Income Tax

Signed 8/6/03







Petitioners, ) Appeal No. 02-0122


v. ) Account No. #####


AUDITING DIVISION ) Tax Type: Income Tax


COMMISSION, ) Tax Year: 1999


Respondent. ) Judge: Davis




G. Blaine Davis, Administrative Law Judge



For Respondent: Ms. Susan Barnum, Assistant Attorney General

Mr. Dan Engh, from the Auditing Division

Mr. Steve Nelson, from the Auditing Division




This matter came before the Utah State Tax Commission for an Initial Hearing pursuant to the provisions of Utah Code Ann. '59-1-502.5, on January 23, 2003.

In this matter, there were originally issues involving 1998, 1999, and 2000 income tax returns for Petitioners. However, the parties have resolved the issues for 1998 and 1999, so the only remaining issues involve the 2000 Utah Individual Income Tax Return for Petitioners.

When Petitioners filed their 2000 Utah Individual Income Tax Return, they took a deduction on line 14 for a retirement exemption, and they also took a deduction on line 17 for health care insurance. Respondent has audited the return of Petitioners and has disallowed those deductions.

For the retirement income deduction, Petitioners deducted an amount withdrawn from an Individual Retirement Account. Petitioners are both under the normal retirement age. For those withdrawals, the 1099 Form received by Petitioners were marked "1-Early Distribution". Petitioners were, at the time of the withdrawal, less than 50 years of age. However, because the amounts withdrawn were used to pay health insurance premiums for one of Petitioners who was unemployed, there was no early withdrawal penalty imposed by the Internal Revenue Code because of Section 72(t)(2)(D), Internal Revenue Code, which provides for an exemption from the early withdrawal penalty for distributions from IRA's to pay health insurance premiums for certain unemployed individuals.

The deduction for health care insurance taken on the return of Petitioners was for the portion of the premium to pay the health insurance premiums for Petitioner who was unemployed during that time, and also for the son of the Petitioners. The health insurance is carried by the employer of Petitioner, and the premiums for her insurance are paid by her employer. However, it is necessary for her to pay the premium for her husband and for their son. Petitioners and their son are all covered by a single insurance policy, but the payment of the premiums is shared between the employer, who pays the portion for the wife, and Petitioners, who pay the portion of the premium applicable to Petitioner and the son.


Utah Code Ann. 59-10-114(2)(d)

"amounts received by taxpayers under age 65 as retirement income which, for purposes of this section, means pensions and annuities, paid from an annuity contract purchased by an employer under a plan which meets the requirements of section 404(a)(2), Internal Revenue Code, or purchased by an employee under a plan which meets the requirements of Section 408, Internal Revenue Code, or paid by the United States, a state, or political subdivision thereof, or the District of Columbia, to the employee involved or the surviving spouse."


Utah Code Ann. 59-10-114(2)(h) provides for a deduction for payments for health care insurance as follows:

(h) subject to the limitations of subsection (3)(e), amounts a taxpayer pays during the taxable year for health care insurance, as defined in Title 31A, Chapter 1, General Provisions:



(A) the taxpayer;

(B) the taxpayer's spouse; and

(C) the taxpayer's dependents; and

(ii) to the extent the taxpayer does not deduct the amounts under Section 125, 162, or 213, Internal Revenue Code, in determining federal taxable income for the taxable year;


Utah Code Ann. 59-10-114(3)(e) provides a limitation on the health care insurance payments as follows:

(e) For purposes of subsection (2)(h), a subtraction for an amount paid for health care insurance as defined in Title 31A, Chapter 1, General Provisions, is not allowed:

. . . .

(ii) for a taxpayer who is eligible to participate in a health plan maintained and funded in whole or in part by the taxpayer's employer or the taxpayer's spouse's employer.


Utah Administrative Code Rule R865-9I-38 provides in relevant part as follows:

"A. Amounts received by taxpayers from pension or annuity plans described in 59-10-114 are not retirement income for purposes of that section if:

1. The amounts received are subject to the penalty or additional tax imposed by I.R.C. sections 72(q) and (t); or

. . . .

3. The amounts received are due to termination of employment before reaching a normal retirement age as established under the qualifying plan."



Pursuant to Utah Code Ann. 59-10-114(d), taxpayers may deduct from their federal taxable income an amount received as retirement income if they are under age 65. In this case, although the amounts were withdrawn from a retirement fund, which would otherwise qualify for the retirement income deduction, they were received as early distributions and were not received as "retirement income". Accordingly, the Commission determines that the deduction for retirement income taken by Petitioners was not appropriate.

For the health care insurance deduction, the facts show that both Petitioners and their son are on a single health insurance plan, and that plan is maintained and is funded in part by the taxpayer's employer or the taxpayer's spouse's employer. Accordingly, Utah Code Ann. 59-10-114(3)(e) provides that a deduction for such health insurance "is not allowed."


Based upon the foregoing, the Commission determines that the deductions taken by Petitioners on their 2000 Utah Individual Income Tax Return were not appropriate. Therefore, the audit assessment is hereby sustained and the Petition for Redetermination is hereby denied. It is so ordered.

This decision does not limit a party's right to a Formal Hearing. However, this Decision and Order will become the Final Decision and Order of the Commission unless any party to this case files a written request within thirty (30) days of the date of this decision to proceed to a Formal Hearing. Such a request shall be mailed to the address listed below and must include the Petitioner's name, address, and appeal number:

Utah State Tax Commission

Appeals Division

210 North 1950 West

Salt Lake City, Utah 84134

Failure to request a Formal Hearing will preclude any further appeal rights in this matter.

DATED this 6th day of August , 2003.




G. Blaine Davis

Administrative Law Judge




The Commission has reviewed this case and the undersigned concur in this decision.

DATED this 6th day of August , 2003.





Pam Hendrickson R. Bruce Johnson

Commission Chair Commissioner





Palmer DePaulis Marc B. Johnson

Commissioner Commissioner