The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us) STATE OF MICHIGAN FRANK J. KELLEY, ATTORNEY GENERAL Opinion No. 6777 November 23, 1993 TAXATION: Taxation of public retirement system survivor's benefit. RETIREMENT: Taxation of public retirement system survivor's benefit. In the Income Tax Act of 1967, the Legislature provided that a Michigan resident, other than a surviving spouse, who receives a survivor's benefit from a state or local public retirement system must include that benefit in computing taxable income. The Legislature also provided that the non-spouse survivor's benefit received under the State Employees' Retirement Act, the Public School Employees' Retirement Act of 1979, and the Michigan Legislative Retirement System Act is not taxable income. Honorable Dennis Olshove State Representative The Capitol Lansing, MI You have asked a question which may be phrased as follows: Does the Income Tax Act of 1967 provide that a Michigan resident, other than a surviving spouse, must include a survivor's benefit from a state or local public retirement system in computing the resident's taxable income? SURVIVOR'S BENEFIT In Michigan, there are a number of state and local public retirement systems. One common feature they share is to permit a retirant to receive a reduced retirement allowance so that the designated surviving beneficiary will continue to receive retirement benefits after the retirant dies. (1) SECTION 30 OF THE INCOME TAX ACT OF 1967 Section 30 of the Income Tax Act of 1967, 1967 PA 281, MCL 206.1 et seq; MSA 7.557(101) et seq, imposes a tax upon individuals based on their "[t]axable income" which is "adjusted gross income as defined in the internal revenue code." This amount is subject to certain adjustments as outlined in section 30. This statute, as adopted in 1967, made no provision for deducting public retirement benefits in arriving at taxable income. Subsequently, in 1969 PA 332 the Legislature amended section 30 of the Income Tax Act of 1967 by adding subsection (a)(viii), which provided for: Subtraction of any retirement or pension benefits received from a public retirement system of or created by act of the state or any of its political subdivisions to the extent otherwise included in adjusted gross income. In 1978 PA 554 the Legislature amended section 30 again and, inter alia, dropped the word "any" before the word "retirement." That amendment was effective for all tax years beginning after December 31, 1977. The language providing for the deduction of public retirement benefits in arriving at taxable income has been retained and is now found in section 30(f)(i). In 1974 PA 217, the Legislature added language to section 30 in subsections (g)(ii)(a) and (b) authorizing the deduction of other retirement benefits in arriving at taxable income as follows: (g) Deduct to the extent included in adjusted gross income; (ii) Any retirement or pension benefits from any other retirement or pension system as follows: (a) For a single return, the sum of not more than $7,500.00. (b) For a joint return, the sum of not more than $10,000.00. That language is now found at section 30(f)(iv)(A) and (B). Thus, the language of section 30 does not expressly exempt survivor benefits received by persons other than retirants from imposition of the state income tax. ADMINISTRATIVE RULE R 206.11(3) In 1978 the Department of Treasury promulgated 1978 AACS, R 206.1 et seq. R 206.11 provides, in part: (1) Retirement and pension benefits received from a retirement system of the state of Michigan or any of its local units of government, including public colleges and universities, may be deducted to the extent included in federal adjusted gross income. (2) Retirement and pension benefits from the following sources, which shall be included in adjusted gross income, are deductible to a maximum of $7,500.00 ($10,000.00 on a joint return). The maximum deduction allowed a married couple filing separately is $10,000.00 (3) Pension or retirement benfits received by a surviving spouse may be deducted to the extent allowed, providing the benefits qualified for deduction prior to the decedent's death. Such benefits, when received by a surviving child, are not deductible. [ Emphasis added.] The Legislature has not in the ensuing fifteen years adopted any legislation altering R 