95-1090

Income Tax

Signed 7/5/96

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

XXXXX,

Petitioners, : ORDER

v. : Appeal No. 95-1090

AUDITING DIVISION OF THE : Account No. XXXXX

UTAH STATE TAX COMMISSION, :

Respondent. : Tax Type: Income Tax

_____________________________________

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, heard the matter for and on behalf of the Commission. Present and representing Petitioner was XXXXX. Present and representing Respondent were XXXXX, Assistant Attorney General, XXXXX and XXXXX of the Auditing Division.

Petitioners are appealing the assessment of additional tax, penalties and interest associated with their income tax for the years XXXXX. For XXXXX, the additional tax assessed was $$$$$, the penalty $$$$$ and the interest as of the date of the hearing was $$$$$. For XXXXX the additional tax assessed was $$$$$, the penalty $$$$$ and the interest to the date of the hearing was $$$$$. The assessment was based on an audit by the Internal Revenue Service (IRS) and the resulting final determination increasing Petitioners' federal taxable income. The IRS reported the increase of Petitioners' federal taxable income to the Respondent. The Respondent made the appropriate changes to Petitioners' state taxable income issuing the Statutory Notice of Change on XXXXX.

Petitioners requested that the Tax Commission modify their federal taxable income, as determined by the IRS, for the purposes of determining their state taxable income. The parties presented briefs on this issue and the Commission issued an interim Order on XXXXX denying reconsideration of the federal taxable income. The remaining issue to be determined at the hearing concerned the assessment of penalties and interest. Petitioners requested that they be waived. Respondent requested that they be upheld.

In support of their position that the penalties and interest should be waived Petitioner explained that he was an attorney. During the period in question he was working solely from his home office. He had taken a home office deduction which, after the IRS audit, the IRS disallowed. Petitioner did not appeal the IRS decision which resulted in the additional federal taxable income upon which the additional state income tax was based. He now realizes he should have appealed to the IRS as it is his opinion that the home office deduction was justified. He requested that the penalties and interest be waived because he was relying on a justifiable position in taking the deduction, and it was a first time business error. He pointed to the waivers pamphlet which listed first time business error as reasonable cause for waiver of penalties. The income and the error were generated from Petitioner's law practice. Petitioner explained that even though he was an attorney he had not been aware that he was required to file an amended return within 90 days of the audit adjustment.

Respondent's representative explained that the Utah Code requires the taxpayer to notify the Commission, by filing an amended return, within 90 days of a final determination from the IRS which affects the taxpayer's state tax liability. The 10% negligence penalty was assessed because Petitioner did not file an amended return within 90 days. She also explained that interest is assessed based on the time value of money and that interest is waived only in the event Tax Commission error caused the assessment of interest.

APPLICABLE LAW

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

For the purposes of determining state taxable income, federal taxable income means taxable income as defined in Section 63, of the Internal Revenue Code. (Utah Code Ann. §59-10-111.)

If a change is made in a taxpayer's net income on his or her federal income tax return, either because the taxpayer has filed an amended return or because of an action by the federal government, the taxpayer must notify the Utah Tax Commission within 90 days after the final determination of such change. (Utah Code Ann. §59-10-536 (5)(a).)

The Tax Commission is granted the authority to waive, reduce, or compromise penalties and interest upon a showing of reasonable cause. (Utah Code Ann. §59-1-401(10).)

DECISION AND ORDER

When the IRS made a final determination to increase Petitioners' federal taxable income, this resulted in a change in Petitioners' state taxable income. The legislature, by statute, has placed the burden upon the taxpayer to notify the State Tax Commission of this change. Petitioner failed to do so and the 10% penalty was assessed along with interest. However, the circumstances described are sufficiently similar to a first time business filing error to waive the penalties.

More stringent guidelines are applied to the waiver of interest because the State of Utah was denied the benefit of the funds, and the Petitioner retained the benefit of the funds, from the time the tax was originally due until it was actually paid by Petitioner. Interest is generally waived only in the event an error on the part of the Tax Commission caused the original underpayment.

Based upon the information presented at the hearing, and the records of the Tax Commission, the Commission sustains the additional income tax assessment and the interest for XXXXX. However, the Commission finds sufficient cause has been shown to waive the penalties of $$$$$ for XXXXX and $$$$$ for XXXXX.

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 5 day of July, 1996.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

W. Val Oveson Roger O. Tew

Chairman Commissioner

Joe B. Pacheco Alice Shearer

Commissioner Commissioner