BEFORE THE UTAH STATE TAX
COMMISSION
_________________________________
XXXXX &
XXXXX, )
: FINDINGS
OF FACT,
Petitioners, ) CONCLUSIONS OF LAW,
: AND FINAL
DECISION
v. )
OPERATIONS
DIVISION OF THE : Appeal No. 92-1891
UTAH STATE TAX
COMMISSION, )
: Account
No. XXXXX
Respondent. )
_______________________________________
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 Petitioners
were XXXXX and XXXXX. Present and
representing the Respondent in this matter was XXXXX, Assistant Attorney
General.
Based
upon the evidence and testimony presented at the hearing, the Tax Commission
hereby makes it:
FINDINGS OF FACT
1. The tax in question is income tax.
2. The years in question are XXXXX, XXXXX and
XXXXX.
3. XXXXX (hereinafter "Petitioner"),
is a retired employee of the XXXXX XXXXX, and resides in XXXXX. He receives retirement income from XXXXX
that is taxable to the state of XXXXX.
4. For the years in question, the Petitioner
and his wife filed joint resident Utah income tax returns. For the XXXXX tax year the Petitioner
claimed a credit for taxes paid to another state of $$$$$. That amount represented the amount of money
that had been withheld by the state of XXXXX on his retirement income. The actual tax liability to the state of
XXXXX for that year was $$$$$.
5. For XXXXX, the Petitioner claimed a credit
of $$$$$ for taxes paid to another state.
The actual amount of tax liability owed to the state of XXXXX for that
period was also $$$$$.
6. For XXXXX, the Petitioner claimed a credit
for taxes paid to another state in the amount of $$$$$. That figure represented the amount of money
withheld by the state of XXXXX on his retirement income. The actual tax liability owed to the state
of XXXXX for that year was $$$$$.
7. When the XXXXX income tax return was
processed by the Tax Commission, the Commission determined that an error had
been made by the Petitioner in claiming the full amount of monies withheld by the
state of XXXXX as a credit for taxes paid to another state and assessed a
deficiency in the amount of $$$$$.
8. When the Petitioners XXXXX return was
processed by the Tax Commission, the Petitioner was erroneously credited $$$$$
in withholding. That figure represented
the amount of money withheld by the state of XXXXX but was erroneously thought
to be withheld by the state of Utah.
The error resulted in a refund check issued to the Petitioner in the
amount of $$$$$.
9. Because of the error committed by the Tax
Commission on the XXXXX return the Petitioner believed that the proper method
of claiming the credit for taxes paid to another state was to claim the entire
amount of money withheld. The
Petitioner then filed his XXXXX return and claimed the entire amount of money
withheld by the state of XXXXX on his retirement income for that year as a
credit for taxes paid to another state.
The Petitioner was subsequently assessed a deficiency in the amount of
$$$$$ for the XXXXX income tax year.
The Petitioner paid that amount on XXXXX.
10. The Petitioner argued that the correct
method of reporting credit for taxes paid to another state is to report the
gross amount withheld by the other state and if there is an over payment,
report the refund received as income in the following income tax year.
11. The Operations Division argued that the
correct method of reporting the credit for taxes paid to another state is to
report the amount of the liability actually paid or due to the other state
(i.e. net amount).
12. For the tax years XXXXX and XXXXX, the
Petitioners were assessed a penalty in the amount of $$$$$ for each year.
CONCLUSIONS OF LAW
A
resident individual shall be allowed a credit against a tax otherwise due under
this chapter equal to the amount of tax imposed on him for the taxable year by
another state of the United States, the District of Columbia, or a possession
of the United States, on income derived from sources therein which is also
subject to tax under this chapter.
The
credit provided by this section shall be computed and claimed in accordance
with rules prescribed by the Commission.
(Utah Code Ann. §59-10-106(1)(3)).
A
Utah resident taxpayer is required to report his entire state taxable income
pursuant to Utah Code Ann. §59-10-106 even though part of the income may be
from sources outside this state. In
this case the resident taxpayer is taxed by another state . . . on income
derived therein which is subject to tax under the Utah Individual Income Tax Act
1973, he is entitled to a credit against his Utah income tax.
A
resident taxpayer may claim this credit by: (1) filing a resident Utah return
showing the computation for tax based on total income before any credit for
taxes in another state; (2) attaching a schedule for each state to which taxes
were due, properly filed in to determine each allowable credit; and (3)
attaching a signed copy of each return filed in another state for the same
period. (Administrative Rule R865-9I-3).
DECISION AND ORDER
In
the present case the issue to be determined by the Commission is whether the
Petitioner is entitled to a credit for the entire amount of monies withheld by
the state of XXXXX for each of the years in question or is he entitled only to
a credit for the amount of tax actually due and paid for those years.
The
Petitioner argued that the entire amount of money withheld by the state of
XXXXX from his retirement income constituted taxes "paid" to another
state as that word is used on the resident long form individual income tax
return form TC-20. Line 25 of that form
provides for "credit for taxes paid to another state". The Petitioner argued that the proper method
of reporting this credit would be to claim a credit for the entire amount
withheld by the other state and report any refund obtained in the following
year when that refund is received.
The
Petitioner argued that his interpretation of line 25 was consistent with the
requirement of Utah Code Ann. §59-10-123 and I.R.S. regulations which, in
essence, requires him to utilize the cash method of accounting for income tax
purposes. He argued that for him to do
otherwise and use the accrual method of reporting the credit would be unlawful.
Utah
Code Ann. §59-10-106(1) states "a resident individual shall be allowed a
credit against the tax otherwise due under this chapter equal to the amount of
tax imposed on him for the taxable year by another state of the United States
(emphasis added). By the terms of that
statutory provision, the credit allowed for taxes paid to another state refers
only to the actual taxes due and owing by the other state for the year in
question. The amount of money withheld
from an individual's pay during the course of that year does not necessarily
represent the tax that will be imposed on him for that year. They represent only an approximation of what
that tax amount would be based upon certain factors.
Rule
R865-9I-3 is consistent with this interpretation of §59-10-106. The rule
requires an individual to attach a schedule for each state to which taxes were
due and for which a credit is claimed and to also attach a signed copy of each
return filed in those other states to his Utah return. The purposes of this, obviously, is to
determine and verify the actual tax liabilities to the other states. It is that amount which the taxpayer may
claim as a credit on his Utah return.
Although
it is true that reporting the credit in this manner is a different accounting
method than the cash method accounting used in reporting income, nevertheless,
the Legislature by enacting §59-10-106 has set forth the amount of credit the
taxpayer is entitled to, and the Tax Commission in promulgating rule R865-9I-3
has determined the manner in which that is to be reported.
Based
upon the foregoing, the Tax Commission affirms the determination of the
Operations Division, however, reverses that portion of the assessment which
imposed a penalty for the years in question.
It is so ordered.
DATED
this 14th day of September, 1993.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
W. Val
Oveson Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco Alice
Shearer
Commissioner Commissioner