13 Or. Tax 143 | Or. T.C. | 1994
In this appeal a recipient of federal pensions seeks refunds of state income taxes. The plaintiff claims that Oregon discriminates against federal pensioners and taxes *144 exempt income. Having stipulated the facts, the parties submitted briefs and presented oral arguments.
Plaintiff is a resident of Oregon and filed state personal income tax returns for 1991. She receives two federal pensions as "pay or compensation for personal service as an officer or employee of the United States." Her federal pension income totaled $31,834 in 1991. Plaintiff initially included this income as taxable, but later filed amended returns claiming refunds.
Plaintiff claims that Oregon impermissibly discriminates between state and federal retirees and, therefore, all of her federal pension income should be exempt. In the alternative, plaintiff asserts that if her federal pension income is subject to state income tax, 68.77 percent of the income is exempt. That is the portion attributable to interest earned by the Civil Service Retirement and Disability Fund (CSRDF), the payor of plaintiff's pensions, from investments or obligations of the United States.
As partial compensation to its state retirees for the personal income taxes they would incur, the legislature increased the PERS benefits slightly. Or Laws 1991, ch 796. Later, state employees, both current and retired, sued the *145
state for breach of their employment contract. In Hughes v.State of Oregon,
Plaintiff does not claim any discrimination exists in the tax statutes. Both federal pensions and state pensions are now taxed in like manner under the state income tax statutes. Rather, plaintiff's argument is based on an economic analysis which assumes the state may not do with the left hand what it cannot do with the right. An appropriate response to plaintiff's argument echoes the language of Davis: What the state does with regard to compensation of its employees, current or retired, is simply irrelevant to an inquiry as to the tax treatment of state and federal pensions.
1. In essence, plaintiff argues that the state cannot change the compensation of its employees without forfeiting the right to tax federal pension income. This is the very type of interference that the doctrine of intergovernmental tax immunity was intended to prevent. Davis did not mandate that state and federal retirees must receive equal pension benefits. Rather, Davis requires that both classes must be treated equally by the state's income tax laws. That the state may relieve its employees of the economic consequences of Davis merely demonstrates that the Supreme Court threw its net into a shallow pond. The only economic effect noted by the court inDavis was an increase in federal income taxes "in some circumstances." Davis at 816, n 4. Aside from administrative confusion and the initial costs of refunds and adjusting systems, Davis need have little economic consequence in Oregon. *146
2. In summary, plaintiff has not shown or asserted any discrimination in the tax treatment of state and federal retirees. Davis does not hold or even intimate that a state is prohibited from adjusting the compensation of its employees, either currently or retired, to make up for the loss of the exemption.
The clear and simple answer is no. Any investment income from federal obligations is paid to CSRDF which owns the obligations. Plaintiff's interest in the trust is as an employee-beneficiary. Plaintiff's own complaint asserts that the pensions are paid as compensation for personal services. Under IRC § 61(a) compensation for personal services is gross income subject to taxation. Plaintiff's pension income is taxable as a distribution from a § 401(a) trust under IRC § 72(e). Guilzon v. Commissioner,
Based on the above, the court finds that department's Opinion and Order No. 93-3829 must be sustained. Defendant to recover costs.