DocketNumber: Docket No. 302771
Citation Numbers: 299 Mich. App. 566
Judges: Kelly, Shapiro, Wilder
Filed Date: 2/21/2013
Status: Precedential
Modified Date: 9/9/2022
Defendant, the Department of Treasury, appeals as of right an order granting summary disposition in favor of plaintiff, Ruth Magen, regarding the taxability of distributions from a private individual retirement account (IRA) whose principal wholly originated in a nontaxable 403(b) retirement account. We affirm because placing otherwise tax-free money into an IRA does not create an obligation to pay taxes on that money.
Flaintiffs now-deceased husband, Myron Magen,
Defendant disagreed with the Magens’ deductions, asserting that the sums were not deductible, and assessed the Magens for the income tax deficiency. Plaintiff appealed in the Court of Claims, which granted summary disposition to plaintiff and vacated the assessments. Defendant appealed in this Court.
Resolution of this case requires that we interpret two provisions of the Income Tax Act, MCL 206.1 et seq. One defines certain retirement accounts as not subject to state income tax. A second defines certain retirement accounts that are subject to state income tax. In reaching a conclusion, our primary goal must be to give effect to the intent of the Legislature. Kessler v Kessler, 295 Mich App 54, 60; 811 NW2d 39 (2011). The intent of the statutes must be determined from an examination of their language and from an examination of the statute within the structure of the act as a whole. See Henry v Dow Chem Co, 484 Mich 483, 495; 772 NW2d 301 (2009).
In 1967, the Legislature passed the Income Tax Act, under which an individual’s taxable income is equal to that person’s adjusted gross income as defined by federal tax law, subject to certain additions and deduc
As used in [MCL 206.30(l)(f)], “retirement or pension benefits” means distributions from all of the following:
(a) Except as provided in subdivision (d), qualified pension trusts and annuity plans that qualify under section 401(a) of the internal revenue code, including all of the following:
{Hi) Employee annuities or tax-sheltered annuities purchased under section 403(b) of the internal revenue code by organizations exempt under section 501(c)(3) of the internal revenue code, or by public school systems.
(d) Retirement and pension benefits do not include:
(i) Amounts received from a plan that allows the employee to set the amount of compensation to be deferred and does not prescribe retirement age or years of service. [MCL 206.30(8)].
The parties agree that the 403(b) account in which plaintiffs money originated constituted the type of plan protected by MCL 206.30(8)(a)(iii). It is also undisputed that a private IRA would normally fall under MCL 206.30(8)(d), and would not be tax-free. Defendant argues that because the distributions came directly from the private IRA, they must be taxed regardless of the fact that the principal in the IRA originally came from a tax-free retirement plan.
It is not disputed that a state retiree may receive those tax-free benefits in the form of periodic annuity payments
The state, however, now asserts that if the lump-sum payment is placed into an IRA, the entire principal, i.e. all the pension income, is subject to Michigan income tax, not merely the interest or other gains based on that principal. The state bases this argument on the fact that MCL 206.30(8)(d) provides for taxation of withdrawals from IRAs. However, we cannot simply select one statute to follow and ignore the other. It is instead our responsibility to harmonize them. And in this case, harmonizing the statutes is fully consistent with the Legislature’s intent to excuse from state income tax those sums earned by state employees and placed, until their retirement, in a 403(b) account.
IRA withdrawals are fully taxable because the monies normally deposited in such accounts are “tax deferred.” Indeed, providing a mechanism for tax deferral of otherwise taxable income is the very reason for the creation of IRAs. Placement of the pension payment in an IRA provides tax deferral of federal income tax otherwise due upon receipt.
An IRA is a vehicle to defer taxes due, not to create taxes where none exist. The trial court thus properly concluded that plaintiffs IRA distributions were not subject to Michigan income tax.
Affirmed.
All references to “Magen” are to the decedent.
“When interpreting a court rule or statute, we must be mindful of ‘the surrounding body of law into which the provision must be integrated ----Haliw v Sterling Hts, 471 Mich 700, 706; 691 NW2d 753 (2005), quoting Green v Bock Laundry Machine Co, 490 US 504, 528; 109 S Ct 1981; 104 L Ed 2d 557 (1989) (Scalia, J., concurring).
Michigan has no authority to declare its pension benefits not subject to federal taxes.
Our dissenting colleague fairly observes that if one looks solely at the language of MCL 206.30(8)(d), the Department of Treasury should prevail. What the dissent fails to take into account, however, is that there are two statutes at issue here; the Legislature passed them both and it is not for us as judges to simply select one to apply and one to ignore. Rather, it is our role to give effect to each of them and to harmonize them consistently with their language and purpose. Moreover, we cannot, as the dissent wishes to do, resolve this case on the basis of federal income tax law since the whole point of this case is that the applicable Michigan tax law, quite unlike the federal law, does not defer state income tax on state pensions, hut rather eliminates it. Lastly, we reject the dissent’s suggestion that we have reached our conclusion because we “perceive a contrary result to be absurd.” Our opinion makes no such statement and