[House Report 109-542]
[From the U.S. Government Publishing Office]
109th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 109-542
======================================================================
STATE TAXATION OF RETIREMENT INCOME
_______
June 29, 2006.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Sensenbrenner, from the Committee on the Judiciary, submitted the
following
R E P O R T
[To accompany H.R. 4019]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Judiciary, to whom was referred the bill
(H.R. 4019) 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, having
considered the same, report favorably thereon with an amendment
and recommend that the bill as amended do pass.
CONTENTS
Page
The Amendment.................................................... 1
Purpose and Summary.............................................. 2
Background and Need for the Legislation.......................... 2
Hearings......................................................... 3
Committee Consideration.......................................... 3
Vote of the Committee............................................ 4
Committee Oversight Findings..................................... 4
New Budget Authority and Tax Expenditures........................ 4
Congressional Budget Office Cost Estimate........................ 4
Performance Goals and Objectives................................. 5
Constitutional Authority Statement............................... 6
Section-by-Section Analysis and Discussion....................... 6
Changes in Existing Law Made by the Bill, as Reported............ 6
Markup Transcript................................................ 7
The Amendment
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. CLARIFICATION OF TREATMENT OF SELF-EMPLOYMENT FOR PURPOSES
OF THE LIMITATION ON STATE TAXATION OF RETIREMENT
INCOME.
(a) In General.--Section 114(b)(1)(I) of title 4, United States Code,
is amended--
(1) by inserting ``(or any plan, program, or arrangement that
is in writing, that provides for retirement payments in
recognition of prior service to be made to a retired partner,
and that is in effect immediately before retirement begins)''
after ``section 3121(v)(2)(C) of such Code'',
(2) by inserting ``which may include income described in
subparagraphs (A) through (H)'' after ``(not less frequently
than annually'',
(3) by adding at the end the following:
``The fact that payments may be adjusted from time to
time pursuant to such plan, program, or arrangement to
limit total disbursements under a predetermined
formula, or to provide cost of living or similar
adjustments, will not cause the periodic payments
provided under such plan, program, or arrangement to
fail the `substantially equal periodic payments'
test.'', and
(4) by adding at the end the following:
``(4) For purposes of this section, the term `retired
partner' is an individual who is described as a partner in
section 7701(a)(2) of the Internal Revenue Code of 1986 and who
is retired under such individual's partnership agreement.''.
(b) Application.--The amendments made by this section apply to
amounts received after December 31, 1995.
Purpose and Summary
H.R. 4019 makes technical and clarifying amendments to
section 114 of title 4 of the United States Code.
Background and Need for the Legislation
H.R. 4019 makes technical and clarifying amendments to
section 114 of title 4 of the United States Code, which was
enacted in 1996 to restrict the ability of States to tax
certain types of pension income received by their former
residents and nonresidents who earned income in that State.\1\
Section 114 exempts from non-resident taxation certain income
received from ``qualified'' pension plans (as defined in the
Internal Revenue Code) as well as income received under certain
``non-qualified'' retirement plans, including liquidation
payments paid out of current year profits to retiring partners
in a service partnership. Specifically, section 114(a)
prohibits a State from taxing ``retirement income'' of its
former residents or nonresidents who earned income within the
State, including income from a nonqualified deferred
compensation plan, provided it 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. Section 114(b)(1)(I)
defines nonqualified deferred compensation plans by reference
to section 3121(v)(2)(C) of the Internal Revenue Code, which
relates to employment taxes.\2\
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\1\Pub. L. No. 104-95, 109 Stat. 979 (codified at 4 U.S.C. Sec. 114
(2002)).
\2\26 U.S.C. Sec. 3121(v)(2)(C) (2002).
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Questions have arisen as to whether section 114 was
intended to apply to nonqualified retirement income paid by a
partnership to its retired nonresident partners (including
retired partner equivalents, e.g., retired principals). The
reference to section 3121(v)(2)(C) is definitional with regard
to nonqualified deferred compensation income, irrespective of
whether the recipient was subject to the Federal Insurance
Contribution Act (``FICA'') tax. Nevertheless, the provision's
incorporation of the Internal Revenue Code's definition of
``nonqualified deferred compensation plans'' has been construed
by at least one State to limit the exemption to payments made
only to retired employees (i.e., those individuals subjected to
FICA tax), as section 3121(v)(2)(C) is written in the context
of employment taxation and there is no specific reference to
retired partners in section 114 of title 4 of the United States
or in section 3121(v)(2)(C) of the Internal Revenue Code.