206.11(3) although section 30 of the Income Tax Act of 1967 has been amended at least nine times since 1978. (2) As the Court of Appeals noted in Dykstra v DNR, 198 MichApp 482, 489-490; 499 NW2d 367 (1993): [W]e note that there has been legislative acquiescence to the interpretation adopted by defendant. The doctrine of legislative acquiescence "is based on the assumption that the Legislature is aware of prior interpretations of its acts, and that the construction given a statute by those charged with its execution is likely to be the most accurate." "[L] egislative silence in the face of an agency's construction of a statute 'can only be construed as consent to the accuracy of that interpretation.' " [ Citations omitted.] In Dykstra the challenged administrative rule was adopted in 1975. The act was amended 8 times in the ensuing 16 years with no change in the text of the challenged rule. In the opinion of the court, at page 490: "By its silence, the Legislature has acquiesced in the department's consistent and long-standing construction of its powers." [ Citation omitted.] Dykstra, at page 484, further instructs: Where, as here, an agency is empowered to make rules, the validity of those rules is to be determined by a three-part test: (1) whether the rule is within the subject matter of the enabling statute; (2) whether it complies with the legislative intent underlying the enabling statute; and (3) whether it is arbitrary or capricious. [ Citations omitted.] R 206.11(3) is within the subject matter of the Income Tax Act of 1967 and it was adopted pursuant to statutory authority. MCL 16.109; MSA 3.29(9), MCL 16.183; MSA 3.29(83), MCL 205.3(b); MSA 7.657(3)(b), and MCL 205.13; MSA 7.657(13). This administrative rule is a reasonable interpretation which is consistent with section 30 of the Income Tax Act of 1967. Compare Chocola v Dep't of Treasury, 422 Mich 229, 243, 369 NW2d 843 (1985). Thus, absent other statutory bases for exemption, section 30 of the Income Tax Act of 1967, as implemented by R 206.11(3), requires a Michigan resident receiving a survivor's benefit under a state or local public retirement system, who is not the surviving spouse of a member of that system, to include that benefit in computing taxable income. RETIREMENT STATUTES WITH STATE TAX EXEMPTIONS There are three retirement system statutes which contain provisions broadly exempting all benefits received by any person from the imposition of any state or local taxation. These tax exemptions pre-date the Income Tax Act of 1967 and R 206.11(3). The acts cover state employees, public school employees and legislators. First, section 40(1) of the State Employees' Retirement Act, MCL 38.40(1); MSA 3.981(40)(1), provides, as it has since 1943 in all relevant respects: The right of a person to a pension, an annuity, a retirement allowance, any optional benefit, any other right accrued or accruing to any person under the provisions of this act, the various funds created by this act, and all money and investments and income of the funds, are exempt from any state, county, municipal, or other local tax.... [Emphasis supplied.] OAG, 1967-1968, No 4604, pp 269, 273 (July 26, 1968), concluded that the Income Tax Act of 1967 did not modify or repeal the exemption from state taxation found in section 40 of the State Employees' Retirement Act. The text of section 40 clearly exempts not only benefits received by a retirant under the State Employees' Retirement System, but any person receiving an optional benefit under the system, from the imposition of income tax liability on the benefit. Second, section 46(1) of the Public School Employees' Retirement Act of 1979, MCL 38.1346(1); MSA 15.893(156)(1), provides: Except as otherwise provided in this section, a retirement allowance, an optional benefit, or any other benefit accrued or accruing to a person under this act, the reserves created by this act, and the money, investments, or income of those reserves are exempt from state, county, municipal, or other local tax.... [Emphasis supplied.] OAG, 1969-1970, No 4660, pp 39, 43 (February 20, 1969), in reviewing the similar predecessor provision in section 25, Chapter I of 1945 PA 136, (3) concluded: In summary, it is my opinion that all sums received by any person by way of a pension, annuity, retirement allowance, optional benefit