49–006 

109TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 2d Session 109–542 

STATE TAXATION OF RETIREMENT INCOME 

JUNE 29, 2006.—Committed to the Committee of the Whole House on the State of 

the Union and ordered to be printed 

Mr. SENSENBRENNER, from the Committee on the Judiciary, 

submitted the following 

R E P O R T 

[To accompany H.R. 4019] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on the Judiciary, to whom was referred the bill 

(H.R. 4019) to amend title 4 of the United States Code to clarify 

the treatment of self-employment for purposes of the limitation on 

State taxation of retirement income, having considered the same, 

report favorably thereon with an amendment and recommend that 

the bill as amended do pass. 

CONTENTS 

Page 

The Amendment ...................................................................................................... 1 

Purpose and Summary ............................................................................................ 2 

Background and Need for the Legislation ............................................................. 2 

Hearings ................................................................................................................... 3 

Committee Consideration ........................................................................................ 3 

Vote of the Committee ............................................................................................. 4 

Committee Oversight Findings ............................................................................... 4 

New Budget Authority and Tax Expenditures ...................................................... 4 

Congressional Budget Office Cost Estimate .......................................................... 4 

Performance Goals and Objectives ......................................................................... 5 

Constitutional Authority Statement ...................................................................... 6 

Section-by-Section Analysis and Discussion .......................................................... 6 

Changes in Existing Law Made by the Bill, as Reported ..................................... 6 

Markup Transcript .................................................................................................. 7 

THE AMENDMENT

The amendment is as follows: 

Strike all after the enacting clause and insert the following: 


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1Pub. L. No. 104–95, 109 Stat. 979 (codified at 4 U.S.C. § 114 (2002)). 

2 26 U.S.C. § 3121(v)(2)(C) (2002). 

SECTION 1. CLARIFICATION OF TREATMENT OF SELF-EMPLOYMENT FOR PURPOSES OF THE 

LIMITATION ON STATE TAXATION OF RETIREMENT INCOME. 

(a) IN GENERAL.—Section 114(b)(1)(I) of title 4, United States Code, is amended— 

(1) by inserting ‘‘(or any plan, program, or arrangement that is in writing, 

that provides for retirement payments in recognition of prior service to be made 

to a retired partner, and that is in effect immediately before retirement begins)’’ 

after ‘‘section 3121(v)(2)(C) of such Code’’, 

(2) by inserting ‘‘which may include income described in subparagraphs (A) 

through (H)’’ after ‘‘(not less frequently than annually’’, 

(3) by adding at the end the following: 

‘‘The fact that payments may be adjusted from time to time pursuant to 

such plan, program, or arrangement to limit total disbursements under a 

predetermined formula, or to provide cost of living or similar adjustments, 

will not cause the periodic payments provided under such plan, program, 

or arrangement to fail the ‘substantially equal periodic payments’ test.’’, 

and 

(4) by adding at the end the following: 

‘‘(4) For purposes of this section, the term ‘retired partner’ is an individual 

who is described as a partner in section 7701(a)(2) of the Internal Revenue Code 

of 1986 and who is retired under such individual’s partnership agreement.’’. 

(b) APPLICATION.—The amendments made by this section apply to amounts received after December 31, 1995. 

PURPOSE AND SUMMARY

H.R. 4019 makes technical and clarifying amendments to section 

114 of title 4 of the United States Code. 

BACKGROUND AND NEED FOR THE LEGISLATION

H.R. 4019 makes technical and clarifying amendments to section 

114 of title 4 of the United States Code, which was enacted in 1996 

to restrict the ability of States to tax certain types of pension income received by their former residents and nonresidents who 

earned income in that State.1 Section 114 exempts from non-resident taxation certain income received from ‘‘qualified’’ pension 

plans (as defined in the Internal Revenue Code) as well as income 

received under certain ‘‘non-qualified’’ retirement plans, including 

liquidation payments paid out of current year profits to retiring 

partners in a service partnership. Specifically, section 114(a) prohibits a State from taxing ‘‘retirement income’’ of its former residents or nonresidents who earned income within the State, including income from a nonqualified deferred compensation plan, provided it is part of a series of substantially equal periodic payments 

made (not less frequently than annually) over the life expectancy 

of the recipient, or for a period of not less than 10 years. Section 

114(b)(1)(I) defines nonqualified deferred compensation plans by 

reference to section 3121(v)(2)(C) of the Internal Revenue Code, 

which relates to employment taxes.2

Questions have arisen as to whether section 114 was intended to 

apply to nonqualified retirement income paid by a partnership to 

its retired nonresident partners (including retired partner equivalents, e.g., retired principals). The reference to section 3121(v)(2)(C) 

