BEFORE THE UTAH STATE TAX
COMMISSION
____________________________________
XXXXX
:
Petitioner, : FINDINGS OF FACT,
: CONCLUSIONS
OF LAW,
v. : AND FINAL DECISION
:
AUDITING
DIVISION OF THE : Appeal No. 92-1635
UTAH STATE TAX COMMISSION :
: Account
No. XXXXX
:
Respondent. : Tax Type: Ind. Income
_____________________________________
STATEMENT OF CASE
This
matter was heard before the Utah State Commission on XXXXX and again on XXXXX
in a formal hearing, Lisa L. Olpin,
Administrative Law Judge, presiding.
Representing Petitioner was XXXXX, a certified public accountant. Representing Respondent was XXXXX, Assistant
Utah Attorney General.
Based
upon the evidence and testimony presented at the hearing, the Tax Commission
makes its:
FINDINGS OF FACT
1. The tax in question is individual income
tax.
2. The years in question are XXXXX.
3. The Auditing Division audited Petitioner's
individual income tax for the years in question and determined that Petitioner
had erred on her amount of state deductions in each of the years. Petitioner was charged with an additional
amount of taxes, plus a ten percent negligence penalty and interest.
4. Petitioner argues that in XXXXX the Tax
Commission had previously approved the manner in which Petitioner had handled
her state deductions and that, therefore, it cannot now change its position and
assess additional taxes, penalty and interest on the intervening returns.
5. Before addressing the merits of this case,
the Tax Commission first determines that Petitioner has timely appealed this
case as Petitioner's certified public accountant had filed a notice of power of
attorney with the Commission, informing the Commission of his
representation. The Commission, for
whatever reason however, failed to send the accountant copies of the statutory
notices.
6. The Commission then considers the merits of
this case without concern for any timeliness issues.
7. Prior to the formal hearing in this matter,
the parties stipulated to several statements of fact. Those stipulations pertinent to the remaining issue are as
follows:
a. Petitioner filed a married filing jointly
federal tax return with her spouse, XXXXX, in each year of the audit period.
b. Petitioner filed a married filing separately
Utah tax return during the audit years, claiming Petitioner was a Utah resident
while her husband was a non-resident.
c. Petitioner moved to Utah on XXXXX. She maintained a residence here for herself
and her children. She is employed with
XXXXX and was transferred by that company to the State of Utah. In consideration for being transferred,
Petitioner received additional compensation for anticipated additional mortgage
interest rates in effect when she moved to Utah. Petitioner's spouse remained
in XXXXX where he was employed and rented a residence.
d. Petitioner has filed tax returns itemizing
the full amount of itemized deduction attributable to the State of Utah
including interest expenses on the Utah home mortgage and property taxes on the
Utah home. Since the tax year XXXXX,
returns have been prepared pursuant to information received in XXXXX from
XXXXX, a former employee of the Utah State Tax Commission. The XXXXX return was adjusted by XXXXX, an
auditor in the Utah State Tax Commission, and he issued a report of Utah
Individual Income Tax Audit Changes Form. (See Exhibit A.) That report was canceled after XXXXX received
it. In reliance on this information,
subsequent returns were prepared by Petitioner and filed with the Tax
Commission.
8. Petitioner's certified public accountant,
XXXXX, has been preparing Petitioner's individual income tax returns since
Petitioner moved to the state. In
preparing Petitioner's returns and based upon the information received by
Commission employee XXXXX, XXXXX determined Petitioner's state deductions and
then subtracted the entire amount
on Petitioner's state returns.
9. XXXXX recalled that XXXXX approved these
100% deductions as an acceptable alternative way to file a return where one
spouse is a Utah resident and the other is not.
10. XXXXX continued to file Petitioner's tax
returns taking these full deductions until the Auditing Division notified Petitioner
in XXXXX of the audit changes.
11. The Auditing Division amended Petitioner's
returns for the years in question, explaining that Petitioner was not entitled
to the full state deductions she had claimed.
XXXXX, a supervising auditor at the Tax Commission, stated that
Petitioner is only allowed to take deductions in proportion to her state of
Utah income.
12. For example, in the tax year XXXXX, the
Auditing Division took Petitioner's and her nonresident spouse's federal
adjusted gross income and divided this sum by Petitioner's federal adjusted
gross income to calculate the pro-rata share of Utah income. In so doing, the percentage of Utah income
was XXXXX. Petitioner is then allowed
certain deductions of up to XXXXX and no more.
13. After adjusting all of the returns for the
years in question, the Auditing Division determined that Petitioner owed more
in taxes. A ten percent negligence
penalty and interest were charged in addition.
