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04/01/76 COOK v. DEPARTMENT TREASURY

April 1, 1976

COOK
v.
DEPARTMENT OF TREASURY



Lindemer, J. Kavanagh, C. J., and Levin, Coleman, and Fitzgerald, JJ., concurred with Lindemer, J. Williams, J., concurred in the result. Ryan, J., took no part in the decision of this case.

SYLLABUS BY THE COURT

1. Taxation -- Income Tax -- Profit-Sharing Trusts -- Lump-Sum Payment.

Income to an employee was realized and taxable when a lumpsum payment of his interest in a profit-sharing trust was made to him.

2. Taxation -- Income Tax -- "Asset Acquired" -- Profit-Sharing Trusts -- Vested Interest.

A taxpayer's interest in a profit-sharing trust was a vested interest and where it was 100% vested before October 1, 1967, was an "asset acquired" for purposes of obtaining an exclusion under the former provisions of the Income Tax Act when the taxpayer had performed all of the services necessary for vesting his interest under the trust agreement although payment would be made only upon retirement or honorable termination from employment (MCL 206.271; MSA 7.557[1271]).

3. Taxation -- Income Tax -- "Asset Acquired" -- "Disposition" -- Profit-Sharing Trusts -- Vested Interest.

The exchange of an employee's vested interest in a profit-sharing trust for a cash lump-sum payment was a "Disposition" of an "asset acquired" within the meaning of a former provision of the Income Tax Act allowing exclusion of a part of the income from Disposition of an asset acquired before January 1, 1968 (MCL 206.271; MSA 7.557[1271]).

4. Taxation -- Income Tax -- "Asset Acquired" -- Profit-Sharing Trusts.

An interest of an employee in a profit-sharing trust is "acquired" when it cannot be defeated by the sole action of the employer (e.g., discharge) within the meaning of a former provision of the Income Tax Act allowing exclusion of a part of the income from Disposition of an asset acquired before January 1, 1968 (MCL 206.271; MSA 7.557[1271]).

The opinion of the court was delivered by: Lindemer

Wendell J. Cook and Lucille K. Cook brought an action for refund of state income taxes when the Department of Treasury disallowed a tax exclusion for a lump-sum payment received by Wendell Cook on February 1, 1968, from an employees' profit-sharing trust. Ingham Circuit Court, Ray C. Hotchkiss, J., denied the refund and the Court of Appeals, McGregor, P. J., and R. B. Burns and R. L. Smith, JJ., affirmed (Docket No. 17579). Plaintiffs appeal. Held:

1. When the lump sum was paid to Wendell Cook, income was realized and taxable. Under the terms of the trust agreement, Cook had provided all the services necessary for 100% vesting of his interest in the profit-sharing fund and retirement or refraining from committing various felonies, such as theft and embezzlement, are not valuable services as yet unrendered to Cook's employer such that the trust interest was not vested.

2. The part of Cook's interest in the profit-sharing trust which was 100% vested prior to October 1, 1967, is an "asset acquired" before that date for purposes of an exclusion under the former provision of § 271 of the Income Tax Act, MCL 206.271; MSA 7.557(1271). The exchange of Cook's vested interest in the trust for the lump sum satisfies the Disposition requirement for the exclusion.

3. The taxable portion of the proceeds from Disposition of the asset is computed from the ratio of the number of months from the effective date of the Income Tax Act until the date of Disposition of the asset to the number of months from the date of acquisition of the asset to the date of Disposition. The interest is "acquired" when the employee's interest cannot be defeated by the sole action of the employer (e.g., discharge), in this case at the rate of 4% per year. The interest in the profit sharing plan was acquired over the 25-year vesting period and acquisition was not deferred until the interest was 100% vested in 1966. The proportion of gain or loss should ...


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