BEFORE THE UTAH STATE TAX COMMISSION
: FINDINGS OF FACT,
Petitioners, ) CONCLUSIONS OF LAW,
: AND FINAL DECISION
AUDITING DIVISION OF THE ) Appeal No. 91‑1996
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. Lisa L. Olpin, Presiding Officer, heard the matter for and on behalf of the Commission. Present and representing Petitioner was XXXXX, a certified public accountant. Present and representing 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 personal income tax.
2. The time period in question is the year XXXXX.
3. Petitioners owned rental property in XXXXX for several years prior to XXXXX. During these years of ownership, Petitioners lived in XXXXX or XXXXX (States that do not have state income tax.)
4. Petitioners filed and paid federal income taxes each of these years, deducting depreciation on their rental property. Although Petitioners were allowed the same deduction on their state returns, they never actually took the deduction as there was no state income tax.
5. In XXXXX, Petitioners moved to Utah and subsequently sold their XXXXX rental property.
6. On their XXXXX federal income tax return, Petitioners showed a $$$$$ profit on the sale of the subject property, calculated as follows:
$$$$$ XXXXX sales price
$$$$$ cost less $$$$$ in depreciation
7. On their Utah State income tax return, Petitioners showed a $$$$$ loss on the sale of the subject property calculated as follows:
$$$$$ XXXXX sales price
$$$$$ recomputed basis
8. Petitioners contend that since they lived in states where there were no state income taxes during ownership of the rental property, they should now be able to claim, in XXXXX, the years of depreciation that they never claimed on the state level.
9. Petitioners relied upon the XXXXX Utah instruction booklet in making the equitable adjustment where it reads that such a deduction is required if "you sold property and your Utah basis in the property sold was in excess of your federal basis."
10. According to Petitioners' interpretation, requiring them to reduce the basis in the subject property "by an amount for which they have received no benefit would be a double tax detriment."
CONCLUSIONS OF LAW
As declared by the state legislature, one objective of the Individual Income Tax Act is to impose on each resident individual for each taxable year a tax measured by the amount of his "taxable income" for such year, as determined for federal income tax purposes, subject to certain adjustments. (Utah Code Ann. '59‑10‑102(10)).
Further, provisions of the federal income tax code are relied upon to the extent practicable to create greater consistency between state and federal procedures and administration. (Utah Code Ann. '59‑10‑102(4)).
The federal statute relevant to the matter before the Commission is found at 29,764; 8 CCH 1992 Stand. Fed. Tax Rep. which states:
If the taxpayer has not taken a depreciation deduction either in the taxable year or for any prior taxable year, adjustments to basis of the property for depreciation allowable shall be determined by using the straight‑line method of depreciation.
It is well‑settled in federal law that upon the sale of property, the depreciation allowable, even though not claimed, must be deducted from the cost of the property in determining the gain or loss. Beckridqe Corp. v. Commission, 9566; 42‑2 U.S. Tax Cas. and Herder et al v. Helvering, 9578; 39‑2 U.S. Tax Cas. and U.S. v. Ludey, 274 U.S. 295, 304.
DECISION AND ORDER
In the present case, Petitioners must deduct the depreciation allowable in order to determine the adjusted basis in the subject property. "Failing to take depreciation when it occurs in the prior taxable years does not prevent its inclusion in the determination of the adjusted cost basis of the property." Herder, supra. The fact that the states where Petitioners resided lacked state income tax is immaterial in the calculation of an adjusted basis upon the sale of the property.
In applying the foregoing to Petitioners XXXXX Utah State income tax return, the adjusted basis in the subject property is exactly the same as the $$$$$ figure Petitioners reported on their XXXXX federal return.
Given that the basis of the subject property is the same on both state and federal returns, no equitable adjustment is necessary.
Based upon the foregoing, the Tax Commission finds that the Auditing Division correctly assessed Petitioners additional personal income based on the sale of the rental property in question. The ten percent negligence penalty is waived; interest is not. It is so ordered.
Dated this 2 day of October, 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).