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Smith v. State Tax Assessor, 860 A.2d 387, 2004 ME 120

Facts

The Smiths were residents of Massachusetts prior to 1998, where they contributed to IRA and SEP accounts and deducted those contributions on their federal tax returns. After moving to Maine in 1999, they received distributions from these accounts and claimed modifications on their Maine tax returns, arguing that the distributions represented income previously taxed by Massachusetts. The Maine Revenue Services disallowed these modifications, leading to an assessment of $4,078.11 in taxes, interest, and penalties, which the Smiths contested.

In tax years 1999 and 2000, the Smiths were residents of Maine. During those years, the Smiths received distributions from their IRA and SEP accounts. For those years, the Smiths filed joint federal income tax returns on which they reported, as a part of their federal adjusted gross income, distributions from their IRA or SEP accounts.

Issue

Whether the Smiths were entitled to deduct Massachusetts income taxes on contributions to their IRA and SEP accounts from their federal adjusted gross income when calculating their Maine taxable income, and whether Maine's taxation of these distributions violated the Commerce Clause, Equal Protection Clause, or Full Faith and Credit Clause of the United States Constitution.

The Smiths argue that: (1) 36 M.R.S.A. § 5122(2)(F) (1990) allows them to subtract from their Maine adjusted gross income the distributions from their IRA and SEP accounts, 1 and (2) the Maine income tax assessed against income arising from distributions of their IRA and SEP accounts violates the Commerce, Equal Protection, and Full Faith and Credit Clauses of the United States Constitution.

Rule

Maine law allows for the deduction of state income taxes imposed on income included in federal adjusted gross income prior to calculating Maine taxable income, as stated in 36 M.R.S.A. § 5122(2)(F).

The adjustment that is the particular focus of this litigation is stated in 36 M.R.S.A. § 5122(2)(F) which indicates that federal adjusted gross income shall be reduced by “[a]n amount equal to income taxes imposed by this State or any other taxing jurisdiction on the taxpayer that are included in the taxpayer's federal adjusted gross income.”

Analysis

The court determined that the Massachusetts income taxes were not imposed on the distributions reported as federal adjusted gross income in the tax years 1999 and 2000. Therefore, the modification under Maine law did not apply, as the taxes were not imposed in the relevant tax years. The court also noted that Maine's taxation of the distributions did not constitute double taxation, as Massachusetts had not taxed the distributions themselves.

Because the Massachusetts taxes were not imposed in the 1999 and 2000 tax years on the income reported as federal adjusted gross income as a result of the IRA and SEP distributions, the modification provided by 36 M.R.S.A. § 5122(2)(F) does not apply.

Conclusion

The Supreme Judicial Court affirmed the decision of the Superior Court, concluding that the Smiths were not entitled to the deductions they claimed and that Maine's taxation of the distributions was constitutional.

Finding no error in application of the Maine income tax laws to the Smiths' income as reported on their Maine and federal income tax returns, we affirm.

Who won?

The State Tax Assessor prevailed in the case because the court found that the Smiths were not entitled to deduct the Massachusetts taxes and that Maine's taxation did not violate any constitutional provisions.

The Supreme Judicial Court, Alexander , J., held that: 1 taxpayers were not entitled to deduct paid Massachusetts income taxes on contributions to IRA and SEP from distributions reported as part of their federal adjusted gross income prior to calculating Maine taxable income.

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