14. XXXXX contends that his client, Petitioner,
should not be accountable for the additional amount in taxes because 1) he filed her returns after asking the
Commission for guidance and approval of the way he filed in XXXXX; and 2) a lead auditor overruled another auditor's
opinion of how to file under the circumstances of this case (in fact, this
earlier XXXXX audit change had it been sustained would have required Petitioner
to limit her deductions on the percentage basis that Auditing now insists
upon).
15. XXXXX also stated that he understood that
there had been no changes in Utah tax law since XXXXX that would have apprised
him of this new method of calculating deductions under these circumstances
where one spouse is a Utah resident and the other is not. He feels that the way he has been preparing
and continues to prepare Petitioner's returns with the 100% deductions is
appropriate.
16. The Auditing Division countered that Utah
law had been amended in XXXXX, specifying how to determine state taxable income
and how to take deductions in these situations where one spouse is a resident
and the other is a nonresident. Utah
Admin. Rule R865-06I-1 (1987), citing Utah Code Ann. §59-10-119.
17. The Auditing Division argued that Petitioner
is liable for the additional tax amount on the each of the years in question
without regard to any prior understanding Petitioner's accountant had with the
Tax Commission because 1) the law overrules any mistake in advice; and 2) the
new rule in XXXXX (and still in effect) specifies the manner in which
Petitioner should have filed her returns and taken deductions in her situation.
CONCLUSIONS OF LAW
Utah
law has stated since as far back as XXXXX, at least, the following statute in
similar wording throughout the years:
Utah
Code Ann. §59-10-119(3) (1992-93)
(3) If either husband or wife is a nonresident
and the other a resident, separate taxes shall be determined on their separate
state taxable incomes on such forms as the commission shall prescribe, unless
both elect to determine their state taxable income as if both were residents. If a husband and wife (one being a resident,
the other a nonresident) file a joint federal income tax return, but determine
their state taxable income separately, they shall compute their taxable incomes
in this state as if their federal taxable incomes had been determined
separately.
The
Utah Administrative Rule which has been in effect since 1987 states the
following language:
Utah
Admin. RuleR865-9I-6(A thru 2(e) (1992-93)
A. With reference to Utah Code Ann. Section
59-10-119, in cases where either husband or wife is a nonresident and the other
is a resident and they have filed a joint federal return, they shall:
1. determine their state taxable income as if
both were residents and file a joint return, or
2. file separate state returns and each shall
determine state taxable income and tax as follows:
a. The amount of the total federal adjusted
gross income pertaining to each spouse shall first be determined. If any adjustments apply jointly to both
spouses, they shall be divided in proportion to the respective incomes of the
individuals before deduction of adjustments.
b. The amount of federal taxable income for
each spouse shall next be determined by subtracting each individual's party of
the deductions and exemptions. Each
spouse's percentage of the standard or itemized deductions shall be the same as
that which each individual's federal adjusted gross income (FAGI) bears to
their total FAGI. Both individuals
shall claim their own exemptions plus a percentage of the exemptions for
dependents.
c. The state taxable income of the resident
spouse shall then be determined by making the applicable additions,
subtractions (see e. below), and equitable adjustments to that individual's
portion of the total federal taxable income.
d. In determining the state taxable income, if
any, of the nonresident spouse--the applicable additions, subtractions, and
equitable adjustments are made to the nonresident spouse's portion of the total
federal taxable income, arriving at the amount that would have been their state
taxable income if the nonresident spouse had been a resident spouse. Reference Utah Code Ann. Section 59-10-119.
e. Any federal income tax deduction shall be
subtracted by each spouse in the same proportion as each individual's federal
adjusted gross income bears to the total FAGI.
DECISION AND ORDER
Of
the several issues before the Tax Commission in this case, the Commission first
concludes that the correct method of calculating income taxes when one spouse
is a resident and the other is a nonresident is found in the administrative
rule cited above. In XXXXX, without
question, the Commission adopted a way to handle the situation Petitioner found
herself in back in XXXXX when she moved to Utah. This method requires Petitioner to limit deductions based upon
the percentage of income earned in Utah in relation to the federal adjusted
income figure as the Auditing Division proposes.
Based
upon this determination, Petitioner is liable for additional taxes as assessed
by the Auditing Division for the years in dispute.
The
fact that Petitioner's accountant relied upon XXXXX advice from a Commission
employee when initially filing the returns between XXXXX is of little
consequence for the audit years of XXXXX as the new administrative rule
outlined the correct way to file and take deductions in these circumstances.
It is not the responsibility of the Auditing
Division to identify and notify each taxpayer who may be affected by each new
change in the law.
Based
upon the foregoing, the Tax Commission finds that Petitioner is liable for the
additional tax amount as assessed by the Auditing Division (with any
corrections in math as needed per the hearing) for the years XXXXX. Penalties
and interest are waived. It is so
ordered.
DATED
this 25 day of August, 1993.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
W. Val
Oveson* Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco Alice
Shearer*
Commissioner Commissioner