On October 7, 2005, Representative Cannon (R-UT) introduced
H.R. 4019 to clarify that this exemption applies to both
retired employees and retired partners by specifically
including written plans or arrangements for retired partners. A
retired partner is defined as a person who is described as a
partner in Internal Revenue Code Section 7701(a)(2) and who is
retired under the person's partnership agreement. The bill
makes clear that any written plan, program, or arrangement in
effect at the time of retirement that provides for payments to
a retired partner in recognition of prior service may qualify
as exempt from nonresident State income taxation as long as
such payments are made over 10 years or more and are made in
substantially equal periodic payments.
H.R. 4019 also clarifies the definition of substantially
equal periodic payments to permit plan caps on retiree payments
and cost of living adjustments (COLAs), and clarifies that the
substantially equal periodic payments test is satisfied when
payments include components from both qualified and
nonqualified plans. These modifications are intended to clarify
existing law rather than substantively amend it.
H.R. 4019 is intended to make clear Congress's original
intent when it passed section 114, i.e. to limit the taxation
of retirement income to the State in which the retiree resides,
whether the retirement payments are made to a retired employee
or a retired partner. H.R. 4019 merely confirms and continues
this Congressional intent.
Hearings
The House Committee on the Judiciary's Subcommittee on
Commercial and Administrative Law held a hearing on H.R. 4019
on December 13, 2005. Testimony was received from the following
witnesses: the Honorable George W. Gekas, former United States
Representative and former Chairman of the Subcommittee on
Commercial and Administrative Law; Lawrence F. Portnoy, retired
partner, PricewaterhouseCoopers LLP; Harley T. Duncan,
Executive Director, Federation of Tax Administrators; and
Stanley R. Arnold, CPA, former Commissioner of New Hampshire's
Department of Revenue Administration and former President of
the Federation of Tax Administrators.
Committee Consideration
On December 13, 2005, the Subcommittee on Commercial and
Administrative law met in open session and ordered favorably
reported the bill, H.R. 4019, by voice vote, a quorum being
present. On June 7, 2006, the full Committee met in open
session and ordered favorably reported the bill, H.R. 4019, as
amended, by voice vote, a quorum being present.
Vote of the Committee
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the Committee notes that there
were no recorded votes during the Committee consideration of
H.R. 4019.
Committee Oversight Findings
In compliance with clause 3(c)(1) of rule XIII of the Rules
of the House of Representatives, the Committee reports that the
findings and recommendations of the Committee, based on
oversight activities under clause 2(b)(1) of rule X of the
Rules of the House of Representatives, are incorporated in the
descriptive portions of this report.
New Budget Authority and Tax Expenditures
Clause 3(c)(2) of rule XIII of the Rules of the House of
Representatives is inapplicable because this legislation does
not provide new budgetary authority or increased tax
expenditures.
Congressional Budget Office Cost Estimate
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, the Committee sets forth, with
respect to the bill, H.R. 4019, the following estimate and
comparison prepared by the Director of the Congressional Budget
office under section 402 of the Congressional Budget Act of
1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, June 22, 2006.
Hon. F. James Sensenbrenner, Jr.,
Chairman, Committee on the Judiciary,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 4019, a bill 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.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Sarah Puro.
Sincerely,
Donald B. Marron,
Acting Director.
Enclosure.
H.R. 4019--A bill 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
H.R. 4019 would amend current law (Public Law 104-95) to
prohibit State taxation of certain retirement income of former
residents. The legislation would specifically limit the ability
of States to tax the retirement income of nonresidents who were
partners in firms domiciled within a State. These provisions
could result in some individuals having lower itemized
deductions of State income taxes on their federal income tax
returns and, therefore, higher federal income taxes. Under the
assumption that, in the absence of this legislation, States
would continue to tax certain retirement income of former
residents, CBO estimates that enacting this bill would result
in an increase in federal income taxes of less than $500,000
per year, totaling about $1 million over the 2007-2016 period.
