95-1879

INCOME TAX

Signed 11/14/97

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

PETITIONER, )

Petitioners, ) ORDER

v. ) Appeal No. 95-1879

AUDITING DIVISION OF THE ) Account No. #####

UTAH STATE TAX COMMISSION, :

STATE OF UTAH, )

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 January 14, 1997. G. Blaine Davis, Administrative Law Judge, heard the matter for and on behalf of the Commission. Present and representing Petitioners was Mr. XXXXX, of the law firm of XXXXX. Present and representing Respondent was Mr. Gale K. Francis, Assistant Attorney General.

Petitioners were residents of the State of Utah during the entire calendar year 1993. During that year, PETITIONER was a shareholder in the corporation of COMPANY A, which had elected Sub-chapter AS@ status under the applicable provisions of the Internal Revenue Code. During 1993, PETITIONER performed construction services for his company within the nation of Mexico. The nation of Mexico required withholding from all payments made to the corporation or to PETITIONER. Petitioners filed a form 1040, U.S. Individual Income Tax Return on or about April 15, 1994 for the year 1993. On Schedule AE@ of that income tax return, Petitioners reported the gross income from PETITIONER share of his holdings in the Sub-chapter AS@ corporation attributable to his services performed within the nation of Mexico, including the amounts which were withheld and paid as tax to the government of Mexico. On that return, Petitioners also took a credit against the federal income tax for the amount of tax which had been paid to the government of Mexico, all as allowed by Section 901 of the Internal Revenue Code. Under that section, a taxpayer may deduct foreign income taxes paid or accrued, or may apply such tax as a credit against U.S. income tax. Petitioners elected to not deduct the foreign income tax from their federal taxable income, but instead elected to apply it as a credit against the U.S. income tax. Petitioners income tax prior to the application of the credit would have been $$$$$ as shown on line 40 of their Schedule 1040 tax return. On line 43 of the federal tax return, they deducted the foreign tax credit in an amount of $$$$$, to leave a net tax due of $$$$$. Therefore, Petitioners elected to use the amount paid to the government of Mexico as a credit against the federal income tax rather than showing it as a deduction from the income on the federal tax return.

Petitioners also filed their State of Utah form TC-40, Individual Income Tax Return on or about April 15, 1994 for the calendar year 1993. Line 4 of said Utah income tax return included the gross income attributable to the services of PETITIONER performed within the nation of Mexico, which included the amounts which were withheld and paid to the government of Mexico. However, Petitioners thereafter deducted the amount of tax paid to the government of Mexico as an equitable adjustment on line 11 on the form TC-40 return, and attached a statement to the return which said as follows:

APer IRC No. 164(a)(3) and IRC No. 901(a), a U.S.

taxpayer may elect either a deduction or credit

for foreign taxes paid. This taxpayer has elected

to gross their income up by the amount of taxes

paid to a foreign country; consequently the

Internal Revenue Service allows the same amount to

be used as a direct offset against U.S. tax. The

State does not allow for this phenomena and since

this is an equitable situation, we are taking an

equitable adjustment for the amount of revenue

which we have grossed up for the federal tax

return. This amounts to $$$$$.@

Respondent examined the Utah income tax returns of Petitioners for 1993, and issued a notice of audit change disallowing the equitable adjustment and assessing Petitioners additional tax in the amount of $$$$$ plus interest at the statutory rate.

Petitioners timely filed a Petition for Redetermination and Respondent=s have filed an Answer to that Petition.

