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

Heading: federal law limits utah’s ability to tax pro-

Text: CEEDS FROM U.S. GOVERNMENT OBLIGATIONS ¶11 The Lees are correct that under some circumstances, federal law prohibits states from taxing the proceeds of U.S. government obligations. Federal law provides that “[s]tocks and obligations of the United States Government are exempt from taxation by a State or political subdivision of a State. The exemption applies to each form of taxation that would require the obligation, the interest on the obligation, or both, to be considered in computing a tax,” with certain exceptions not relevant to the Lees’ appeal. 31 U.S.C. § 3124(a). The U.S. Supreme Court has said that “the interest on the obligation is ‘considered’ when that interest is included in computing the taxpayer’s net income or earnings for the purpose of an income tax or the like.” Neb. Dep’t of Revenue v. Loewenstein, 513 U.S. 123, 129 (1994). Thus, if a taxpayer receives income directly from U.S. obligations that is included in the taxpayer’s reported net income, then that income is exempt from state taxation. ¶12 Utah recognizes this exemption through Utah Code section 59-10-114(2)(a)(i), which provides that “the interest or a dividend on an obligation or security of the United States” is deductible from state adjusted gross income if it is (1) “included in adjusted gross income for federal income tax purposes for the taxable year” and (2) “exempt from state income taxes under the laws of the United States.” ¶13 Although income received as interest on U.S. government obligations is exempt from state taxation, the income the Lees claimed to be exempt was not received as interest on U.S. obligations, but rather as distributions from a qualified Section 401 plan. Thus, the distributions qualify for a tax exemption only if the Plan acted as a conduit, allowing the funds to retain their tax-exempt character after distribution.