Opinion ID: 867791
Heading Depth: 2
Heading Rank: 1

Heading: the lees’ plan is a qualified plan under

Text: SECTION 401 OF THE INTERNAL REVENUE CODE ¶7 The parties agree that both the Lees’ profit-sharing plan and their previous defined-benefit plan were Section 401 qualified plans. Section 401 defines a qualified plan as [a] trust created or organized in the United States . . . if contributions are made to the trust by such employer, or employees, or both, or by another employer who is entitled to deduct his contributions under section 404(a)(3)(B) . . . for the purpose of distributing to such employees or their beneficiaries the corpus and income of the fund accumulated by the trust in accordance with such plan. 26 U.S.C. § 401(a). Section 401 discusses three types of qualified plans: stock bonus plans, pension plans, and profit-sharing plans. Id. ¶8 Under federal law, an employer can deduct its contributions to qualified plans when made. Id. § 404(a). Accordingly, contributions by Mr. Lee’s sole proprietorship were tax-deductible to the business in the year of contribution. As a further tax benefit, employer contributions are not included in the employee’s gross income at the time of contribution. Employees are taxed on the funds only when they receive distributions. Id. § 402(a). ¶9 Internal Revenue Code section 402(a) states that “any amount actually distributed to any distributee by any employees’ trust described in section 401(a) . . . shall be taxable to the distributee, in the taxable year of the distributee in which distributed, under section 72.” That is, distributions made from any Section 401 qualified plan are taxed as annuities under Internal Revenue Code section 72. Section 72 provides that every distribution “received as an annuity”—which under section 402(a) includes distributions from a qualified plan—must be included in gross income. Id. § 72(a)(1). ¶10 Consequently, the distributions Mr. Lee received from his qualified plan are taxable as ordinary income, just as any distribution from a retirement or pension plan. The parties disagree, however, as to whether distributions from the Plan are tax-exempt because the Plan funds were invested in U.S. government obligations. 3 LEE v. UTAH STATE TAX COMMISSION Opinion of the Court