Molter v. Department of Treasury

• Decision Date: 02 September 1993
• Docket Number: No. 6,Docket No. 93747,6
• Citation: 505 N.W.2d 244,443 Mich. 537
• Parties: , 17 Employee Benefits Cas. 1585 Albert J. MOLTER, Plaintiff, v. DEPARTMENT OF TREASURY, Defendant. Calendar
• Court: Michigan Supreme Court

Page 244

505 N.W.2d 244

443 Mich. 537, 17 Employee Benefits Cas. 1585

Albert J. MOLTER, Plaintiff, v. DEPARTMENT OF TREASURY, Defendant.

Docket No. 93747.

Calendar No. 6.

Supreme Court of Michigan.

Argued March 2, 1993.

Decided Sept. 2, 1993.

[443 Mich. 539] Ronald A. Molter, plaintiff/appellant pro se.

Ross Bishop, Asst. Atty. Gen., Lansing (Frank J. Kelley, Atty. Gen., Thomas L. Casey, Sol. Gen., Russell E. Prins and Ross H. Bishop, Asst. Attys. Gen., on brief on appeal), for defendants-appellees.

OPINION

ROBERT P. GRIFFIN, Justice.

We must decide whether distributions from a deferred compensation plan, paid to a nonresident, are subject to the state's income tax if the original contributions to the plan represented earnings from employment in Michigan. Affirming a decision of the Court of Claims, the Court of Appeals ruled that distributions from such a plan are taxable. We affirm in part and reverse in part.

I

Plaintiff Molter, while a State of Michigan employee, participated in a deferred compensation plan qualified under § 457 of the Internal Revenue Code (IRC). ¹ He began receiving distributions from his plan account in 1982, two years after his retirement. Pursuant to § 351 of the Michigan Income Tax Act, as amended (MITA), ² M.C.L. § 206.1 et seq.; M.S.A. § 7.557(101) et seq., the State of Michigan withheld state income taxes from those distributions. ³

On January 1, 1983, plaintiff moved to Florida, and he has maintained his residency there since that date. Even though plaintiff moved, the state continued to withhold state income taxes from plaintiff's distributions. Plaintiff protested the withholdings and requested an informal hearing. At that hearing, the referee denied plaintiff's claim for a refund of the taxes.

Shortly thereafter, plaintiff initiated this action in the Court of Claims, contending that distributions made in accordance with the plan to nonresidents of deferred compensation and interest earned on deferred compensation are not taxable under the MITA. In addition, plaintiff raised an equal protection claim, arguing that the Michigan Department of Treasury had made no effort to collect state income taxes on the deferred compensation of former residents who worked for private employers, but "has adopted the policy and practice of taxing the Deferred Income of only those nonresidents who were formerly State Employees...."

Upon cross motions for summary disposition, ⁴ the Court of Claims determined that deferred compensation and the interest earned on that compensation, paid to a retiree while a nonresident, are subject to the Michigan income tax. The court further determined that the Department of Treasury's practice of withholding state income taxes only from former state employees violated the Equal Protection and Uniformity of Taxation Clauses of the Michigan Constitution. ⁵ However, finding the department's practice to be unintentional, the court awarded plaintiff no refund of past amounts withheld; instead, the department was enjoined from withholding state income taxes with respect to future distributions to plaintiff.

Both parties appealed, and the Court of Appeals agreed with the Court of Claims that both the deferred compensation and the interest earned on that compensation are taxable under Michigan law. However, the panel disagreed that plaintiff's equal protection rights had been violated, concluding that "there is no failure to equally tax similarly situated entities. The only difference occurs in the time or method of collection." 193 Mich.App. 421, 429-430, 484 N.W.2d 702 (1992).

We granted plaintiff's application for leave to appeal. 441 Mich. 878, 491 N.W.2d 571 (1992).

II

A deferred compensation plan implemented under § 457 of the IRC permits an employee to set aside a portion of earnings in a savings program before those earnings are taxed. Section 457(a) provides that, for purposes of the federal income tax, compensation deferred under such a plan is not taxed in the year it is earned, but "shall be includible in gross income only for the taxable year in which such compensation or other income is paid or otherwise made available to the participant or other beneficiary."

The MITA adopts the federal definition of gross income and likewise imposes a tax on deferred compensation when it is disbursed to an employee. Section 28 of the MITA provides: " 'Taxable income' or 'net income' means, unless specifically defined otherwise in this act, taxable income as defined in the internal revenue code for the subject taxpayer for federal income tax purposes...."

