95-0125

Income
Signed 8/28/95

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

XXXXX, )

Petitioner, : ORDER

v. : Appeal No. 95-0125

AUDITING DIVISION OF THE : Account No. XXXXX

UTAH STATE TAX COMMISSION, :

Respondent. : Tax Type: Income

_____________________________________

STATEMENT OF CASE

This matter came before the Utah State Tax Commission for an Initial Hearing pursuant to the provisions of Utah Code Ann. §59-1-502.5, on XXXXX. Jane Phan, Administrative Law Judge, and Commissioner Alice Shearer heard the matter for and on behalf of the Commission. Present and representing Petitioner by telephone conference call was XXXXX. Present and representing Respondent were XXXXX, Assistant Attorney General, and XXXXX of the Auditing Division.

Petitioner is appealing the additional assessment of income taxes and interest made by Respondent for the XXXXX tax year in the amount of $$$$$. This additional assessment was based on an adjustment made by the Internal Revenue Service(IRS) increasing Petitioner's federal taxable income.

Petitioner filed a resident income tax return with the State of Utah for the XXXXX tax year along with his federal income tax return. Sometime after the federal return was filed the IRS notified Petitioner concerning the disallowance of an exemption relating to Petitioner's minor child and of a deduction relating to a casualty loss. Petitioner did not contest the IRS's action, although he felt it was incorrect, and the IRS made a final determination disallowing the exemption and deduction which increased Petitioner's federal taxable income.

Respondent was notified by the IRS of its final determination and adjustment to Petitioner's federal taxable income. Respondent made the appropriate change to Petitioners state taxable income, computed the resulting additional tax owed and issued the Statutory Notice of Audit Change on XXXXX.

APPLICABLE LAW

A tax is imposed on the state taxable income of every resident individual. (Utah Code Ann. §59-10-104.)

State taxable income is defined as federal taxable income with certain modifications, subtractions and adjustments. (Utah Code Ann. §59-10-112.)

Federal taxable income means taxable income as currently defined in Section 63, of the Internal Revenue Code of 1986. (Utah Code Ann. §59-10-111.)

ANALYSIS

The issue in this matter is not whether Petitioner would be entitled to the exemption and deduction, it is instead whether the Commission can redetermine their validity following the IRS's final determination to disallow them.

At the hearing Petitioner stated that he was entitled to the exemption for his minor child and the casualty loss deduction. Petitioner provided some information concerning the exemption and deduction which was not particularly conclusive but it was not refuted by Respondent. Instead Respondent pointed out that a taxpayer's state taxable income starts with his or her federal taxable income. Where the IRS has made a determination disallowing the exemption and deduction thereby increasing Petitioner's federal taxable income, Respondent wondered whether the Commission could reopen the issue of the availability of the exemption and deduction.

The Utah Legislature has determined that a taxpayer's state taxable income starts with that taxpayer's federal taxable income as defined by Section 63 of the Internal Revenue Code of 1986. Utah Code Ann.§59-10-111. In the implementation of this provision, recognizing that the IRS is the appropriate entity to make decisions concerning the Internal Revenue Code, the Commission consistently has not considered the validity of the IRS's final determination concerning exemptions or deductions.

The exemption and deduction at issue are components of federal taxable income and they are not considered separately from federal taxable income in determining state taxable income. In this case Petitioner did not contest the IRS assessment and allowed the IRS to make a final determination increasing his federal taxable income. Petitioner should have contested the IRS decision. The Commission will not review the validity of the IRS's final determination in this matter.

DECISION AND ORDER

Based upon the information presented at the hearing, and the records of the Tax Commission, the Commission denies Petitioner's appeal of the additional income tax assessment for the year XXXXX. The Commission sustains the XXXXX Statutory Notice of Audit Change with its assessment of additional tax, penalty and interest against Petitioner.

This decision does not limit a party's right to a Formal Hearing. However, this Decision and Order will become the Final Decision and Order of the Commission unless any party to this case files a written request within thirty (30) days of the date of this decision to proceed to a Formal Hearing. Such a request shall be mailed to the address listed below and must include the Petitioner's name, address, and appeal number:

Utah State Tax Commission

Appeals Division

210 North 1950 West

Salt Lake City, Utah 84134

Failure to request a Formal Hearing will preclude any further administrative action or appeal rights in this matter.

DATED this 28th day of August, 1995.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

W. Val Oveson Roger O. Tew

Chairman Commissioner

Joe B. Pacheco Alice Shearer

Commissioner Commissioner