or any other benefits accruing to such person pursuant to Section 25, Chapter I of the state teachers retirement act, supra, are exempt from state income taxes and persons receiving retirement benefits from the Michigan public school retirement system may exclude such sums in determing their adjusted gross income. [ Emphasis supplied.] That conclusion is also compelled under the above-quoted language of section 46(1) of the Public School Employees' Retirement Act of 1979. The conclusion clearly applies to any person, not just a retirant, receiving an optional benefit from the Public School Employees' Retirement System. Third, section 57(1) of the Michigan Legislative Retirement System Act, MCL 38.1057(1); MSA 2.169(57)(1), provides: Except as provided in subsection (2), all retirement allowances and other benefits payable under this act and all accumulated credits of members, deferred vested members, and retirants in this retirement system are unassignable and shall not be subject to execution, garnishment, or attachment, or to taxation by the state or any of its political subdivisions. [ Emphasis supplied.] This tax exemption has existed since the effective date of 1961 PA 167, which amended section 57 quoted above. This tax exemption includes "all ... other benefits" as well as retirement allowances and it is not limited to retirants who were previously members of the retirement system. While there is also a tax exemption in the statute providing for the establishment of retirement systems for city library employees in cities of 250,000 or more, 1927 PA 339, MCL 38.701 et seq; MSA 15.1771 et seq, the exemption in section 5 only applies to "annuities payable to the members of the staff." [ Emphasis supplied.] Thus, the exemption clearly does not apply to a survivor's benefit. None of the other retirement statutes covering public employees contains a tax exemption provision. See OAG, 1991-1992, No 6697, pp 116, 117, n 3 (December 18, 1991). The provisions of R 206.11(3), which implement the Income Tax Act of 1967, cannot repeal or alter the specific statutory provisions which provide statutory tax exemptions for survivors' benefits in the state employees', public school employees' and legislators' retirement systems. OAG, 1967-1968, No 4604, p 273, supra, and OAG, 1969-1970, No 4660, p 43, supra. An administrative rule may not contravene a statute passed by the Legislature. Sterling Secret Service, Inc v Dep't of State Police, 20 MichApp 502, 513-520; 174 NW2d 298 (1969). Thus, while R 206.11(3) is a valid administrative interpretation of section 30 of the Income Tax Act of 1967 as to public retirement survivors' benefits received from the other state and local public retirement systems, it must be construed so as to leave intact the specific tax exemptions in the three retirement statutes previously discussed. CONCLUSION It is my opinion, therefore, that in the Income Tax Act of 1967, the Legislature provided that a Michigan resident, other than a surviving spouse, who receives a survivor's benefit from a state or local public retirement system must include that benefit in computing taxable income. The Legislature also provided that the non-spouse survivor's benefit received under the State Employees' Retirement Act, the Public School Employees' Retirement Act of 1979, and the Michigan Legislative Retirement System Act is not taxable income. Frank J. Kelley Attorney General (1 For example, options for payment of benefits to a named beneficiary are available under: (a) The State Employees' Retirement Act, 1943 PA 240, Sec) 31, MCL 38.31; MCL 3.981(31). (b) Public School Employees' Retirement Act of 1979, 1980 PA 300, Sec. 85, MCL 38.1385; MSA 15.893(195). (c) Michigan Legislative Retirement System Act, 1957 PA 261, Secs. 13a, 14, 22; MCL 38.1013a, 38.1014, 38.1022; MSA 2.169(13.1), 2.169(14), 2.169(22). (d) Judges' Retirement Act of 1992, 1992 PA 234, Sec. 506; MCL 38.2506; MSA 27.125(506). (e) Firefighters and Police Officers Retirement Act, 1937 PA 345, Sec. 6, MCL 38.556, MSA 5.3375(6). (f) Municipal Employees' Retirement Act of 1984, 1984 PA 427, Sec. 23, MCL 38.1523; MSA 5.4001(23). (2 See 1980 PA 250, 1980 PA 517, 1981 PA 135, 1982 PA 240, 1984 PA 284, 1984 PA 415, 1986 PA 315, 1987 PA 254 and 1988 PA 516) (3 The Public School Employees' Retirement Act of 1979, Sec)