is definitional with regard to nonqualified deferred compensation 

income, irrespective of whether the recipient was subject to the 

Federal Insurance Contribution Act (‘‘FICA’’) tax. Nevertheless, the 

provision’s incorporation of the Internal Revenue Code’s definition 

of ‘‘nonqualified deferred compensation plans’’ has been construed 


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by at least one State to limit the exemption to payments made only 

to retired employees (i.e., those individuals subjected to FICA tax), 

as section 3121(v)(2)(C) is written in the context of employment 

taxation and there is no specific reference to retired partners in 

section 114 of title 4 of the United States or in section 3121(v)(2)(C) 

of the Internal Revenue Code. 

On October 7, 2005, Representative Cannon (R–UT) introduced 

H.R. 4019 to clarify that this exemption applies to both retired employees and retired partners by specifically including written plans 

or arrangements for retired partners. A retired partner is defined 

as a person who is described as a partner in Internal Revenue Code 

Section 7701(a)(2) and who is retired under the person’s partnership agreement. The bill makes clear that any written plan, program, or arrangement in effect at the time of retirement that provides for payments to a retired partner in recognition of prior service may qualify as exempt from nonresident State income taxation 

as long as such payments are made over 10 years or more and are 

made in substantially equal periodic payments. 

H.R. 4019 also clarifies the definition of substantially equal periodic payments to permit plan caps on retiree payments and cost of 

living adjustments (COLAs), and clarifies that the substantially 

equal periodic payments test is satisfied when payments include 

components from both qualified and nonqualified plans. These 

modifications are intended to clarify existing law rather than substantively amend it. 

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 resides, whether the retirement payments are made to a retired employee or a retired 

partner. H.R. 4019 merely confirms and continues this Congressional intent. 

HEARINGS

The House Committee on the Judiciary’s Subcommittee on Commercial and Administrative Law held a hearing on H.R. 4019 on 

December 13, 2005. Testimony was received from the following witnesses: the Honorable George W. Gekas, former United States Representative and former Chairman of the Subcommittee on Commercial and Administrative Law; Lawrence F. Portnoy, retired partner, 

PricewaterhouseCoopers LLP; Harley T. Duncan, Executive Director, Federation of Tax Administrators; and Stanley R. Arnold, CPA, 

former Commissioner of New Hampshire’s Department of Revenue 

Administration and former President of the Federation of Tax Administrators. 

COMMITTEE CONSIDERATION

On December 13, 2005, the Subcommittee on Commercial and 

Administrative law met in open session and ordered favorably reported the bill, H.R. 4019, by voice vote, a quorum being present. 

On June 7, 2006, the full Committee met in open session and ordered favorably reported the bill, H.R. 4019, as amended, by voice 

vote, a quorum being present. 


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VOTE OF THE COMMITTEE

In compliance with clause 3(b) of rule XIII of the Rules of the 

House of Representatives, the Committee notes that there were no 

recorded votes during the Committee consideration of H.R. 4019. 

COMMITTEE OVERSIGHT FINDINGS

In compliance with clause 3(c)(1) of rule XIII of the Rules of the 

House of Representatives, the Committee reports that the findings 

and recommendations of the Committee, based on oversight activities under clause 2(b)(1) of rule X of the Rules of the House of Representatives, are incorporated in the descriptive portions of this report. 

NEW BUDGET AUTHORITY AND TAX EXPENDITURES

Clause 3(c)(2) of rule XIII of the Rules of the House of Representatives is inapplicable because this legislation does not provide new 

budgetary authority or increased tax expenditures. 

CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

In compliance with clause 3(c)(3) of rule XIII of the Rules of the 

House of Representatives, the Committee sets forth, with respect to 

the bill, H.R. 4019, the following estimate and comparison prepared 

by the Director of the Congressional Budget office under section 

402 of the Congressional Budget Act of 1974: 

U.S. CONGRESS, CONGRESSIONAL BUDGET OFFICE, Washington, DC, June 22, 2006. 

Hon. F. JAMES SENSENBRENNER, Jr., 

Chairman, Committee on the Judiciary, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 4019, a bill to amend title 

4 of the United States Code to clarify the treatment of self-employment for purposes of the limitation on State taxation of retirement 

income. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Sarah Puro. 

Sincerely, 

DONALD B. MARRON, 

Acting Director. 

Enclosure. 

