Income Tax

Signed 12/19/02







Petitioners, )

) Appeal No. 02-0125

v. )




COMMISSION, ) Judge: Phan


Respondent. )




Jane Phan, Administrative Law Judge


For Petitioner: PETITIONER 1


For Respondent: Dan Engh, Manager, Income Tax Auditing

Brenda Slater, Senior Auditor



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 August 20, 2002.

Petitioners are appealing an income tax audit deficiency for the tax years 1998, 1999 and 2000. The deficiency stems from Respondent's disallowance of the portion of their retirement deduction attributable to the Social Security Disability Benefits received by PETITIONER. The amount of tax deficiency for 1998 is $$$$$, for 1999 the tax is $$$$$ and for 2000 is $$$$$. Interest was also assessed from the date that the taxes were due for each respective year until the deficiency was paid by Petitioner. Petitioner is requesting a refund.



Petitioners argue that there is an unfair double standard were disability income is concerned. PETITIONER had to stop working prior to age 62 due to health reasons and started receiving social security disability payments. In 1998 she was 59 years old. Petitioners point out that government employees or employees of large corporations can retire early at age 55 and it is Petitioners position that the retired employees are entitled to take a retirement deduction while a person the same age, but receiving disability can not take the deduction. Petitioners acknowledge that Respondent's position is consistent with the law as it is currently written but argue there should be a change in the system. However, they did not understand the law at the time they prepared and filed their income tax returns for the years in question and indicate that the instructions for Utah's income tax forms should have been more clear.

Respondent pointed out that under Utah law disability income is included in taxable income as it is included in federal taxable income and there are no specific Utah adjustments or deductions that apply. Utah Code Ann. Sec. 59-10-114 (2)(d) does provide a deduction to those under age 65 for retirement income. However, it is Respondent's position that under that statute disability income is not retirement income and does not qualify for the retirement deduction. The interpretation is supported by the fact that the Social Security Administration distinguishes its disability payments from its retirement payments. When the person receiving the disability income turns 62, the Social Security Administration, changes the nature of the payments from disability to retirement payments and at that point the recipient would be entitled to a retirement income deduction in Utah.


State taxable income is defined in Utah Code Ann.'59-10-112 as follows:

"State taxable income" in the case of a resident individual means his federal taxable income (as defined by Section 59-10-111) with the modifications, subtractions, and adjustments provided in Section 59-10-114 . . .

Federal taxable income is defined in Utah Code Ann. '59-10-111 as follows:

"Federal taxable income" means taxable income as currently defined in Section 63, Internal Revenue Code of 1986.


Certain additions and subtractions from federal taxable income are set out at Utah Code Ann. Sec. 59-10-114 which provides in pertinent part at subsection (2)(d) a deduction as follows:

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 there of, or the District of Columbia, to the employee involved or the surviving spouse.


The Tax Commission may waive penalties or interest pursuant to Utah Code Ann. 59-1-401(10) which states as follows:

The Tax Commission is granted the authority to waive, reduce, or compromise penalties and interest upon a showing of reasonable cause. Utah Code Ann. '59-1-401(10).




Upon review of this matter, the Commission finds that Respondent is following the state law as it is written. Petitioners unfortunately assumed that the disability payment was the same as a Social Security retirement benefit. The Tax Commission must follow the laws as they are written. The Commission notes that it has waived interest in a similar matter because the 1999 Utah Instruction booklet was somewhat unclear. The 1998 Instruction Booklet would also have had the same language. The instruction booklet was revised for the 2000 tax year to more clearly indicate that the below 65 retirement deduction included only social security retirement income. On this basis the Commission finds reasonable cause for waiver of the interest for both the 1999 and 1998 tax years.

Based on the forgoing, the audit deficiency of individual income tax is sustained in this matter for the tax years 1998, 1999 and 2000. However, the interest is waived for tax years 1998 and 1999. The interest is sustained for tax year 2000. 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 19th day of December , 2002.


Jane Phan

Administrative Law Judge




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

DATED this 19th day of December , 2002.



Pam Hendrickson R. Bruce Johnson

Commission Chair Commissioner




Palmer DePaulis Marc B. Johnson

Commissioner Commissioner