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BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

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BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA
BEFORE THE STATE BOARD OF EQUALIZATION
OF THE STATE OF CALIFORNIA
In the Matter of the Appeal of
HOWARD A. AND MARCIA SCHMIDT
1
For Appellants:
Martin I. Schneyer
Attorney at Law
For Respondent:
Mark McEvilly
Counsel
!
O P I N I O N
This appeal is made pursuant to section 18593 of
the Revenue and Taxation Code from the action of the
Franchise Tax Board on the protest of Howard A. and
Marcia Schmidt against proposed assessments of additional
personal income tax in the amounts of $1,115.61,
$2,676.76, and $2,226.07 for the years 1976, 1977, and
1978, respectively.
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Appeal of Howard A. and Marcia Schmidt
The question for decision is whether certain
monthiy pension benefits received by appellant Howard A.
Schmidt were excludible from taxable income for purposes of
the California personal income tax. The answer to that
question depends on whether or not the pension benefits.had
accrued as income, within the meaning of section 17596 of
the Revenue and Taxation Code, prior to the time appellant
became a California resident.
.
Appellants, husband and wife, established residency in California in 1970. Prior to that time, they had
resided in New Jersey where appellant-husband (hereinafter
"appellant") worked for Great American Insurance Company
(hereinafter "Great American"). ,In 1970, at the time o.f
relocation, appellant was eligible to retire from Great
American and receive a pension pursuant to the terms of the
company pension plan. Instead, he continued to.work for
Great American in California until 1976 when he, iu fact,
did retire. The Great American retirement plan permitted
employeesto elect among several methods of pension payments, including a category entitled "options as may be
approved by the Retirement Committee." At retirement, in
1976, the appellant chose to receive monthly pension
payments for his and his spouse's lifetime. That option
provided that retirement income shall be paid in monthly
installments to the employee and his spouse, or the
survivor thereof, "ceasing with the payment on the first of
the month during which the.death [of the survivor] occurs."
Appellant received pension payments of $19,645, $47,147,
and $47,147 in 1976, 1977, and 1978, respectively. During
1976, the initial year of pension payments, appellant
deducted $2,908 from the payment received which represented
his contribution to the pension.plan. In addition, based
on the number of months of employment in each state (259
months in New Jersey and 243 months in California),
appellant excluded 51.6 percent of the payments as being
accruable in a state other than California. Therefore, for
the years at issue, the appellant reported.48.4,percent of
the pension received as being taxable in the State of
California. On audit, respondent determined that appellant
was not entitled to attribute any portion of the pension to
another state and determined that the entire portion
received (except the $2,908 return of his contribution ih
1976) was taxable in the State of.California. This
resulted in increasing income by $10,137, $24,328, and
$24,328 in 1976, 1977, and 1978, respectively. Appellant
protested the resulting proposed assessments,. Respondent
denied the protest and affirmed the proposed assessments.
This timely appeal followed.
0
a
Appeal of Howard A.'and Marcia Schmidt
Except as otherwise provided in the law,
California personal income tax is imposed upon the entire
taxable income of every resident of California and upon the
income of nonresidents which is derived from sources within
(Rev. & Tax. Code;§ 17041.) In cases like
California.
the present one, where a taxpayer's residency status
changes, section 17596 of the Revenue and Taxation Code.
provides:
When the status of a taxpayer changes from
resident to nonresident, or from nonresident to
resident, there shall be included in determining
income from sources within or without this State,
as the case may be, income and deductions accrued
prior to the change of status even though not
otherwise includible in respect of the period
prior to such change, but the taxation or deduction of items accrued prior to the change .of
status shall not be affected by the change.
..
Reading these statutes together, "sections 17041 and 17596
require that appellant pay California income tax on the
retireme.nt income he received while a resident of
California, unless these funds accrued as income prior to
the time appellant and his wife moved here." (Appeal of
Kenneth Ellington and Estate of Harriet Ellington,
Deceased, Cal. St. Bd. of Equal., Oct. 17, 1973. See also,
, Cal. St. Bd. of
,
; Appeal of, Edward
B. and Marion R. Flaherty, Cal. St. Bd. of Equal., Jan. 6,
1969.) This accrual treatment of reporting retirement
income applies even though the taxpayer may be on the cash
receipts and disbursements accounting basis. -"Generally,
under an accrual method, income is to be included for the
taxable year when all the events have occurred which fix
the right to receive such income and the amount thereof can
be determined with reasonable accuracy." (Treas.. Reg. S
1.446-1(c) ii.)
