BEFORE THE UTAH STATE TAX COMMISSION
Petitioners, ) FINDINGS OF FACT,
: CONCLUSIONS OF LAW,
v. ) AND FINAL DECISION
AUDITING DIVISION OF THE ) Appeal No. 91‑1712
UTAH STATE TAX COMMISSION, :
) Account No. XXXXX
STATEMENT OF CASE
This matter came before the Utah State Tax Commission for a formal hearing on XXXXX. Paul F. Iwasaki, Presiding Officer, heard the matter for and on behalf of the Commission. Present and representing the Petitioner was XXXXX, C.P.A. Present and representing the Respondent was XXXXX, Assistant Utah Attorney General.
Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. The tax in question is income tax.
2. The income tax years in question are XXXXX, XXXXX and XXXXX.
3. In XXXXX, the Petitioners purchased a business in the state of XXXXX. At that time and until they sold the business in XXXXX, the Petitioners were residents of XXXXX.
4. In XXXXX, the Petitioners sold the business. By the terms of that sale, the Petitioners were to receive $$$$$ per month for XXXXX years with balloon payments due on certain specified dates.
5. In XXXXX the Petitioners left XXXXX and became residents of XXXXX, Utah.
6. During the years in question, the Petitioners received the monthly payments from the sale of the business. Those payments included the amounts due for principal and interest.
7. During the years in question the Petitioners did not include the principal portion of the payments received from the sale of the business in their Utah income tax returns, but did include the interest portion of those payments.
8. The Petitioners included the principal portion of the payments in their federal returns for the years in question.
9. For the tax years XXXXX, XXXXX and XXXXX, additional tax, penalty and interest was assessed in the amounts of $$$$$; $$$$$; and $$$$$ respectively. These deficiencies were based upon the Petitioners not having included the principal portion of the installment payments received while they were residents of the state of Utah.
10. The state of Washington has no state individual income tax.
CONCLUSIONS OF LAW
If any provision of the Internal Revenue Code requires the inclusion of an item of gross income or the allowance of an item of deduction from gross income in the computation of federal taxable income of a taxpayer for any taxable year beginning on or after the effective date of this chapter, and if such item has been taken into account in computing the taxable income of the taxpayer for state income tax purposes for any prior taxable year, the Commission shall make or allow such adjustments to the taxpayer's state taxable income as are necessary to prevent the inclusion for a second time or deduction for a second time for such item for state income tax purposes. (Utah Code Ann. '59‑10‑115(1).)
If in a return filed for a taxable year beginning on or after the effective date of this chapter, the taxpayer reports gain or loss from the disposition of property . . . and if his basis for gain or loss on the disposition of such property, . . . is different for federal income purposes than it would be for state income tax purposes if the provisions of former Chapter 14, Title 59, were applicable to such taxable year, the Commission shall allow or make such adjustment to the state taxable income of the taxpayer for such taxable year as will result in the use by the taxpayer of the same basis, for such purpose, that he would be allowed or required to use in reporting such gain or loss, . . . if the provision of former Chapter 14, Title 59, were applicable to the taxable year . . . . (Utah Code Ann. '59‑10‑115(2).)
"State taxable income" in the case of a resident individual means his federal taxable income (as defined by '59‑10‑111) . . . (Utah Code Ann. '59‑10‑112).)
DECISION AND ORDER
The issue before the Commission is whether, under the circumstances and facts presented in this case, the income received from the Petitioners's sale of their business is income that is taxable in this state.
The Petitioner seems to argue that at the time the property was sold, the amount realized, that is the gain, was known and thus was realized at that time. Because the state of XXXXX has chosen not to impose an income tax on that gain, Utah by so doing, violates the full faith and credit clause of the United States Constitution.
Under the circumstances of this case, the Tax Commission rejects the Petitioners argument. Although the Petitioner realized a gain from the sale of the business at the time of the sale, the Petitioner deferred recognition of that gain by accepting payment under the installment method. Further, the Petitioner reported the gain under the installment method for federal income tax purposes. By so doing, and by becoming a resident of the state of Utah, the Petitioner thus submitted to Utah law regarding the treatment of payments received under the installment method as reported for federal income taxes purposes.
Simply put, because the Petitioner reported the gain for federal income tax purposes as an installment sale, and because Utah law defines "state taxable income" as federal taxable income (subject to certain modifications and adjustments), the Petitioner recognized income in Utah as a resident of Utah.
It should be noted that since no income tax on installment payments received by the Petitioner while a resident of the state of Utah were subject to XXXXX income tax, there is no duplication of state income tax paid on the same income.
Based upon the foregoing, the Tax Commission affirms the determination of the Auditing Division in its assessing an income tax deficiency plus interest for the years in question. The Tax Commission does, however, find that a waiver of the penalty imposed for each of the years in question is appropriate. It is so ordered.
DATED this 20 day of August, 1992.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger O. Tew
Joe B. Pacheco S. Blaine Willes
NOTICE: You have twenty (20) days after the date of the final order to file a request for reconsideration or thirty (30) days after the date of final order to file in Supreme Court a petition for judicial review. Utah Code Ann. ''63‑46b‑13(1), 63‑46b-14(2)(a).