CBO estimates that H.R. 4019 would have no significant impact
on federal spending.
The prohibition on taxing the income of certain retirees
would constitute an intergovernmental mandate as defined in the
Unfunded Mandates Reform Act (UMRA) because it would preempt
the authority of States to tax. Since UMRA includes in its
definition of the direct costs of a mandate amounts that State
and local governments would be prohibited from raising in
revenues, the cost of this mandate would include the amounts
that States are currently collecting but would be precluded
from collecting under H.R. 4019. Based on information from the
States and some of the affected partnerships, CBO estimates
that the net costs to State governments would likely total less
than $5 million annually and thus would not exceed the
threshold established in UMRA ($64 million in 2006, adjusted
annually for inflation) in any of the first five years after
enactment.
Under current law, there is some uncertainty as to the
taxability of the income of retired partners who do not
currently live in the State where they initially earned that
income. Only one State, New York, has issued rules that require
retired partners to pay such taxes, and those rules are
currently being challenged in court. At least 15 other States
report that they currently collect tax on such revenues
although they are not actively auditing or pursuing partners or
companies who are not remitting these taxes. It is unclear if
other States currently collect such tax or would do so in the
next five years in the absence of legislation.
In total, CBO estimates that actual State tax collections
that would be affected by this legislation total less than $10
million annually. Many retired partners who pay taxes to States
where they do not currently live receive credit for those taxes
in the State where they do live. Such credits would partially
offset these losses, resulting in a net impact across all
States totaling less than $5 million annually.
The bill contains no private-sector mandates as defined in
UMRA.
The CBO staff contacts for this estimate are Barbara
Edwards (for federal revenues) and Sarah Puro (for the State
and local impact). This estimate was approved by Peter H.
Fontaine, Deputy Assistant Director for Budget Analysis, and G.
Thomas Woodward, Assistant Director for Tax Analysis.
Performance Goals and Objectives
The Committee states, pursuant to clause 3(c)(4) of rule
XIII of the Rules of the House of Representatives, that H.R.
4019 will clarify treatment of self-employment for purposes of
the limitation on State taxation of retirement income.
Constitutional Authority Statement
Pursuant to clause 3(d)(1) of rule XIII of the Rules of the
House of Representatives, the Committee finds the authority for
this legislation in art. I, Sec. 8, cl. 8 of the Constitution.
Section-by-Section Analysis and Discussion
The following discussion describes the bill as reported by
the Committee.
Sec. 1. Clarification of treatment of self-employment for purposes of
the limitation on State taxation of retirement income
Subsection 1(a) of H.R. 4019 amends section 114 of title 4
of the United States Code to clarify that States may not impose
an income tax on non-resident retirement income received under
certain nonqualified deferred compensation plans, including
written plans, in effect at the time of retirement, providing
for payments to a retired partner (as defined in subsection
1(a)) in recognition of prior service, as long as such payments
are made over 10 years or more, and are made in substantially
equal periodic payments.
Subsection 1(a) of H.R. 4019 also amends section 114 to
permit benefit reductions pursuant to a predetermined formula
capping total disbursements, or benefit adjustments pursuant to
plan provisions providing COLA adjustments, without causing the
periodic benefits provided under the plan to fail the
``substantially equal periodic payments'' test. For example, in
order to manage retirement costs, a company might limit
aggregate payments to retirees to a certain percentage of its
annual income such that benefit reductions would be required if
this cap is reached. Subsection 1(a) of H.R. 4019 amends
section 114 to clarify that the substantially equal periodic
payments test is satisfied when payments include components
from both qualified and nonqualified plans. For example, under
a pre-determined plan formula, the total annual payments to a
retiree may remain the same from year to year, but the payments
may be required to come first from a Keogh plan (i.e.,
qualified plan) until depleted and then from the general assets
of the business (i.e., nonqualified plan).
