STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 5783

September 17, 1980

CONSTITUTIONAL LAW:

Const 1963, art 4, Sec. 1

TAXATION:

State income tax treatment of temporary disability sick pay as part of gross income

A taxpayer is not liable on his or her state income tax on the entire amount of temporary disability sick pay received for the tax years 1975 and 1976.

As to the tax years 1977, 1978 and 1979, a taxpayer is liable on his state income tax on the full amount of temporary disability sick pay received during such years. However, a taxpayer who received long-term disability pay for the tax years 1977, 1978 and 1979 is not liable for state income taxes on the long-term disability pay up to the maximum amount of $100 per week or $5,200 per year, subject to reduction dollar for dollar, where the taxpayer's total adjusted gross income, including such long-term disability pay, exceed $15,000, provided that the taxpayer is under 65, is totally and permanently disabled and is retired on disability.

Honorable Doug Ross

State Senator

Capitol Building

Lansing, Michigan

You have requested my opinion on the state income tax liability, if any, for temporary disability sick pay received for the tax years 1975, 1976, 1977, 1978, and 1979.

The Tax Reform Act of 1976, 90 Stat 1520 (1976), 26 USC 1, et seq, which was passed October 4, 1976, repealed the sick pay exclusion granted by Section 105(d) of the United States Internal Revenue Code, 68A Stat 3 (1954), 26 USC 105(d), and substituted a new-long term disability income exclusion of $100 a week. The repeal, according to the Tax Reform Act was effective for taxable years beginning after December 31, 1975. On May 23, 1977, Congress passed the Tax Reduction and Simplification Act of 1977, 91 Stat 126 (1977), 26 USC 1, et seq, supra, which changed the effective date of the repeal from taxable years beginning after December 31, 1975 to taxable years beginning after December 31, 1976. The effect of this act was to delay the repeal of the sick pay exclusion for one year.

The Michigan Income Tax Act, 1967 PA 281, MCLA 206.1 et seq; MSA 7.557(101), Sec. 12(2), as it was in effect in the calendar years 1975 and 1976, provided that any reference to the Internal Revenue Code, supra, was with respect to the United States Internal Revenue Code of 1954, as amended, 68A Stat 3 (1954), 26 USC 1-8023, and in effect on December 31, 1970, or at the option of the taxpayer in effect for his taxable year. On January 11, 1977 by means of 1976 PA 434, 1967 PA 281, Sec. 12(2), supra, was amended to allow a Michigan taxpayer the option of using the Internal Revenue Code, supra, in effect on November 15, 1976, or in effect for the taxpayer's taxable year.

These statutory changes in both State and Federal tax law must be considered and applied where appropriate in order to assess the tax consequences for each of the years 1975 through 1979. The basic inquiry is whether the state income tax administrator may recognize and give effect to retroactive tax legislation passed by the Congress.

First, adjusted gross income for 1975 did not include temporary disability sick pay income which was excludable therefrom pursuant to the Internal Revenue Code, Sec. 105(d), supra, until its repeal by the Tax Reform Act of 1976, supra. Since the Michigan tax base begins with federal adjusted gross income, it similarly 'excluded' temporary disability sick pay income. Thus, the taxpayer need not include temporary disability sick pay within the taxpayer's adjusted gross income for state income tax purposes for 1975.

Second, a Michigan resident who filed his 1976 state income tax return was allowed to deduct the temporary disability sick pay from the taxpayer's gross income for state income tax purposes pursuant to controlling state law in effect on December 31, 1976. 1967 PA 281, Sec. 12(2), supra, granted to the taxpayer the option of using the United States Internal Revenue Code in effect on December 31, 1970, or the code in effect for the taxable year. The Internal Revenue Code, supra, in effect on December 31, 1970, authorized the prior sick pay exclusion, and therefore, a Michigan resident may claim it on his 1976 return.

Third, a Michigan taxpayer who filed state income tax returns in 1977, 1978, and 1979 is not able to claim the temporary disability sick pay exclusion because of the repeal of that exclusion by the Tax Reform Act of 1976, supra. The Internal Revenue Code, supra, in existence on November 15, 1976, and adopted by the Legislature by amendatory 1976 PA 434, effective January 11, 1977, had substituted a long-term disability exclusion up to a maximum of $100 a week or $5,200 a year in its place, subject to reduction, dollar for dollar, to the extent that the taxpayer's adjusted gross income exceeds $15,000, and only if the taxpayer under 65 has retired on disability and is permanently and totally disabled.