H.R. 4019—A bill to amend title 4 of the United States Code to clarify the treatment of self-employment for purposes of the limitation on State taxation of retirement income 

H.R. 4019 would amend current law (Public Law 104–95) to prohibit State taxation of certain retirement income of former residents. The legislation would specifically limit the ability of States 

to tax the retirement income of nonresidents who were partners in 

firms domiciled within a State. These provisions could result in 

some individuals having lower itemized deductions of State income 


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taxes on their federal income tax returns and, therefore, higher 

federal income taxes. Under the assumption that, in the absence of 

this legislation, States would continue to tax certain retirement income of former residents, CBO estimates that enacting this bill 

would result in an increase in federal income taxes of less than 

$500,000 per year, totaling about $1 million over the 2007–2016 period. CBO estimates that H.R. 4019 would have no significant impact on federal spending. 

The prohibition on taxing the income of certain retirees would 

constitute an intergovernmental mandate as defined in the Unfunded Mandates Reform Act (UMRA) because it would preempt 

the authority of States to tax. Since UMRA includes in its definition of the direct costs of a mandate amounts that State and local 

governments would be prohibited from raising in revenues, the cost 

of this mandate would include the amounts that States are currently collecting but would be precluded from collecting under H.R. 

4019. Based on information from the States and some of the affected partnerships, CBO estimates that the net costs to State governments would likely total less than $5 million annually and thus 

would not exceed the threshold established in UMRA ($64 million 

in 2006, adjusted annually for inflation) in any of the first five 

years after enactment. 

Under current law, there is some uncertainty as to the taxability 

of the income of retired partners who do not currently live in the 

State where they initially earned that income. Only one State, New 

York, has issued rules that require retired partners to pay such 

taxes, and those rules are currently being challenged in court. At 

least 15 other States report that they currently collect tax on such 

revenues although they are not actively auditing or pursuing partners or companies who are not remitting these taxes. It is unclear 

if other States currently collect such tax or would do so in the next 

five years in the absence of legislation. 

In total, CBO estimates that actual State tax collections that 

would be affected by this legislation total less than $10 million annually. Many retired partners who pay taxes to States where they 

do not currently live receive credit for those taxes in the State 

where they do live. Such credits would partially offset these losses, 

resulting in a net impact across all States totaling less than $5 million annually. 

The bill contains no private-sector mandates as defined in 

UMRA. 

The CBO staff contacts for this estimate are Barbara Edwards 

(for federal revenues) and Sarah Puro (for the State and local impact). This estimate was approved by Peter H. Fontaine, Deputy 

Assistant Director for Budget Analysis, and G. Thomas Woodward, 

Assistant Director for Tax Analysis. 

PERFORMANCE GOALS AND OBJECTIVES

The Committee states, pursuant to clause 3(c)(4) of rule XIII of 

the Rules of the House of Representatives, that H.R. 4019 will clarify treatment of self-employment for purposes of the limitation on 

State taxation of retirement income. 


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CONSTITUTIONAL AUTHORITY STATEMENT

Pursuant to clause 3(d)(1) of rule XIII of the Rules of the House 

of Representatives, the Committee finds the authority for this legislation in art. I, § 8, cl. 8 of the Constitution. 

SECTION-BY-SECTION ANALYSIS AND DISCUSSION

The following discussion describes the bill as reported by the 

Committee. 

Sec. 1. Clarification of treatment of self-employment for purposes of 

the limitation on State taxation of retirement income 

Subsection 1(a) of H.R. 4019 amends section 114 of title 4 of the 

United States Code to clarify that States may not impose an income tax on non-resident retirement income received under certain 

nonqualified deferred compensation plans, including written plans, 

in effect at the time of retirement, providing for payments to a retired partner (as defined in subsection 1(a)) in recognition of prior 

service, as long as such payments are made over 10 years or more, 

and are made in substantially equal periodic payments. 

Subsection 1(a) of H.R. 4019 also amends section 114 to permit 

benefit reductions pursuant to a predetermined formula capping 

total disbursements, or benefit adjustments pursuant to plan provisions providing COLA adjustments, without causing the periodic 

benefits provided under the plan to fail the ‘‘substantially equal 

periodic payments’’ test. For example, in order to manage retirement costs, a company might limit aggregate payments to retirees 

to a certain percentage of its annual income such that benefit reductions would be required if this cap is reached. Subsection 1(a) 

of H.R. 4019 amends section 114 to clarify that the substantially 

equal periodic payments test is satisfied when payments include 

components from both qualified and nonqualified plans. For example, under a pre-determined plan formula, the total annual payments to a retiree may remain the same from year to year, but the 

payments may be required to come first from a Keogh plan (i.e., 

qualified plan) until depleted and then from the general assets of 

the business (i.e., nonqualified plan). 

