Court Opinion

ID: 9722084
Source: CourtListenerOpinion
Date Created: 2023-08-26 09:16:37.929559+00
Date Added: 2024-06-11T18:24:30.574880
License: Public Domain

Riley, J.
(concurring in part and dissenting in part). I agree with the majority in all aspects save one: the taxation of plaintiff’s interest income. I believe that the operative factor in determining when the state may tax "interest” income is the termination of deferral status of a § 457 plan. At that point, the balance of any deferred compensation, together with any capital appreciation, becomes the unrestricted property of the plan participant. Interest accrued thereafter would be taxable under state law as "interest income.” I would therefore affirm the Court of Appeals decision in its entirety.
Under § 457, "any amount of compensation deferred under the plan, and any income attributable to the amounts so deferred, shall be includible *557in gross income only for the taxable year in which such compensation or other income is paid . . . (Emphasis added.) Subsection (8) of 26 USC 457 defines "[i]ncome attributable” to the amounts so deferred as "[g]ains from the disposition of property [which] shall be treated as income attributable to such property.” I read this to mean that any contributions to a §457 plan, as well as any capital gains or interest earned thereon, are part of the corpus that is taxable for federal purposes. See McDonald v Director, Div of Taxation, 10 NJ Tax 556 (1989), modified on other grounds 247 NJ Super 326; 589 A2d 186 (1991)1 (the corpus of a profit sharing, deferred compensation plan was treated as an indivisible unit of employer compensation to the extent that all benefits derived therefrom, including asset appreciation, were taxable as compensation for services rendered within the state). Because this state has adopted the federal definitions and standards, I believe that all of the amounts deferred or gains earned directly thereon are taxable as income attributable to services rendered within the state in the year paid regardless of the taxpayer’s residence.
In my view, the only time that a distinction between contributions and asset appreciation is necessary is after the deferral status of compensation is terminated. At that point, a participant’s share of a § 457 plan, which includes interest or other capital appreciation, becomes the property of *558the employee participant.2 In the case of a lump-sum payout, the participant’s share is taxed once paid, and any implications that deferred compensation laws would have are no longer a concern. If the plan participant chooses periodic payments, there would still be the problem of interest earned once the participant’s plan balance technically becomes the property of the participant. Accordingly, the participant’s share of a § 457 plan could no longer be considered as "deferred compensation.” Interest earned thereafter, then, would be true interest income of the individual and not part of the trust or plan corpus. Accordingly, the interest could only be taxed if the former employee were a resident. See MCL 206.113; MSA 7.557(1113).
In sum, I believe that the corpus of a deferred compensation plan designated to a participant, including gains by way of interest or capital appreciation, is taxable as an indivisible unit when deferral status is terminated. See McDonald, supra. Any further interest or capital gains earned after termination of deferred status would be taxed separately from whatever trust or plan corpus remains. Thus, interest earned at this point would be taxable only if the recipient were a *559resident. From an administrative standpoint, this would only require that the trust or plan administrator calculate interest from the moment of termination of deferred status in cases of periodic payments.3
Based on the foregoing, I would affirm the decision of the Court of Appeáls. The basis for taxing interest or other capital appreciation is for services rendered in the state until deferral status is terminated. Thus, state law on taxation of interest, and the related concept of residency, applies immediately following the termination of deferral status.
Mallett, J., concurred with Riley, J.

 The facts in McDonald indicate that the plaintiff earned a significant proportion of his salary for services rendered in other states in his capacity as salesman, officer, and director, which required him to travel to, and hence earn salary in, other states. The New Jersey Superior Court concluded that the calculation for taxable pension income was the quotient of the time employed within New Jersey and the time employed within and without New Jersey. Id. at 330-331. We need not address the merits of this position at this time, however, because the facts involved here nowhere indicate that plaintiff ever earned salary for work performed outside the state.

 It is on this basis that I distinguish cases such as Michaelsen v New York State Tax Comm, 67 NY2d 579; 505 NYS2d 585; 496 NE2d 674 (1986). In Michaelsen, the plaintiff received stock options as part of his compensation attributable to business carried on within the state. Id. at 583. The operative event for taxation is the exercise of the options, and the value for state taxation purposes is the difference between the option price and the fair market value of the stock on the date the options were exercised. Id. at 584-585. Any capital gains made after the exercise of the options were true investment income and not compensation "attributable to his 'business . . . carried on in th[e] state’ . . . .” Id. at 584. In short, it is the date that a plan asset becomes the property of the participant, whether by exercise of a stock option or by termination of deferral status, that dictates the time after which any capital appreciation is no longer attributable to deferred compensation earned for the rendition of services within a state.

 In this case, the date of withdrawal, i.e., termination of deferred status, was January 1, 1982. Plaintiff’s residency status changed on January 1, 1983. Accordingly, the state is entitled to taxes on any interest earned in this one year period not as compensation for services rendered in the state, but as "[i]nterest . . . allocable to this state [because] the taxpayer [was] a resident . . . .” See MCL 206.113; MSA 7.557(1113).