It must be concluded that the Michigan taxpayer, pursuant to 1967 PA 281, Sec. 12(2), supra, must follow the Internal Revenue Code, supra, as it existed on November 15, 1976 in determining gross income for state income tax purposes for the tax years 1977, 1978 and 1979. On November 15, 1976, the prior temporary disability sick pay exclusion had been repealed, and subsequent amendment of the Internal Revenue Code, by 91 Stat 126 (1977), supra, in May of 1977 delaying the repeal for one year must be disregarded. When a state statute tie-bars Michigan taxable income to adjusted gross income as defined in the Internal Revenue Code, supra, in effect on November 15, 1976, the tax administrator must look to the Internal Revenue Code, supra, the way it was on that specific date, and must disregard any subsequent amendments. To do otherwise would constitute delegation of legislative power to the United States Government, which would effectively permit the federal government to determine Michigan Tax policy.

The law is well settled that the Legislature may, in enacting legislation, incorporate by reference existing federal or state statutes. Pleasant Ridge v Governor, 382 Mich 225; 169 NW2d 625 (1969), Dearborn Independent, Inc v Dearborn, 331 Mich 447; 49 NW2d 370 (1951), 1 OAG, 1955, No 2004, p 167 (April 6, 1955). However, any attempt by the Legislature to adopt by reference future legislation or amendments to existing legislation which are subsequently enacted by another sovereign entity constitutes an unlawful delegation of legislative power. Warren v State Construction Code Commission, 66 Mich App 493; 239 NW2d 640 (1976), People v Urban, 45 Mich App 255; 206 NW2d 511 (1973).

The decision of the Michigan Supreme Court in Minor Walton Bean Co v Unemployment Compensation Commission, 308 Mich 636; 14 NW2d 524 (1944) is in point. The Michigan Legislature, in enacting 1936 Ex Sess PA 1, the unemployment compensation statute, adopted the definition of the term 'employment' to exclude any service not included as 'employment' under the federal social security act, ch 531, Sec. 907, Title 9; 49 State 642; 42 USC 1107. The Court held that in adopting by reference the definition contained in the federal social security act, ch 531, Sec. 907, Title 9, supra, the Legislature may not subject the act to future congressional action. Colony Town Club v Michigan Unemployment Compensation Commission, 301 Mich 107; 3 NW2d 28 (1942).

Under these authorities, it is abundantly clear that the Legislature may incorporate by reference existing provisions of the Internal Revenue Code, supra, but it may not incorporate future amendments by the Congress to the Internal Revenue Code, supra, without unlawfully delegating the legislative power of the state, contrary to Const 1963, art 4, Sec. 1.

In summation, a taxpayer filing 1975 and 1976 Michigan income tax returns may exclude from adjusted gross income the total amount of temporary disability sick pay income pursuant to the Internal Revenue Code, Sec. 105(d), supra, in effect on December 31, 1970. In 1977, 1978 and 1979, a taxpayer who filed a state income tax return may not claim any temporary disability sick pay exclusion because of the repeal of that exclusion by the Tax Reform Act of 1976, supra. In these years, a taxpayer is governed by the Internal Revenue Code, Sec. 105(d), supra, in existence on November 15, 1976, which provides for the exclusion of long-term disability payments to the maximum amount of $100 a week or $5,200 a year for taxpayers under age 65 who have retired on disability and are permanently and totally disabled. The maximum amount excludable is to be reduced on a dollar-for-dollar basis by the amount of the taxpayer's adjusted gross income (including long-term disability income) in excess of $15,000. Thus, if a taxpayer receives $5,200 in long-term disability income and $15,000 (or more) in other income, which together equal $20,200 (or more), he or she would not be entitled to the exclusion of his long-term disability payments.

It is, therefore, my opinion that a taxpayer is not liable on his or her state income tax on the entire amount of temporary disability sick pay received for the tax years 1975 and 1976. Further, it is my opinion that as to the tax years 1977, 1978 and 1979, a taxpayer is liable on his state income tax on the total amount of temporary disability sick pay received during such years. However, a taxpayer who is receiving long-term disability pay is not liable for state income taxes on the long-term disability pay up to the maximum amount of $100 per week or $5,200 per year, subject to reduction dollar for dollar, where the taxpayers total adjusted gross income, including long-term disability pay, exceeds $15,000, provided that the taxpayer is under 65, is totally and permanently disabled and is retired on disability.

Frank J. Kelley