STATEMENT OF THE CASE

This appeal concerns assessments against Petitioner for tax years 1998 and 1999. In tax years 1998 and 1999, Petitioner took early distributions from his IRA account and applied the distributions to his expenses for higher education. In 1998, Petitioner took a retirement deduction on line 14 of his state return in the amount of $$$$$. The deduction corresponds to Petitioner’s IRA distribution in that year. The 1099-R associated with the distribution indicates a distribution code of “1,” which indicates “early disbursement” of retirement funds. Similarly, Petitioner took a retirement deduction on his 1999 state return. The 1099-R for tax year 1999 also indicates an early distribution in the amount of $$$$$.

The Auditing Division disallowed the deductions because the distributions were not “retirement” distributions within the meaning of section 59-10-114. Consequently, the Division issued assessments again Petitioner for unpaid taxes. Petitioner objected to the assessments, and this matter was argued in an Initial Hearing on October 23, 2002.[1]^,
[2]

DISCUSSION

There is no dispute that Petitioner took distributions from his IRA before he reached normal retirement age of 59 ½. However, Petitioner states that he withdrew the funds from his IRA account to fund his higher educational expenses. Such early withdrawals are allowed without penalty under the IRS code, so Petitioner argues that the distribution is deductible from his gross income for state tax purposes.

At the federal level, early distributions from IRA accounts are normally subject to tax as ordinary income, plus an additional 10% penalty. Although an exception to the additional 10% penalty applies to early distributions used for qualified higher educational expenses, the penalty exemption does not make the distribution itself tax exempt. The focus of our inquiry is not whether these early distributions were subject to the 10% penalty, but whether the early distributions constitute retirement income for which Petitioner was entitled a deduction on his state return.

Section 59-10-114 of the Utah Code provides for a deduction on the state return for “amounts received by taxpayers under the age of 65 as retirement income . . . .” (Emphasis added.) For purposes of the deduction, “retirement income” is a pension or annuity, paid from an annuity contract purchased by an employer on behalf of an employee pursuant to section 404 (a) (2) of the IRS Code or purchased by the taxpayer under a plan as provided in section 408 of the IRS Code. Respondent argues that an early disbursement for educational expenses is not a retirement pension or annuity payment within the meaning of section 59-10-114 of the Utah Code. We agree.

The Utah Code does not specifically define “pension” or “annuity,” but section 59-10-103 (2) of the Utah Code provides that any term used in Utah’s Individual Income Tax Act has the “same meaning as when used in comparable context in the laws of the United States relating to federal income taxes unless a different meaning is clearly required.” The IRS defines “pension” as “a series of definitely determinable payments” made to the taxpayer after he or she retires. The payments are made at regular intervals and are based on certain factors, such as years of service with an employer or upon compensation level with the employer. An “annuity” is a series of payments that are made under terms of a contract. The payments may be fixed or variable, but they are paid out at regular intervals over a period of time that is more than one year.[3] The distributions at issue here are from a retirement account, but they are not “retirement income.”

DECISION

The Commission upholds the Division’s decision to disallow the deduction and the assessment for unpaid tax. Petitioner’s request for relief is denied.

BY ORDER OF THE COMMISSION:

DATED this 5^th day of November , 2002.

_________________________

Administrative Law Judge

The undersigned Commissioners have reviewed this matter and concur in this decision.

Pam Hendrickson R. Bruce Johnson

Commission Chair Commissioner

Palmer DePaulis Marc B. Johnson

Commissioner Commissioner

[1] The Division is aware of another distribution from this retirement account in 1999, but because the distribution was coded as a “7” or “normal distribution,” the Division allowed the deduction for that distribution without further question.

[2] Petitioner states that the distribution code for this type of withdrawal has changed since the tax years in question. Nevertheless, unless the distribution can be characterized as a normal “retirement” distribution, the question remains whether it is deductible under §59-10-114 of the Utah Code. That issue is not before us here, so we leave it for an appropriate time.