September 26, 1994
TO: OPERATIONS MEMBERS NO. 34-94
PENSION MEMBERS NO. 30-94
TRANSFER AGENT ADVISORY COMMITTEE NO. 38-94
RE: INSTITUTE COMMENT LETTER ON "SOURCE STATE TAXATION"
LEGISLATION
__________________________________________________________
The Institute has submitted the attached letter to the House
Judiciary Committee to convey its concerns about the "source-
state taxation" provisions in Section 801 of the Bankruptcy
Amendments Act of 1994 (S. 540). S. 540 has been passed by the
Senate and is pending in the House Judiciary Committee.
"Source-state taxation" is the assessment of state income
tax on pension distributions to a nonresident on the basis of the
portion of the total pension that was "earned" while the retiree
worked in the "source" state. Section 801 would exempt from
"source" state taxation only (1) $25,000 per year in annuity-type
pension distributions meeting certain requirements, and (2) an
additional $25,000 (indexed for the cost-of-living) pursuant to a
one time election and which is received after the age of 59-1/2.
As currently drafted, Section 801 could lead to state taxing
authorities requiring that mutual funds and similar financial
institutions report or withhold "source" state income taxes on
pension income. A mutual fund, however, typically will not know
the total accruals or account balance in a plan for any
participant, and a distribution from a mutual fund may represent
only a portion of the total annual or lump sum retirement
distributions for that participant. Furthermore, mutual funds
typically do not have the information needed to allocate pension
distributions by "source" state, because they have no means of
tracking the states in which participants "earn" their pension
and the amount "earned" in each state.
For these reasons, the Institute urged that Section 801 be
amended to protect mutual funds and similar financial
institutions that make retirement benefit distributions from
being required by any state to deduct and withhold income taxes
or to issue any reports with respect to any such tax.
We will keep you informed of developments.
John J. Canary, Jr.
Assistant Counsel -
Pension
Attachment