With respect to the first argument of Petitioners, that Utah Code Ann. '59-10-115(4) specifically allows the equitable adjustment, Petitioner submits that Utah Code Ann. '59-10-112 defines state taxable income as Afederal taxable income as defined by '59-10-111, with the modifications, subtractions and adjustments provided in '59-10-114". Utah Code Ann. '59-10-111 defines federal taxable income as Ataxable income as currently defined in Section 63, Internal Revenue Code of 1986". Section 63 of the Internal Revenue Code of 1986 defines taxable income as Agross income minus the deductions allowed by this chapter@. Petitioners therefore suggest that since the amount of foreign tax is Aallowable@ that it is only the income from the federal return, after deduction of the foreign tax amount, which constitutes state taxable income under the statute. However, the argument of Petitioner does not recognize that Section 63 of the Internal Revenue Code allows deductions allowed by the chapter. Even though the foreign tax is allowable as a deduction if the taxpayer makes the election to deduct it rather than take the credit, it was not allowed as a deduction in the manner in which Petitioners filed their federal income tax return. The federal law specifically allows Petitioner to make the election to either deduct the amount of foreign tax or to take a credit from the amount of tax due on the federal return. Petitioners elected to take a credit rather than a deduction, and therefore the deduction for foreign taxes was not allowed on the federal tax return of Petitioners. The income defined by the state statute is therefore the income as shown on the federal return of Petitioners.

Petitioners also argue that Utah Code Ann. '59-10-115 provides equitable adjustments specifically for this type of situation. However, Sub-section 4 of that statute provides for such an equitable adjustment only Awhere solely by reason of the enactment of this chapter, the taxpayer would otherwise receive or have received a double tax benefit or suffer or have suffered a double tax detriment." The purpose of that statute is to make equitable adjustments where income has either been included twice or where a deduction has been deducted twice on returns of the State of Utah or another state, either in the same year or in a different tax year. That is not applicable to Petitioners situation. Petitioners have just had to comply with the tax laws of more than one country. Petitioners have not been taxed on the income in more than one state of the U.S. or in more than one year. The legislature could have provided for the deduction of taxes paid to a foreign country, or it could have provided a credit for such taxes. The legislature did not choose to make such deduction or credit available. This Commission cannot add or modify statutes as it may or may not deem to be needed.

The second argument of Petitioner is that Utah Administrative Rule R865-9-4I requires that Petitioner be granted this deduction. That rule provides as follows:

AEvery taxpayer shall report and the Tax Commission

shall make or allow such adjustments to the taxpayer=s

state taxable income as are necessary to prevent the

inclusion or deduction for a second time on his

Utah income tax return of items involved in

determining his federal taxable income. Such ad-

justments shall be made or allowed in an equitable

manner as defined in Utah Code Ann. '59-10-115 or

as determined by the Tax Commission consistent

with provisions of the Individual Income Tax Act.@

The rule is even more limited than the statute and is only used to Aprevent the inclusion or deduction for a second time on his Utah income tax return of items involved in determining his federal taxable income." The income in question has only been included one time on the state return of Petitioners, it has not been included or deducted for a second time on his Utah income tax return. Therefore, the rule is not applicable to this case.

The third argument of Petitioner is that the Idaho case of Bogner v. State Department of Revenue, 693 P. 2d 1056 (Idaho, 1984), would provide for such a credit. In that case, the facts were very similar to this case, except the individual was a West German citizen, but a resident of Idaho. She therefore had to pay taxes on her German income in Germany, as well as the United States and Idaho. The court in that case did allow her to deduct the foreign taxes paid on her Idaho income. However, the court=s ruling there was based upon the specific statutory language in Idaho, which statutory language is not the same as the Utah statutory language. That case is therefore not controlling or relevant to the decision here.

DECISION AND ORDER

Based upon the information presented at the hearing, and the records of the Tax Commission, the Commission finds that the audit assessment made by Respondent against Petitioner should be sustained. There is no legal basis for Petitioner deducting as an equitable adjustment, or otherwise, the amount of taxes paid to a foreign country from their Utah individual income tax return. Such deduction or any credit is not allowed by the statutes of the State of Utah. The Petition for Redetermination is hereby denied.

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 14 day of NOVEMBER, 1997.

BY ORDER OF THE UTAH STATE TAX COMMISSION.