Even though the MITA adopts the federal definition of taxable income, the state and federal income tax schemes are not identical as applied to nonresidents of the State of Michigan. Under § 30(1)(i) of the MITA, a taxpayer's income is subject to "[a]djustments resulting from the allocation and apportionment provisions of chapter 3." Pursuant to chapter 3, the income of a nonresident is allocated to this state if it is "earned, received, or acquired ... [f]or the rendition of personal services performed in this state." M.C.L. § 206.110(2)(a); M.S.A. § 7.557(1110)(2)(a). ⁶

Plaintiff contends that the distributions he has received since becoming a resident of Florida are not taxable under the MITA because those payments have not been earned for the rendition of personal services performed in this state. Plaintiff presents two arguments in support of this proposition. First, he maintains that the distributions he has received from the plan represent investment income, not compensation for personal services rendered in the state. Second, plaintiff argues that even if the distributions represent compensation for services rendered, they do not represent compensation for any services rendered in the taxable year in which they were received. We shall consider each of these arguments in turn.

A

The state may impose a tax only if the tax is expressly authorized by law. The authority to tax will not be inferred. In re Dodge Bros., 241 Mich. 665, 669, 217 N.W. 777 (1928); Detroit Hilton v. Dep't of Treasury, 422 Mich. 422, 428, 373 N.W.2d 586 (1985); 3A Singer, Sutherland Statutory Construction (5th ed), § 66.01, p 1. Here defendant finds authority to tax plaintiff's deferred compensation in § 110(2) of the MITA. As already noted, that section provides:

"For a nonresident individual ... all taxable income is allocated to this state to the extent it is earned, received, or acquired, in 1 or more of the following ways:

"(a) For the rendition of personal services performed in this state."

This section is unambiguous. It allocates to this state all of the taxable income of a nonresident that has been earned for work performed in Michigan. Even so, plaintiff argues that § 110(2) does not apply to distributions from a 457 plan. He maintains that the distributions he receives from the plan represent income earned on investments rather than income for the rendition of personal services. Because contributions were made to the plan under § 457, they became the property of the state; the state then invested the funds, and they are, and have been, subject to loss. Thus, plaintiff argues, funds in the plan are an investment, and the distributions he receives are simply returns on that investment. We disagree.

The money that plaintiff contributed to his 457 plan was a portion of the wages he received as an employee of the State of Michigan. It is undisputed that as a state employee he performed personal services in Michigan. Thus, his contributions clearly were earnings for "personal services performed in this state." They did not cease to be compensation for personal services simply because disbursement was deferred or because they were invested before disbursement.

Closely analogous is the situation presented in Michaelsen v. New York State Tax Comm., 67 N.Y.2d 579, 505 N.Y.S.2d 585, 496 N.E.2d 674 (1986). In Michaelsen, the taxpayer, a resident of Connecticut, was granted options to buy stock at a certain price in connection with his employment in New York. He did not exercise those options when they were granted; rather, he exercised them several years later, presumably after the fair market value of the stock was greater than the option price.

In assessing the taxpayer's New York income tax liability, the Michaelsen court followed the federal approach, ⁷ and held that the income earned from the stock options was not recognized for tax purposes until the stock was sold. Moreover, the court determined that the delay between the realization of income from the stock option (the purchase of the stock) and the recognition of that income for tax purposes (the sale of the stock) had no effect on the authority of New York to tax the income, even though the compensation was invested during the delay. Instead, the court held that the income the nonresident taxpayer received when he sold the stock remained compensation "attributable to [the taxpayer's] 'business, trade, profession or occupation carried on in [New York]' and therefore taxable in New York...." Id. at 584, 505 N.Y.S.2d 585, 496 N.E.2d 674. See also Pardee v. New York State Tax Comm., 89 A.D.2d 294, 456 N.Y.S.2d 459 (1982) (the portion of a lump sum distribution from a nonresident employee's profit-sharing plan that represented contributions made by the taxpayer's employer was taxable as income by New York); Gosewisch v. Dep't of Revenue, 40 Pa.Commw. 565, 397 A.2d 1288 (1979) (distributions from an employee profit-sharing plan were treated as compensation for services rendered in the year received, not as income from the disposition of personal property).

Likewise, the deferred compensation set aside by plaintiff in this case remains income for the rendition of personal services performed in Michigan, even though it was contributed to a 457 plan.

B

Plaintiff alternatively argues that, even if the distributions represent compensation for services...