Subsection (1)(b) specifies that the amendment applies to 

amounts received after December 31, 1995. For open years, refunds 

or credits would be available to the extent allowed under applicable 

state law. 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (new matter is printed in italic 

and existing law in which no change is proposed is shown in 

roman): 

SECTION 114 OF TITLE 4, UNITED STATES CODE 

§ 114. Limitation on State income taxation of certain pension income 

(a) * * * 

(b) For purposes of this section— 


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(1) The term ‘‘retirement income’’ means any income from— 

(A) * * * 

* * * * * * * 

(I) any plan, program, or arrangement described 

in section 3121(v)(2)(C) of such Code (or any plan, 

program, or arrangement that is in writing, that 

provides for retirement payments in recognition of 

prior service to be made to a retired partner, and 

that is in effect immediately before retirement begins), if such income— 

(i) is part of a series of substantially equal periodic 

payments (not less frequently than annually which 

may include income described in subparagraphs (A) 

through (H)) made for— 

(I) * * * 

* * * * * * * 

Such term includes any retired or retainer pay of a member or 

former member of a uniform service computed under chapter 

71 of title 10, United States Code. The fact that payments may 

be adjusted from time to time pursuant to such plan, program, 

or arrangement to limit total disbursements under a predetermined formula, or to provide cost of living or similar adjustments, will not cause the periodic payments provided under 

such plan, program, or arrangement to fail the ‘‘substantially 

equal periodic payments’’ test. 

* * * * * * * 

(4) For purposes of this section, the term ‘‘retired partner’’ is 

an individual who is described as a partner in section 

7701(a)(2) of the Internal Revenue Code of 1986 and who is retired under such individual’s partnership agreement. 

* * * * * * * 

MARKUP TRANSCRIPT

BUSINESS MEETING 

WEDNESDAY, JUNE 7, 2006 

HOUSE OF REPRESENTATIVES, COMMITTEE ON THE JUDICIARY, Washington, DC. 

The Committee met, pursuant to notice, at 1:10 p.m., in Room 

2141, Rayburn House Office Building, the Honorable F. James Sensenbrenner, Jr. (Chairman of the Committee) presiding. 

[Intervening business.] 

Chairman SENSENBRENNER. The next item on the agenda is the 

adoption of H.R. 4019 to amend title 4 of the United States Code 

to clarify the treatment of self-employment for purposes of the limitation of State taxation on retirement income. 

The Chair recognizes the gentleman from Utah, Mr. Cannon, the 

Chairman of the Subcommittee on Commercial and Administrative 

Law for a motion. 


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Mr. CANNON. Thank you, Mr. Chairman. The Subcommittee on 

Commercial and Administrative Law reports favorably the bill H.R. 

4019 and moves its favorable recommendation to the full House. 

[The bill, H.R. 4019, follows:] 


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Chairman SENSENBRENNER. Without objection, H.R. 4019 will be 

considered as read and open for amendment at any point. The 

Chair recognizes Mr. Cannon to strike the last word, and recognizes him for 5 minutes. 

Mr. CANNON. I thank the Chairman. 

H.R. 4019 is a technical amendment to Public Law 104–95. This 

legislation clarifies that all retirees should be treated the same 

with regard to how States may tax retirement payments. 

In 1996, Congress passed Public Law 104–95 to prohibit States 

from taxing the retirement income of nonresident retirees. Essentially, when retirees, most of whom are on fixed incomes, are not 

living in the State, then no State except the State where the individual resides should tax the retiree’s income. 

After passage of the 1996 law, most States interpreted the law 

as it was intended to apply to all retirees, including employees and 

partners. One State, however, has recently taken the position that 

it can treat retired employees of a company and retired partners 

from partnerships differently. 

The State’s interpretation is contrary to the original intent of the 

law and would allow for a State to tax retirement payments of a 

person who retires from a partnership no matter where the retiree 

is living. This was not the intent of Congress when the bill was 

passed, as was emphasized at our hearing by our former colleague, 

who was chair of the Subcommittee when Public Law 104–95 was 

enacted. Congress intended for all retirees to be treated the same 

under the law, and H.R. 4019 simply clarifies that intent. States 

must treat all retirees similarly. 

I worked with the State tax administrators to craft a manager’s 

amendment to alleviate some of their initial concerns, and I appreciate their efforts in coming to the table to reach an agreement. 

I urge all of my colleagues to support H.R. 4019 and I yield back. 