Subsection (1)(b) specifies that the amendment applies to
amounts received after December 31, 1995. For open years,
refunds or credits would be available to the extent allowed
under applicable state law.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (new matter is
printed in italic and existing law in which no change is
proposed is shown in roman):
SECTION 114 OF TITLE 4, UNITED STATES CODE
Sec. 114. Limitation on State income taxation of certain pension income
(a) * * *
(b) For purposes of this section--
(1) The term ``retirement income'' means any income
from--
(A) * * *
* * * * * * *
(I) any plan, program, or
arrangement described in
section 3121(v)(2)(C) of such
Code (or any plan, program, or
arrangement that is in writing,
that provides for retirement
payments in recognition of
prior service to be made to a
retired partner, and that is in
effect immediately before
retirement begins), if such
income--
(i) is part of a series of
substantially equal periodic payments
(not less frequently than annually
which may include income described in
subparagraphs (A) through (H)) made
for--
(I) * * *
* * * * * * *
Such term includes any retired or retainer pay of a
member or former member of a uniform service computed
under chapter 71 of title 10, United States Code. The
fact that payments may be adjusted from time to time
pursuant to such plan, program, or arrangement to limit
total disbursements under a predetermined formula, or
to provide cost of living or similar adjustments, will
not cause the periodic payments provided under such
plan, program, or arrangement to fail the
``substantially equal periodic payments'' test.
* * * * * * *
(4) For purposes of this section, the term ``retired
partner'' is an individual who is described as a
partner in section 7701(a)(2) of the Internal Revenue
Code of 1986 and who is retired under such individual's
partnership agreement.
* * * * * * *
Markup Transcript
BUSINESS MEETING
WEDNESDAY, JUNE 7, 2006
House of Representatives,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 1:10 p.m., in
Room 2141, Rayburn House Office Building, the Honorable F.
James Sensenbrenner, Jr. (Chairman of the Committee) presiding.
[Intervening business.]
Chairman Sensenbrenner. The next item on the agenda is the
adoption of H.R. 4019 to amend title 4 of the United States
Code to clarify the treatment of self-employment for purposes
of the limitation of State taxation on retirement income.
The Chair recognizes the gentleman from Utah, Mr. Cannon,
the Chairman of the Subcommittee on Commercial and
Administrative Law for a motion.
Mr. Cannon. Thank you, Mr. Chairman. The Subcommittee on
Commercial and Administrative Law reports favorably the bill
H.R. 4019 and moves its favorable recommendation to the full
House.
[The bill, H.R. 4019, follows:]
Chairman Sensenbrenner. Without objection, H.R. 4019 will
be considered as read and open for amendment at any point. The
Chair recognizes Mr. Cannon to strike the last word, and
recognizes him for 5 minutes.
Mr. Cannon. I thank the Chairman.
H.R. 4019 is a technical amendment to Public Law 104-95.
This legislation clarifies that all retirees should be treated
the same with regard to how States may tax retirement payments.
In 1996, Congress passed Public Law 104-95 to prohibit
States from taxing the retirement income of nonresident
retirees. Essentially, when retirees, most of whom are on fixed
incomes, are not living in the State, then no State except the
State where the individual resides should tax the retiree's
income.
After passage of the 1996 law, most States interpreted the
law as it was intended to apply to all retirees, including
employees and partners. One State, however, has recently taken
the position that it can treat retired employees of a company
and retired partners from partnerships differently.
The State's interpretation is contrary to the original
intent of the law and would allow for a State to tax retirement
payments of a person who retires from a partnership no matter
where the retiree is living. This was not the intent of
Congress when the bill was passed, as was emphasized at our
hearing by our former colleague, who was chair of the
Subcommittee when Public Law 104-95 was enacted. Congress
intended for all retirees to be treated the same under the law,
and H.R. 4019 simply clarifies that intent. States must treat
all retirees similarly.
I worked with the State tax administrators to craft a
manager's amendment to alleviate some of their initial
concerns, and I appreciate their efforts in coming to the table
to reach an agreement.
I urge all of my colleagues to support H.R. 4019 and I
yield back.
Chairman Sensenbrenner. In the absence of the gentleman
from North Carolina, the gentleman from Michigan is recognized
for 5 minutes for an opening statement.
