Could a South Carolina resident claim a credit for another state's tax on pension income earned through medical services performed in that state?

Plain-English summary

South Carolina Private Letter Ruling 87-7 allowed a South Carolina resident physician to claim a credit for income tax paid to another state on pension income.

The pension had been funded through the physician's professional medical corporation while he practiced in California. The Commission treated the retirement payments as income earned from personal services performed in that state.

Because section 12-7-2410 granted a credit for another state's tax on personal-service income earned there, the pension tax qualified. The credit was limited to the South Carolina tax attributable to the income taxed by both states.

The physician's pension

The taxpayer was a physician with a money-purchase pension plan funded over the years through his professional corporation medical practice in another state.

He was entering semi-retirement and expected to begin receiving retirement income in mid-1988, when he would be a South Carolina resident.

The other state treated the pension as deferred compensation for personal services and sourced it to the place where the services were performed rather than the taxpayer's residence or place of payment.

The ruling's discussion identified the physician's career and personal services as being in California.

South Carolina's historical credit rule

Section 12-7-2410 allowed a South Carolina resident a credit when the resident was liable for another state's income tax on:

• income earned from personal services performed in the other state; or
• income received through a nonresident fiduciary.

The credit applied only to income included in South Carolina taxable income.

It could not exceed the proportion of South Carolina income tax attributable to the South Carolina taxable income also taxed by the other state.

Why pension income counted as earned personal-service income

The South Carolina Code did not define income earned from personal services for this purpose.

The ruling cited Adam v. Burts for definitions of earned as gaining, deserving, or becoming entitled to compensation through labor, services, or performance, including income fixed under a contract.

It also cited Fennell v. South Carolina Tax Commission for the conclusion that income from services performed by dentists and other professionals was income from personal services.

The Commission concluded that the physician earned the pension during his California medical career. The personal services producing the pension therefore were performed in California.

What this means for you

South Carolina residents receiving out-of-state pensions

PLR 87-7 tied the historical credit to where the personal services earning the pension were performed, not merely where the retiree lived when payments began.

Physicians and other professionals

The ruling treated professional medical work as personal services and the pension as compensation earned over that career.

Retirement and tax planners

Even when the credit qualified, it was limited to the South Carolina tax attributable to the income taxed by both states.

Multistate taxpayers

The favorable result depended on actual tax paid to another state on income fitting the personal-services category in the cited statute.

Readers applying the ruling today

PLR 87-7 applied 1987 pension-sourcing and resident-credit law. Current federal restrictions, state sourcing, retirement-income statutes, reciprocal rules, credit calculations, residency, and return requirements must be checked independently.

Common questions

Q: Did the physician qualify for the other-state tax credit?

A: Yes. The Commission treated the pension as earned from personal services performed in California.

Q: Why was a pension treated as personal-service income?

A: It was deferred compensation funded through the physician's professional practice and earned during his medical career.

Q: Did South Carolina residency when payments began prevent the credit?

A: No. The ruling allowed the credit because another state taxed income earned from services performed there.

Q: Was the credit unlimited?

A: No. It could not exceed the South Carolina tax attributable to the income taxed by both states.

Q: Did the ruling concern a pension earned from South Carolina work?

A: No. The personal services producing the pension were performed in California.

Q: Can another retiree rely on PLR 87-7?

A: No. The ruling states that it applied only to the requesting taxpayer's specific facts, had no precedential value, and was not intended for distribution.

Citations and references

• S.C. Code section 12-7-2410 — historical credit for income tax paid to another state
• S.C. Code sections 12-7-410, 12-7-430, and 12-7-435 — South Carolina taxable income and credit limitation
• Adam v. Burts, 140 S.E.2d 586 — meaning of earned, as quoted in the ruling
• Fennell v. South Carolina Tax Commission, 103 S.E.2d 424 — professional income as personal-service income
• S.C. Code section 12-3-170 — private-letter-ruling authority

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR87-7.pdf

Original ruling text

SC PRIVATE LETTER RULING #87-7

TO:

XYZ Company

SUBJECT:

Income Tax Credit

REFERENCE:

S.C. Code Section 12-7-2410

AUTHORITY:

S.C. Code Section 12-3-170

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 distribution.

Question:
Is a South Carolina resident allowed a credit for taxes paid to a State on account of pension
income?
Facts:
The taxpayer, a physician, has a money purchase pension plan which he has funded over the
years through his professional corporation medical practice in a State. The taxpayer is now in
semi-retirement and will begin to draw his retirement income starting in mid 1988 at which time
he will be a resident of South Carolina. A State will tax the pension income as it considers a
retirement annuity or pension to be deferred compensation for personal services and the source
of the income from personal services is the place where the services are actually performed and
not the residence of the taxpayer or the place of payment.
Discussion:
South Carolina Code Section 12-7-2410 provides a credit for income tax paid by a South
Carolina resident to another state as follows:
Whenever an individual who is a resident of South Carolina is liable for income tax in
another state on account of (1) income earned from personal services rendered in the other
state, or (2) income received through a nonresident fiduciary, the Tax Commission shall
credit the amount of income tax payable for the income year by the taxpayer under this

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Title with the amount of tax paid by the taxpayer to another state on South Carolina taxable
income. In no case shall the credit herein allowed exceed an amount equivalent to the
proportion of South Carolina Income Tax attributable to the South Carolina taxable income
as determined in accordance with Section 12-7-410, as modified by Sections 12-7-430 and
12-7-435 and taxed by another state.
The South Carolina Code has no definition as to what constitutes income earned from
personal services. The South Carolina Supreme Court used the following to define
"earned" in Adam v. Burts 140 S.E.2d 586.
"In Webster's New Twentieth Century Dictionary the work "earned" is defined as meaning
"to gain as profit". Webster's New Collegiate Dictionary defines the word "earned" as
meaning to "deserve" and to "merit". The word "earned" has been construed as meaning
entitled to a sum of money under the terms of a contract. WesternStates L. Ins. Co. v.
Lockwood, 166 Cal. 185, 135 P. 496.
"Earned" means to merit or deserve, as labor or services; to do that which entitles one to a
reward whether the reward is received or not, to acquire by labor, services or performance.
Cold Metal Process v. Commissioner, 6 Cir., 247 F2d 864. Income is earned when all
events have occurred which fix its amount and determine the liability of the party from
whom it is forthcoming to pay."
The S.C. Supreme Court in Fennell v. South Carolina Tax Commission 103 SE. 2d 424 ruled that
income from services rendered by dentists as well as other professionals, was from "personal
services".
The pension income in question was "earned" during the course of the taxpayer's career as a
physician in California. The "personal services" which earned the pension income were rendered
in California.
Conclusion:
The taxpayer, a resident of South Carolina, is allowed a credit for taxes paid to a State on
account of pension income.
SOUTH CAROLINA TAX COMMISSION
s/S. Hunter Howard Jr.
S. Hunter Howard, Jr., Chairman
s/John M. Rucker
John M. Rucker, Commissioner
s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr. Commissioner
Columbia, South Carolina
July 22
, 1987
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