Chairman SENSENBRENNER. In the absence of the gentleman 

from North Carolina, the gentleman from Michigan is recognized 

for 5 minutes for an opening statement. 

Mr. CONYERS. Thank you, Mr. Chairman. I appreciate the work 

of the Subcommittee Chairman, and I speak on behalf of the gentleman from North Carolina, Mr. Watt. 

We do not oppose H.R. 4019, which is intended to clarify Public 

Law 104–95 by prohibiting States from taxing the retirement income of any nonresident whether the individual is a retired employee, partner or principal, and that benefit reduction calculations 

under the bill include components from both qualified and nonqualified plans. 

One thing that I had originally opposed has been corrected. Since 

1996, States have adjusted their tax system to reflect the policy, 

and to allow several different interpretations of the policy would 

upset expectations and reliance on the law and would further confuse the tax system and certainly lead to litigation. 

This clarification is a needed measure to protect the current 

State taxation policies, and I urge my colleagues not to oppose it 

and to support the measure and I ask unanimous consent to include my further statement in the record. 

Chairman SENSENBRENNER. Without objection, so ordered. 

Without objection, all Members may introduce opening statements into the record at this point. 


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The Chair recognizes the gentleman from Utah, Mr. Cannon, to 

offer an amendment in the nature of a substitute. 

Mr. CANNON. Thank you, Mr. Chairman. I have an amendment 

in the nature of a substitute at the desk. 

[The amendment follows:] 


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Chairman SENSENBRENNER. The Clerk will report the amendment. 

The CLERK. Amendment in the nature of a substitute to H.R. 

4019, offered by Mr. Cannon. Strike all after the enacting clause 

and insert the following—— 

Chairman SENSENBRENNER. Without objection, the amendment 

in the nature of a substitute is considered as read and open for 

amendment at any point, and the Chair recognizes the gentleman 

from Utah, Mr. Cannon, for 5 brief minutes. 

Mr. CANNON. Thank you, Mr. Chairman. If you can speed up 

your clock, I think I can still beat it. 

This amendment perfects the underlying legislation during the 

hearing on H.R. 4019 held by the Subcommittee on Commercial 

and Administrative Law. Mr. Harley Duncan from the Federation 

of Tax Administrators had a few reservations and some suggestions 

which we have incorporated so that the bill would clarify the language of Public Law 104–95 and not extend the 1996 law into new 

areas. 

This amendment refines the language of the bill to correspond to 

the current statute in a manner acceptable to all interested parties. 

I urge my colleagues to support this amendment and I yield back 

the many minutes that remain of my time. 

Chairman SENSENBRENNER. Are there any second degree amendments to the amendment in the nature of a substitute? 

For what purpose does the gentleman from Michigan seek recognition? 

Mr. CONYERS. To strike the requisite number of words. 

Chairman SENSENBRENNER. The gentleman is recognized for 5 

minutes. 

Mr. CONYERS. I am pleased to rise in support of the amendment 

in the nature of a substitute offered by our colleague, Mr. Cannon, 

and comment favorably as well on the remarks of Mr. Harley Duncan. 

This amendment in the nature of a substitute reflects those definitions that have been referred to and fully complies with the intent of the Federation of Tax Administrators’ suggestion. And so I 

think we on this side have no objection to this substitute and urge 

its passage. 

And I return the time. 

Chairman SENSENBRENNER. Are there any second degree amendments to the amendment in the nature of a substitute offered by 

the gentleman from Utah? 

If there are none, the question occurs on the amendment in the 

nature of a substitute offered by the gentleman from Utah, Mr. 

Cannon. Those in favor will say aye. 

Opposed, no. 

The ayes appear to have it. The ayes have it. The amendment 

in the nature of a substitute is agreed to. 

A reporting quorum is not present. Without objection, the previous question is ordered on the motion to report H.R. 4019 favorably as amended. 

[Intervening business.] 

Chairman SENSENBRENNER.The unfinished business is the motion to report the bill H.R. 4019 favorably, as amended, on which 


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the previous question has been ordered. A reporting quorum is 

present. 

All those in favor, signify by saying aye. 

Opposed, no. 

The ayes appear to have it. The ayes have it. The motion to report the bill favorably, as amended, is agreed to. 

Without objection, the bill will be reported favorably to the 

House in the form of a single amendment in the nature of a substitute incorporating the amendments adopted here today. 

Without objection, the staff is directed to make any technical and 

conforming changes and all Members will be given 2 days, as provided by the House rules, in which to submit additional dissenting 

supplemental or minority views. 

Æ 


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