Opinion No. (1988) ( 1988 )

RE: TAXATION STATUS OF TEACHERS' RETIREMENT SYSTEM BENEFITS AS TREATED ON OKLAHOMA STATE INCOME TAX FORM 511

ATTORNEY GENERAL HENRY HAS RECEIVED YOUR RECENT LETTER ASKING ABOUT THE TREATMENT OF RETIREMENT BENEFITS RECEIVED BY CITIZENS OF THE STATE FROM THE OKLAHOMA TEACHERS' RETIREMENT SYSTEM ON THE 1987 STATE INCOME TAX FORM 511. IN CONFIRMATION OF MY PRIOR CONVERSATIONS WITH YOU, I HAVE REVIEWED THIS FORM AND HAVE DISCUSSED THE MATTER AT LENGTH WITH BOTH YOUR CONSTITUENT, MR. GRIFFIN, AND ALSO WITH MR. CRUM OF THE TAX COMMISSION. IT IS MY LEGAL OPINION THAT THIS FORM DOES, IN FACT, AND AT LAW, COMPLY WITH THE REQUIREMENTS OF OKLAHOMA LAW REGARDING THE EXEMPTION FROM TAXATION ACCORDED TO RETIREMENT BENEFITS FROM THE SYSTEM.

AS YOU ARE ALREADY AWARE, THE TERMS OF 70 O.S. 17-109(1981) PROVIDE THAT THE RIGHT OF A PERSON TO AN ANNUITY OR RETIREMENT ALLOWANCE, OR BASICALLY ANY OTHER KIND OF RETIREMENT BENEFIT FROM THE SYSTEM IS EXEMPT FROM STATE TAXATION. MR. GRIFFIN'S CONFUSION STEMS FROM A MISUNDERSTANDING ON HIS PART AS TO WHAT THE TERMS OF PART THREE OF FORM 511 REQUIRE OF HIM..

LINE ONE OF PART ONE OF THE FORM REQUIRES THAT THE TAXPAYER REPORT HIS FEDERAL ADJUSTED GROSS INCOME, AS ALSO REPORTED BY THE TAXPAYER ON HIS FEDERAL INCOME TAX FORM. PAYMENTS RECEIVED BY THE TAXPAYER FROM THE SYSTEM WOULD BE INCLUDED IN THIS BEGINNING POINT BECAUSE THE FEDERAL INCOME TAX CODE IS NOT BOUND BY THE CONSTRAIN S OF OKLAHOMA LAW, AND MONIES RECEIVED FROM OKLAHOMA RETIREMENT SYSTEMS ARE FULLY TAXABLE UNDER FEDERAL INCOME TAX REQUIREMENTS, EXCEPT AS MIGHT BE PROVIDED FOR BY FEDERAL LAW.

HOWEVER, THAT REQUIREMENT ON LINE ONE IS JUST A BEGINNING POINT IN THE CALCULATION PROCESS. THE REQUIREMENT THAT RETIREMENT BENEFITS FROM THE SYSTEM BE EXEMPT FROM TAXATION UNDER STATE LAW IS CARRIED OUT IN LINE THREE OF PART ONE, WHERE THE FORM INDICATES THAT THE TAXPAYER IS TO SUBTRACT FROM LINE ONE'S FIGURES ALL INCOME EXEMPT FROM TAX BY STATUTE. INDEED, IN THE EXPLANATORY EXAMPLES PROVIDED IN THE INSTRUCTION BOOK INCLUDED FOR THE TAXPAYER WITH THE FORM 511, NOTE THREE THEREOF SPECIFICALLY STATES THAT RETIREMENT BENEFITS RECEIVED FROM THE SYSTEM ARE THE TYPE OF PAYMENTS TO BE INCLUDED IN LINE THREE OF PART ONE OF FORM 511.

AS ONE WORKS THROUGH THE FORM, THE SUBTRACTION FOR EXEMPT INCOME IS ADDED TO OTHER TYPES OF SUBTRACTIONS PROVIDED FOR ON LINES TWO AND FOUR OF PART THREE, AND THEN THE ENTIRE AMOUNT FROM LINES TWO, THREE, AND FOUR ARE SUBTRACTED FROM LINE ONE, SO THAT THE TAXPAYER'S OKLAHOMA ADJUSTED GROSS INCOME (REPORTED ON LINE TWELVE OF PART ONE), THE FIGURE FROM WHICH THE TAXPAYER'S ULTIMATE TAX BILL IS CALCULATED, DOES NOT TAKE INTO ACCOUNT AT ALL ANY MONIES RECEIVED FROM THE TEACHERS' RETIREMENT SYSTEM.

