Signed 9/21/94







Petitioners, : ORDER


v. : Appeal No. 93-1057





Respondent. : Tax Type: INDIVIDUAL INCOME



This matter came before the Utah State Tax Commission for a Settlement Conference pursuant to the provisions of Utah Code Ann. 59-1-502.5, on XXXXX. Lisa L. Olpin, Administrative Law Judge, conducted the conference. Commissioners Joe B. Pacheco, and Alice Shearer also heard the matter for and on behalf of the Commission. Present and representing Petitioner was XXXXX. Present and representing Respondent was XXXXX C.P.A., of the Operations Division of the Utah State Tax Commission.


1. The tax in Question is Individual Income Tax for the Year XXXXX (XXXXX to XXXXX).

2. Petitioner was aXXXXX in the U.S. Air Force stationed at XXXXX Utah (XXXXX) for the first 6 months of XXXXX.

3. Petitioner was a resident of Pennsylvania during the time he was stationed at HAFB.

4. Petitioner retired from the Air Force on XXXXX. Upon Retirement he purchased a home in the State of Utah where he now resides as a Utah resident.

5. Petitioner had active duty pay for the first half of XXXXX only and retirement pay for the balance of the year.

6. Petitioner was not required to file a Pennsylvania return while in the military as military pay is exempt in that state.

7. Petitioner contends that the method prescribed by the Operations Division results in over taxation for the year XXXXX because Utah law requires that federal adjusted gross income is the starting point for the Utah Return. Petitioner says that the standard method of using schedule A to determine the percentage of tax liability in Utah is not a fair method when the income earned out of state or as a non-resident is much higher than the income earned in Utah. By starting with a higher adjusted gross income initially, a larger percentage of income is taxed at the 7.2% rate, and the schedule A method doesn't adequately compensate. Even though the Utah tax booklet states, "Nonresidents who are stationed in Utah solely due to military orders are not subject to tax on their military pay in Utah," the standard method on the TC-40NR taxes all income, including military, nonresident pay. Petitioner submitted five examples to show different tax results under various approaches to support his position.

8. Petitioner feels that the last example he submitted represents the fairest treatment. This method allocates all of the retirement pay earned in Utah,(last 6 months), and adds the actual interest and dividends earned in Utah. A reduction is made for half of the capital loss and half of the partnership loss for an adjusted Gross Income of $$$$$. The AGI is further reduced by actual deductions related to Utah, half of the church contributions and half of the personal exemptions. Petitioners method also takes a one-half retirement income deduction as he is retired. The resulting tax is $$$$$. Petitioners' original return using a slightly different method, was submitted with a tax liability of $$$$$ and was paid timely. Petitioner requests the difference of XXXXX be refunded at this time.

9. The Operations Division used the standard method which starts with Federal Adjusted Gross Income (FAGI) and proceeds to allocate that income on schedule A, Page 2 of the State Return (TC- 40NR). The process used in Schedule A is to derive a percentage that the Utah income bears to the total federal adjusted gross income. This percentage is then multiplied by a pre-allocated tax which gives the Utah tax liability.

The pre-allocated tax is computed in the standard manner, that is, Utah taxable income for the TC-40 NR is computed in the same manner as a full year resident starting with Federal Adjusted Gross Income and results in a full year tax.

10. Respondent cites Utah Code 59-10-112 and 59-10-116, and 59-10-121 which defines the taxable income for resident and nonresident individuals. Respondent concludes that the audited tax of $$$$$ reflects the correct tax due.

11. Utah Code Annotated 59-10-121, provides for a proration when two returns are required. The statute allows the Tax Commission to require an individual whose status changes from resident to nonresident, or nonresident to resident, to file two part year returns. One return as a resident and one return as a nonresident. The Code further states: "the total of the taxes due thereon shall not be less than would be due if the total of the taxable incomes reported on the two returns were includable in one return." It would appear the intent of the code is to assure the taxpayer files using the methods currently prescribed, unless proration of the return would result in a higher tax due. Since the proration requested by the Petitioner would result in a lower tax assessment, the Operations Division requests that the audited assessment should be allowed to stand.


The Tax Commission considers the argument of the taxpayer to be the most persuasive in this case. The Commission is concerned that if the Respondent's position is adopted nonresidents stationed in Utah would be subject to income tax for their military pay while on duty in Utah. In the case before us, the military pay received by the taxpayer would be taxed under the standard method of using Schedule A for the allocation. The Commission determines that military pay received by nonresidents stationed in Utah was not intended to be taxed, therefore method Number 4 (Attachment 5 as presented by the taxpayer) is the most acceptable determination of this taxpayers liability. The Tax Commission determines that this is a unique case in that the allocation and division of taxpayer's income did not fit the form for reporting and for that reason finds that the tax liability for the year XXXXX is determined to be $$$$$ based on a Utah taxable income of $$$$$. The Operations Division is ordered to adjust their records and to refund the amount of $$$$$ together with interest to the taxpayers. This Decision and Order will become the Final Decision and Order of the Commission unless any party to this case files a written request for a Formal hearing within twenty (20) days of the date of this decision. Such a request shall be mailed to the address listed below and must include the Petitioner's name, address, appeal number:

Utah State Tax Commission

Appeals Division

210 North 1950 West

Salt Lake City, Utah 84134


DATED this 21st day of September, 1994.


W. Val Oveson Roger O. Tew

Chairman Commissioner

Joe B. Pacheco Alice Shearer

Commissioner Commissioner

NOTICE: You have twenty (20) days after the date of a final order to file a Request for Reconsideration with the Commission. If you do not file a Request for Reconsideration with the Commission, you have thirty (30) days after the date of a final order to file a.) a Petition for Judicial Review in the Supreme Court, or b.) beginning July 1, 1994, a Petition for Judicial Review by trial de novo in district court. (Utah Administrative Rule R861-1A-5 (P) and Utah Code Ann. 59-1-601 (1),63-46b-13 (1), 63-46-14(3)(a).)