Mr. Conyers. Thank you, Mr. Chairman. I appreciate the work
of the Subcommittee Chairman, and I speak on behalf of the
gentleman from North Carolina, Mr. Watt.
We do not oppose H.R. 4019, which is intended to clarify
Public Law 104-95 by prohibiting States from taxing the
retirement income of any nonresident whether the individual is
a retired employee, partner or principal, and that benefit
reduction calculations under the bill include components from
both qualified and nonqualified plans.
One thing that I had originally opposed has been corrected.
Since 1996, States have adjusted their tax system to reflect
the policy, and to allow several different interpretations of
the policy would upset expectations and reliance on the law and
would further confuse the tax system and certainly lead to
litigation.
This clarification is a needed measure to protect the
current State taxation policies, and I urge my colleagues not
to oppose it and to support the measure and I ask unanimous
consent to include my further statement in the record.
Chairman Sensenbrenner. Without objection, so ordered.
Without objection, all Members may introduce opening
statements into the record at this point.
The Chair recognizes the gentleman from Utah, Mr. Cannon,
to offer an amendment in the nature of a substitute.
Mr. Cannon. Thank you, Mr. Chairman. I have an amendment in
the nature of a substitute at the desk.
[The amendment follows:]
Chairman Sensenbrenner. The Clerk will report the
amendment.
The Clerk. Amendment in the nature of a substitute to H.R.
4019, offered by Mr. Cannon. Strike all after the enacting
clause and insert the following----
Chairman Sensenbrenner. Without objection, the amendment in
the nature of a substitute is considered as read and open for
amendment at any point, and the Chair recognizes the gentleman
from Utah, Mr. Cannon, for 5 brief minutes.
Mr. Cannon. Thank you, Mr. Chairman. If you can speed up
your clock, I think I can still beat it.
This amendment perfects the underlying legislation during
the hearing on H.R. 4019 held by the Subcommittee on Commercial
and Administrative Law. Mr. Harley Duncan from the Federation
of Tax Administrators had a few reservations and some
suggestions which we have incorporated so that the bill would
clarify the language of Public Law 104-95 and not extend the
1996 law into new areas.
This amendment refines the language of the bill to
correspond to the current statute in a manner acceptable to all
interested parties. I urge my colleagues to support this
amendment and I yield back the many minutes that remain of my
time.
Chairman Sensenbrenner. Are there any second degree
amendments to the amendment in the nature of a substitute?
For what purpose does the gentleman from Michigan seek
recognition?
Mr. Conyers. To strike the requisite number of words.
Chairman Sensenbrenner. The gentleman is recognized for 5
minutes.
Mr. Conyers. I am pleased to rise in support of the
amendment in the nature of a substitute offered by our
colleague, Mr. Cannon, and comment favorably as well on the
remarks of Mr. Harley Duncan.
This amendment in the nature of a substitute reflects those
definitions that have been referred to and fully complies with
the intent of the Federation of Tax Administrators' suggestion.
And so I think we on this side have no objection to this
substitute and urge its passage.
And I return the time.
Chairman Sensenbrenner. Are there any second degree
amendments to the amendment in the nature of a substitute
offered by the gentleman from Utah?
If there are none, the question occurs on the amendment in
the nature of a substitute offered by the gentleman from Utah,
Mr. Cannon. Those in favor will say aye.
Opposed, no.
The ayes appear to have it. The ayes have it. The amendment
in the nature of a substitute is agreed to.
A reporting quorum is not present. Without objection, the
previous question is ordered on the motion to report H.R. 4019
favorably as amended.
[Intervening business.]
Chairman Sensenbrenner.The unfinished business is the
motion to report the bill H.R. 4019 favorably, as amended, on
which the previous question has been ordered. A reporting
quorum is present.
All those in favor, signify by saying aye.
Opposed, no.
The ayes appear to have it. The ayes have it. The motion to
report the bill favorably, as amended, is agreed to.
Without objection, the bill will be reported favorably to
the House in the form of a single amendment in the nature of a
substitute incorporating the amendments adopted here today.
Without objection, the staff is directed to make any
technical and conforming changes and all Members will be given
2 days, as provided by the House rules, in which to submit
additional dissenting supplemental or minority views.