§40-18-25.1. Estates and trusts - Exemptions.

(a) Trusts shall be exempt from the tax imposed by this chapter if they are exempt from federal income tax under 26 U.S.C. § 501 (relating to exempt organizations), § 401 (relating to pension and profit sharing trusts), § 408 and § 408A (relating to individual retirement accounts and individual retirement annuities), § 530 (relating to Coverdell education savings accounts), or § 664 (relating to charitable remainder trusts). The foregoing exemption shall not apply, however, to any entity that is not exempt from federal income tax by reason of 26 U.S.C. §§ 502 or 503, nor to any income of an otherwise exempt organization to the extent that such income constitutes "unrelated business taxable income," as defined in 26 U.S.C. § 512.

(b) The taxation of distributions from a trust described in 26 U.S.C. § 401 that constitutes a "defined contribution plan" as defined in 26 U.S.C. § 414(i) shall be determined in accordance with 26 U.S.C. § 402. The penalty taxes imposed by 26 U.S.C. § 72(t) shall not apply. For purposes of this section, the taxpayer's investment in the contract shall include amounts contributed prior to January 1, 1982, to a trust described in subsection (a) for which no deduction was allowed under Section 40-18-15 or corresponding provisions of prior laws of Alabama, or in the case of salary reduction plans, were not excluded from gross income under Section 40-18-14.

(c) Contributions to a trust made by an employer during a taxable year of the employer which ends within or with a taxable year of the trust for which the trust is not exempt from federal income tax under 26 U.S.C. § 501 shall be taxed in accordance with 26 U.S.C. § 402(b).

(d) The taxation of distributions from a trust described in 26 U.S.C. §§ 408, 408A, or 530 shall be determined in accordance with whichever of those sections is applicable. The penalty taxes imposed by 26 U.S.C. § 72(t) shall not apply. For purposes of this section, the taxpayer's investment in the contract shall include:

(1) Amounts contributed prior to January 1, 1982, by an individual for himself or herself, his or her spouse, or both, under an individual retirement account, annuity, or bond for which no deduction was allowed under Section 40-18-15 or corresponding provisions of prior laws of this state.

(2) The amount included in gross income in prior years by the employee, the distributee, his or her predecessor in interest, or the trust by reason of the lack of exemption from the tax imposed by this chapter of a trust, individual retirement account, individual retirement annuity, or individual retirement bond to which contributions described in subdivision (1) were made.

(3) The amount included in gross income by the employee, distributee, or predecessor in interest as a result of a distribution from any other trust, individual retirement plan, individual retirement account, individual retirement bond, or custodial account because such distribution was not excludable from gross income as a rollover distribution, as defined in 26 U.S.C. §402(c) or equivalent provisions of prior law, when made or was includable pursuant to 26 U.S.C. § 408(m), relating to investments in collectibles treated as distributions.

(Act 2006-114, §3.)