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Policy letter; reciprocal agreement; Mar16,2004

Topic Code: R111Reciprocal Agreement (ST)(MVF)           Document Reference: 04201034

March 16, 2004

Redacted Content

RE: Unemployment Compensation & Severance Pay – Iowa-Illinois Reciprocal
Agreement

Dear Redacted Content :

Your FAX dated March 10, 2004 has been referred to me for reply. Your FAX requested a determination regarding income from unemployment compensation and severance pay, and whether this income should be reported to Iowa or Illinois.

You were an Iowa resident for the entire 2003 tax year, and you were employed by Quad-City Development Group, an employer located in Illinois. Your last day of employment with Quad-City Development Group was November 14, 2003. A Severance Agreement and Release was signed with your employer, also on November 14, 2003. The agreement stated that you would receive lump-sum payments of $6,500 on November 26, 2003 and $13,500 on January 14, 2004. The agreement states that no portion of the payment shall be characterized or constituted as wages, back pay or any other form of compensation for employment or punitive damages. You also receive unemployment compensation from the Illinois Department of Employment Security.

You indicated in your letter that you have filed your Iowa individual income tax return for 2003. You included both the unemployment compensation and the severance pay as Iowa source income on this return, based on the assumption that all compensation received by an Iowa resident working in Illinois was covered by the Iowa-Illinois reciprocal agreement. You are now questioning whether the unemployment compensation and severance pay should have included as Iowa source income on the 2003 return.

The Iowa-Illinois reciprocal agreement provides that income earned from personal services in Illinois by residents of Iowa will be subject to Iowa tax as long as income earned from personal services in Iowa by residents of Illinois are subject to Illinois tax. Income from personal services includes wages, salaries, commissions, tips, deferred compensation, pensions and annuities and any other remuneration paid for personal services.

The question posed in your letter involves whether unemployment compensation and severance pay should be considered income from personal services.

Your letter is correct in stating that unemployment compensation is not considered income from personal services for purposes of the reciprocal agreement. Iowa Rule 701-38.13(1)(g) states as follows:

g. For purposes of the agreement, “compensation” means wages, salaries, commissions, tips, deferred compensation, pensions, and annuities and any other remuneration paid for personal services. In the case of deferred compensation, pensions, and annuities, those incomes are deemed to have been earned at the time of employment. Therefore, if an Illinois resident receives a pension or annuity from employment in Iowa at the time the reciprocal agreement was in effect, the pension or annuity income is not taxable to Iowa since it is “compensation” covered by the reciprocal agreement. “Compensation” does not include unemployment compensation benefits which an Illinois resident receives due to employment in Iowa. (emphasis added).

Therefore, the unemployment compensation received in 2003 should be reported to the state of Illinois.

The issue regarding severance pay is not specifically addressed in the Iowa rules regarding the reciprocal agreement. The Department notes that another rule regarding compensation of nonresident members of professional athletic teams, Rule 40.46(1)(c), states as follows:

c. The term “total compensation for services rendered as a member of a professional athletic team” means the total compensation received during the taxable year for services rendered. “Total compensation” includes, but is not limited to, salaries, wages, bonuses (as described in subparagraph (1) of this paragraph), and any other type of compensation paid during the taxable year to a member of a professional athletic team for services performed in that year. Such compensation does not include strike benefits, severance pay, termination pay, contract or option year buy–out payments, expansion or relocation payments, and any other payments not related to services rendered for the team. (emphasis added).

While this rule does not specifically address compensation for personal services under the reciprocal agreement, it does provide guidance regarding how severance pay is treated for other types of income from personal services. In addition, the Severance Agreement and Release states that no portion of this severance payment should be characterized or constitute wages or other form of compensation for employment or punitive damages.

Therefore, the Department contends that the lump sum payment of $6,500 should not be considered income from personal services for purposes of the reciprocal agreement, and this income should be reported to the state of Illinois.

The advice given in this letter is not a declaratory order issued in accordance with Iowa Code Section 17A.9 and is not binding upon the Department. If you intend to rely on the advice in filing a return or amended return with the Department, please include a copy of this letter with the appropriate return.

If you have any questions on this matter, please contact me at (515) 281-6183.

Sincerely,

Jim McNulty

Policy Section

Compliance Division