President Signs Law Blocking State Taxation of Retirement Payments to Nonresident Partners

Stan Arnold (Senior Tax Policy Advisor for Rath, Young and Pignatelli) Provided Testimony in Support of This Important Federal Legislation
August 4, 2006
Washington, DC

On Aug. 3, President Bush signed into law H.R. 4019, which clarifies that states may not tax nonqualified retirement benefits paid by a partnership to its retired nonresident partners.

Stan Arnold (Senior Tax Policy Advisor for Rath, Young and Pignatelli) provided testimony in favor of the bill before the Subcommittee on Commercial and Administrative Law of the House Judiciary Committee. (See prior news item.) Mr. Arnold is the former Commissioner of the New Hampshire Department of Revenue Administration and the former President of the Federation of Tax Administrators. He testified on behalf of Rath | Young client, PricewaterhouseCoopers.

Public Law 104-95, enacted in 1996, prohibited states from taxing the retirement income of nonresidents. Certain states, including New York, had taken the position that this law did not prevent the state from taxing nonqualified retirement benefits paid by a partnership to its retired nonresident partners because Internal Revenue Code Section 3121(v)(2)(C) applied only to employees, not partners.

As stated in the House Judiciary Committee Report on the bill:

"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 residess, whether the retirement payments are made to a retired employee or a retired partner. H.R. 4019 merely confirms and continues this Congressional intent."

The new law is effective for retirement amounts received after December 31, 1995, so that the original intent of Congress is enforced as of the original enactment date of the 1996 legislation.

Rath | Young is pleased to have assisted its client and others to resolve an adverse state tax determination efficiently and appropriately, by working through the legislative process to make certain that citizens can rely on clear actions Congress when it decides to resolve a state tax question.

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Founded in 1987, Rath, Young and Pignatelli was one of the first law firms in New England to recognize the importance of merging traditional law firm practice areas with legislative and public policy expertise. Through offices in New Hampshire and Boston, Rath, Young and Pignatelli serves domestic and international clients with the firm’s sophisticated legal expertise and commitment to achieving client success.