
95, section 3121(v)(2)(C) of the Code, or subsequently issued Treasury 
Regulations for that section.
  In addition, at least one State tax revenue department has taken the 
position that the periodic benefits provided under the plan fail the 
``substantially equal periodic payments'' test if the plan provides for 
benefit reductions pursuant to a pre-determined formula capping total 
disbursements. Under a similar analysis,

[[Page 22742]]

periodic benefits that are subject to adjustment pursuant to a plan 
provision providing cost-of-living adjustments could also fail to 
qualify as ``substantially equal periodic payments.'' Because 
businesses are not permitted to pre-fund nonqualified deferred 
compensation benefits on a tax-favored basis, some businesses find it 
prudent to cap total disbursements under a pre-determined plan formula, 
such as a percentage of the business's overall income. This cap 
operates to keep retirement costs within a reasonable range sustainable 
by the business, in effect protecting the business from unusual demands 
triggered by demographic variations. Similarly, many plans provide for 
cost-of-living adjustments to retirement benefits. Any such adjustments 
made as a result of a pre-determined plan formula do not change the 
nature of the retirement benefit and should not cause the retirement 
benefits to fail to meet the ``substantially equal periodic payments'' 
test.
  The application of the ``substantially equal periodic payments'' test 
is unclear when retirement benefits include components from both 
qualified plans (no substantially equal periodic payment requirement) 
and nonqualified plans. Consider a plan in which total annual payments 
to a retiree do not change from year to year, but the payments are 
required to come first from a Keogh (i.e., qualified plan) until 
depleted and then from the general assets of the business (i.e., 
nonqualified plan). Under a pre-determined plan formula, the total 
annual payment remains the same and is part of a series of 
substantially equal periodic payments. However, the sources underlying 
the total payment will change as the qualified plan is depleted and 
nonqualified payments are increased to maintain annual payments at the 
same level.
  This legislation would clarify that States may not impose an income 
tax on retirement income of nonresidents received under certain 
nonqualified deferred compensation plans, including plans for retired 
partners (treated as such under applicable tax laws). This would also 
clarify that retired partner equivalents, that is retired principals, 
will be treated as retired partners for purposes of this provision. 
This legislation would also clarify that benefit reductions pursuant to 
a pre-determined formula capping total disbursements, or benefit 
adjustments pursuant to a plan provision providing cost-of-living 
adjustments are permitted, and do not cause the periodic benefits 
provided under the plan to fail the ``substantially equal periodic 
payments'' test. It is also my intent to clarify that the 
``substantially equal periodic payments'' test is satisfied when 
payments include components from both qualified and nonqualified plans. 
Because this legislation merely clarifies Congressional intent with 
respect to current law, it would apply as of the effective date of P.L. 
104-94, that is to amounts received after December 31, 1995.
  These changes are intended to make it clear that, when Congress 
originally passed this legislation, it did not want to allow States to 
tax retirement income, other than the State where the retiree resides, 
whether the retirement payments are made to a retired employee or a 
retired partner. The present bill merely confirms Congressional intent 
to prohibit State taxation of retirement payments made to nonresidents.

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