Lee v. Utah State Tax Comm’n

In 1990, Chin Lee established a defined-benefit plan, which he converted in 1996 into a profit-sharing plan, both of which were qualified plans. Chin's sole proprietorship contributed funds to the Plan from 1990 to 1995. These funds were invested entirely in U.S. government obligations, the interest on which was tax-exempt. In their 2005 and 2006 tax filings, Chin and Yvonne Lee reported Plan distributions and claimed deductions for federal obligation interest that the Plan earned in those and in earlier years. The Utah State Tax Commission disallowed these deductions, concluding that the Lees' distributions from the Plan were not exempt from state taxation even though the Plan assets were invested solely in U.S. government obligations. The Supreme Court affirmed, holding that no portion of the Plan distributions was tax-exempt, as (1) the distributions from the Plan qualified for a tax exemption only if the Plan acted as a conduit, allowing the funds to retain their tax-exempt character after distribution; and (2) the Lees' qualified profit-sharing plan was a non-conduit entity, and thus, the funds did not retain their character as interest on U.S. obligations upon distribution to the Lees. Therefore, the distributions were fully taxable by Utah.View "Lee v. Utah State Tax Comm'n " on Justia Law