02-0604

Income Tax

6/18/03

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

PETITIONER, )

) ORDER

Petitioners, )

) Appeal No. 02-0604

v. ) Account No. #####

)

AUIDITING DIVISION OF ) Tax Type: Income Tax

THE UTAH STATE TAX )

COMMISSION, ) Judge: Phan

)

Respondent. )

_____________________________________

Presiding:

Jane Phan, Administrative Law Judge

Appearances:

For Petitioner: Petitioner

For Respondent: John McCarrey, Assistant Attorney General

Becky McKenzie, Senior Auditor, Income Tax Auditing

STATEMENT OF THE CASE

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 November 25, 2002.

Petitioner is appealing an audit deficiency of additional income tax and interest for the tax year 1998. The Statutory Notice of Audit Change was issued on March 27, 2002. The amount of the deficiency at issue is $$$$$ in tax as well as the interest accrued thereon. No penalty was assessed. The deficiency is the result of Respondent’s disallowance of a net operating loss carry forward.

The loss at issue was incurred in 1994 from a Utah source. Petitioners, however, were residents of STATE during that year. Petitioners claimed the loss on their federal income tax return for 1994 but were unable to claim the loss on any state return for that year, as they had insufficient income to offset the loss in Utah and STATE does not have a state individual income tax. Petitioners later moved to Utah and filed a Utah resident individual income tax return for the year 1998. On their 1998 Utah return they claimed the Utah loss generated in 1994. Since they had already claimed the loss on their federal return in 1994 they did not claim it again on their federal return in 1998. This led to a discrepancy between their federal taxable income for the 1998 tax year and what they claimed on their Utah return. As a result, Petitioners, 1998 Utah income tax return was audited.

It was Respondent’s position that the loss can only be taken on the Utah return for the same year as it is taken on the federal return. Petitioner argues to the contrary.

This is an issue that has been considered by the Commission on previous occasions and it has been the Commission’s conclusion that a loss can only be taken on the Utah return for the same year that it was taken on the federal return. As Respondent’ points out there is no other statutory basis for the deduction of a loss from “state taxable income.” In Utah, state taxable income starts with the federal taxable income for that year. There are then some modifications, subtractions or adjustments that are made to the federal taxable income and these are set out at Utah Code Ann. Sec. 59-10-114, none of which allow for a loss that is not already included in the federal taxable income.

Petitioner argues that Utah Code Ann. Sec. 59-10-120 would require Respondent to allow the loss for Petitioner. That section deals with changes in resident or nonresident status which occurs during the tax year. It does not support Petitioners’ contention that it serves to allow a loss occurring four years prior. The disallowance of the loss has nothing to do with Petitioners’ change of status from nonresident to resident. For example if Petitioners’ remained nonresidents in 1998 but earned Utah source income during 1998, they still would be precluded from offsetting the 1994 loss against the 1998 income if they had already claimed the loss on their 1994 federal income tax return.

Petitioners also argue that an equitable adjustment should be made pursuant to Utah Code Ann. §59-10-115. The Commission finds no basis in the statute of rule for this type of adjustment. The Tax Commission is bound to follow the plain language of the law. The facts in this matter do not fit within the statutorily provided equitable adjustment at Utah Code Ann. 59-10-115 subsections (1) through (3). Subsection (4) authorizes the Tax Commission to prescribe by rule additional situations were equitable adjustments may be made. Pursuant to that authority, the Commission has issued Utah Administrative Rule R865-9I-4. The Tax Commission has already considered whether an equitable adjustment may be made in factual situations similar to Petitioners and concluded to the contrary. The decisions were issued in two similar appeals, Tax Commission Order, Appeal No. 02-0009 and Appeal No. Order 01-1469. There is no basis in this appeal to decide to the contrary of the Commission's previous decisions.

APPLICABLE LAW

Utah Code Ann. Sec. 59-10-112 provides:

“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.

Utah Code Ann. §59-10-122 provides:

(1) For purposes of the tax imposed by this chapter, a taxpayer’s taxable year shall be the same as his taxable year for federal income tax purposes.

Utah Code Ann. §59-10-115(4) provides:

"(4) The commission shall by rule prescribe for adjustments to state taxable income of the taxpayer in circumstances other than those specified by Subsections (1), (2), and (3) of this section where, solely by reason of the enactment of this Chapter, the taxpayer would otherwise receive or have received a double tax benefit or suffer or have suffered a double tax detriment. Anything in this section or this chapter to the contrary notwithstanding, the Commission may not make any adjustment pursuant to this section which will result in an increase or decrease of tax liability the amount of which is less than $25."

Utah Administrative Code, Rule R865-9I-4.A. provides:

"A. Every taxpayer shall report and the Tax Commission shall make or allow such adjustments to the taxpayer's state taxable income as are necessary to prevent the inclusion or deduction for a second time on his Utah income tax return of items involved in determining his federal taxable income. Such adjustments shall be made or allowed in an equitable manner as defined in Utah Code Ann. §59-10-115 or as determined by the tax commission consistent with provisions of the Individual Income Tax Act."

DECISION AND ORDER

Based on the forgoing, Petitioner's appeal in this matter is 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 18^th day of June , 2003.

____________________________________

Jane Phan

Administrative Law Judge

BY ORDER OF THE UTAH STATE TAX COMMISSION.

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

DATED this 18^th day of June , 2003.

Pam Hendrickson R. Bruce Johnson

Commission Chair Commissioner