Was a 1987 IRA withdrawal fully taxable in South Carolina when another state had denied deductions for the original contributions?

Plain-English summary

South Carolina Private Letter Ruling 89-4 concluded that a taxpayer's 1987 IRA withdrawal was fully taxable in South Carolina, even though Pennsylvania had not allowed deductions for the original contributions made while the taxpayer lived there.

The taxpayer established the IRA as a Pennsylvania resident. Pennsylvania denied deductions for the contributions and, according to the ruling's facts, did not tax IRA distributions. After becoming a South Carolina resident, the taxpayer withdrew the funds in 1987 and included the full distribution on both the federal and South Carolina returns.

The ruling said that was the correct result. Historical S.C. Code § 12-7-410 began with federal gross income, adjusted gross income, and taxable income. Sections 12-7-430 and 12-7-435 supplied state modifications, but neither provided an adjustment for IRA contributions or distributions. Because the distribution was included in federal income, it was included in South Carolina income.

The historical transition rule in § 12-7-455 did not help. It reconciled certain differences between pre-1985 South Carolina and federal treatment, not differences between South Carolina law and another state's law, and it did not specifically address IRA contributions.

Common questions

Q: Did South Carolina reduce the taxable distribution because Pennsylvania had denied the contribution deductions? No. The ruling included the full federally taxable distribution in South Carolina income.

Q: Why did federal treatment control? South Carolina's historical starting point was federal income, subject to specified state modifications.

Q: Was there a South Carolina modification for IRA distributions? No. The ruling found none in the cited modification statutes.

Q: Did the 1985 transition rule reconcile Pennsylvania and South Carolina treatment? No. The ruling said the transition provision addressed differences between South Carolina and federal treatment before 1985, not differences among states.

Q: Can another taxpayer rely on PLR 89-4? No. The ruling says it applies only to the specific facts or circumstances in the request and has no precedential value.

Citations and references

• S.C. Code § 12-7-410 (historical federal-income starting point)
• S.C. Code §§ 12-7-430 and 12-7-435 (historical South Carolina modifications)
• S.C. Code § 12-7-455 (historical transition rules)
• S.C. Code § 12-3-170 and SC Revenue Procedure 87-3 (authority identified in the ruling)

Subject

Individual Retirement Account

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR89-4.pdf

Original ruling text

SC PRIVATE LETTER RULING #89-4

TO:

Mr. X

SUBJECT:

Individual Retirement Account

REFERENCE:

S.C. Code Section 12-7-410
S.C. Code Section 12-7-430
S.C. Code Section 12-7-435
S.C. Code Section 12-7-455

AUTHORITY:

S.C. Code Section 12-3-170
SC Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request. Private Letter Rulings have no precedential value
and are not intended for general distribution.

Question:
Is a taxpayer's withdrawal from an IRA (Individual Retirement Account) fully taxable when
amounts contributed while a nonresident were not deductible due to another State's laws?
Facts:
The taxpayer, while a resident of Pennsylvania, established an IRA. Pennsylvania does not allow
an income tax deduction for IRA contributions and does not tax any of the distribution from an
IRA. In 1987, as a resident of South Carolina, he withdrew the funds from his IRA. The
withdrawal was fully taxable on his 1987 Federal return and South Carolina return.
Discussion:
South Carolina Code Section 12-7-410 provides:
The South Carolina gross income, adjusted gross income, and taxable income of an
individual is the individual's gross income, adjusted gross income and taxable income
as determined under the Internal Revenue Code with the modifications specified in
Sections 12-7-430 and 12-7-435.

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Sections 12-7-430 and 12-7-435, which provide modifications to federal income, do not provide
any modifications as a result of contributions to or distributions from an IRA. Therefore, when
an IRA distribution is included in a taxpayer's federal income, it is included in his South Carolina
income. The provisions of 12-7-410, 12-7-430 and 12-7-435 were enacted as part of the Federal
Conforming Act of 1985 and were effective for years beginning after December 31, 1984.
As part of the Federal Conforming Act, Section 12-7-455 was passed to provide transitional
rules. Certain transactions occurring prior to January 1, 1985 that were treated differently for
South Carolina and Federal purposes are addressed and the differences reconciled by allowing deductions, adjusting gains and so forth. There are no provisions addressing differences in
South Carolina laws and the laws of other states. Thus the only differences to be reconciled are
differences between South Carolina treatment and Federal treatment prior to 1985. Additionally,
Section 12-7-455 does not specifically address differences in IRA contributions.
Conclusion:
A taxpayer's withdrawals from an IRA are fully taxable even though amounts contributed while
a nonresident were not deductible due to another State's laws.

SOUTH CAROLINA TAX COMMISSION

s/S. Hunter Howard Jr.
S. Hunter Howard, Jr., Chairman

s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner

s/T. R. McConnell
T. R. McConnell, Commissioner

Columbia, South Carolina
April 7
, 1989

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