Accordingly, we must now determine whether the
monthly benefits received by appellant had accrued as
income prior to the time appellant moved to California. We
have consistently held that where the employee's right to
his monthly retirement benefits was contingent upon his
surviving through the month, there is no accrual of income
within the meaning of section 17596 of,the Revenue and
Taxation Code until he actually receives each pension
payment. (Appeal of Henry D. and Rae
Appeal of Lee J. and Charlot- supra; Appeal of
..
Appeal of Howard-P
A. and Marcia Schmidt
Edward B. and Marion R. Flaherty, supra.) As indicated
Zbove, appellant's right to monthly retirement benefits is
contingent upon survival through the month. Again, the
retirement plan provides that payments will cease with the
payment on the first of the month during which the death of
the survivor occurs. Therefore, under the well settled
rule, the monthly benefits received by appellant in 1976;
1977 and 1978, at issue herein, accrued during those years
while appellant was a resident of California.
Nevertheless, appellant argues that under the
category of "options as may be approved by the Retirement
Committee,n he was entitled to a lump-sum settlement. Ap-,ellant argues that had he elected suc,h a lump-sum settlement in 1970 while st,ill a resident of New Jersey, no
amount of such sum would have been taxable in California.
,Thuc;, appellant continues, the amount of the monthly pay-.
ments taxable in California during the period at issue
shculd be based on the services pe.rformed within and withThere is nothing in the record that indiGUN CaliEornia.
cates that appellant was entitled to such a 1umpTsum settlement. However, even assuming that he.was so entitled
pursuant to the above-noted category, appellant's argument
is without merit. In a substantially similar set of. facts,
we concluded that in spite of the existence of a lump-sum
withdrawal option while the taxpayers were previously residents of another state, the monthly pension benefits they
received while residents of California were subject to the
substantial contingency of continued survival; Therefore,
we determined that no part of the pension payments received'
by the taxpayers while they were residents of California
was excludible from their California taxable income.
(Appeal of Robert H. and Josephine Borchers, Cal. St. Bd.
of Equal., April 6, 1977.) In the Borchers appeal, we
stated:
We do not deny that if appellant husband had'
taken the lump sum benefit, that amount of income
would have accrued prior to his becoming a
California resident. His right to that sum of
money would have been nonforfeitable prior to his
move to California. The fact is, however, that
he did not choose that option, and we agree with
respondent that the situation must be viewed in
light of what he,did do and not what he might
have done.
t'nlikc the Appeal of Dr. F. W. C. Tydeman, Cal. St. Bd. of
Equal., Jan. 5, 1950, there has been no proof that
a
Appeal of Howard A. and Marcia Schmidt
appellant had a vested right of immediate withdrawal before
his move in 1970.
Again, as in.the Borchers appeal, the "situation
must be viewed in light of what he did do and not what he
might have done." What appellant did do was to elect an
option of pension payments that was subject to the
’
substantial contingency of continual survival. Under
Revenue and Taxation Code section 17596 and the cases
decided thereunder, appellant's monthly retirement benefits
at issue did not accrue as income until they were actually
received, since his potential right to those payments was
subject to the substantial contingency of his survivalthrough each month. We must, therefore, conclude that
respondent correctly determined that no portion of the
pension,payments at issue was excludible (except the $2,909
return of contribution) from taxable income in this state.
,
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Appeal of Howard A. and Marcia Schmidt
O R D E R
Pursuant to the views expressed in the opinion
of the board on file in this proceeding, and good cause
appearing therefor,
IT IS HEREBY ORDERED, ADJUDGED'AND DECREED,
pursuant to section 18595 of the Revenue and Taxation
Code, that the action of.the Franchise Tax Board on the
protest of Howard A. and Marcia Schmidt against proposed
assessments of additional personal income tax in the
amounts of $1,115.61, $2,676.76, and $2,226.07, for the
years 1976, 1977, and 1978, respectively, be and the same
is hereby sustained.
.
Done at Sacramento, California, this 3rd day
cf January , 1983, by the State Board of Equalization,
with Board Members Mr. Bennett, Mr. Dronenburg and
Mr. Nevins present.
I Chairman
M_ Rennet+
Ernest J. Dronenburg, Jr.
Richard
Nevins
I
Member
Member
-I
Member
I
Member
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