BEFORE THE UTAH STATE TAX COMMISSION
XXXXX & XXXXX, )
: FINDINGS OF FACT,
Petitioners, ) CONCLUSIONS OF LAW,
: AND FINAL DECISION
OPERATIONS DIVISION OF THE : Appeal No. 92-1891
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 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
Joe B. Pacheco Alice Shearer