PART THREE IS THE PORTION OF THE FORM WHERE THE TAXPAYER IS PERMITTED TO RECEIVE AN ADDITIONAL DEDUCTION FROM HIS OKLAHOMA ADJUSTED GROSS INCOME OF MONIES HE HAS ACTUALLY PAID TO THE FEDERAL GOVERNMENT IN FEDERAL INCOME TAXES. PART THREE, LINE EIGHTEEN REQUIRES THE TAXPAYER TO REPORT THE AMOUNT OF MONEY THAT HE HAS ACTUALLY PAID TO THE FEDERAL GOVERNMENT IN FEDERAL INCOME TAXES. LINES NINETEEN AND TWENTY THEN PROVIDE FOR A MATHEMATICAL COMPUTATION METHOD WHEREBY THE TAXPAYER IS PERMITTED TO DEDUCT FROM HIS OKLAHOMA ADJUSTED GROSS INCOME ONLY THE AMOUNT OF SUCH FEDERAL TAXES THAT HE ACTUALLY PAID TO THE FEDERAL GOVERNMENT FROM INCOME TAXABLE UNDER OKLAHOMA LAW.

IN ESSENCE, PART THREE, AND THE DEDUCTIONS PROVIDED FOR IN THAT PART, PERMITS THE TAXPAYER TO LOWER HIS ULTIMATE TAX BILL TO THE STATE IN AMOUNTS ABOVE AND BEYOND THE SUBTRACTIONS (EXEMPTIONS) PROVIDED FOR IN PART ONE OF THE FORM. THE REQUIREMENTS OF SECTION 70 O.S. 17-109 OF TITLE 70 DO NOT REQUIRE THE STATE TO EXEMPT FROM STATE INCOME TAX ALL MONIES PAID TO THE FEDERAL GOVERNMENT IN FEDERAL INCOME TAXES. RATHER, SUCH DEDUCTIONS FLOW FROM A DIFFERENT SOURCE OF STATE LAW AND DO NOT PRESENTLY REQUIRE THE STATE TO TOTALLY EXEMPT FROM THE TAXPAYER'S ULTIMATE STATE TAX BILL ALL MONIES PAID IN THE FORM OF FEDERAL INCOME TAXES.

IN THIS REGARD, 68 O.S. 2358(D)(8)(A)/68 O.S. 2358(D)(8)(B)(1987) PROVIDE:

"8. A. AN INDIVIDUAL TAXPAYER, WHETHER RESIDENT OR NONRESIDENT, MAY DEDUCT AN AMOUNT EQUAL TO THE FEDERAL INCOME TAXES PAID BY SAID TAXPAYER DURING THE TAXABLE YEAR.

B. FEDERAL TAXES AS DESCRIBED IN SUBPARAGRAPH A OF THIS PARAGRAPH SHALL BE DEDUCTIBLE BY ANY INDIVIDUAL TAXPAYER WHETHER RESIDENT OR NONRESIDENT. ONLY TO THE EXTENT THEY RELATE TO INCOME SUBJECT TO TAXATION PURSUANT TO THE PROVISIONS OF THE OKLAHOMA INCOME TAX ACT. THE MAXIMUM AMOUNT ALLOWABLE IN THE PRECEDING PARAGRAPH SHALL BE PRORATED ON THE RATIO OF THE OKLAHOMA ADJUSTED GROSS INCOME TO FEDERAL ADJUSTED GROSS INCOME."

FROM OUR PRIOR CONVERSATION IN YOUR OFFICE, IT IS MY UNDERSTANDING THAT YOU ONLY DESIRED A FORMAL RESPONSE TO YOUR QUESTION IN THE EVENT THAT THIS OFFICE FOUND SOME IMPROPRIETY IN THE MANNER THAT THE TAX COMMISSION'S FORMS WERE TREATING RETIREMENT BENEFITS. AS IT IS THE OPINION OF THIS OFFICE THAT SUCH IS NOT THE CASE, AND THAT THE FORM IN QUESTION IS AN ACCURATE REPRESENTATION OF THE REQUIREMENTS OF STATE LAW, I HAVE TRANSMITTED THIS INFORMAL LETTER TO YOU, IN HOPES THAT SAME WILL ADEQUATELY RESOLVE YOUR CONCERNS. I HAVE COMMUNICATED THESE OBSERVATIONS PERSONALLY TO MR. GRIFFIN.

(income TAX) (MICHAEL SCOTT FERN)