96-2391

Income Tax

Signed 8/7/97

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

PETITIONER, :

Petitioners, : ORDER

v. : Appeal No. 96-2391

CUSTOMER SERVICE DIVISION, : Account No. #####

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 June 26, 1997. Jane Phan, Administrative Law Judge, heard the matter for and on behalf of the Commission. Present and representing Petitioners was PETITIONERS REP., CPA. Present and representing Respondent were Susan Barnum, Assistant Attorney General, along with Brent Barney and Robert Jenson of the Customer Service Division.

Petitioner is appealing the assessment of additional Utah individual income tax, penalty and interest for the tax year 1995. Respondent made the assessment based on the the income Petitioners had reported on their federal income tax return for 1995.

APPLICABLE LAW

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

Resident individual is defined in Utah Code Ann. §59-10-103(1)(j) as follows:

A "resident individual" is either:

(I) an individual who is domiciled in this state for any period of time during the taxable year; or

(ii) an individual who is not domiciled in this state but maintains a permanent place of abode in this state and spends in the aggregate 183 or more days of the taxable year in this state.

For Utah residents, state taxable income is defined as federal 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.) 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).)

ANALYSIS

The issues put before the Tax Commission in this appeal are whether the additional $$$$$ of Petitioners retirement income, the $$$$$ of deferred income and the $$$$$ of life insurance income was income taxable in Utah for 1995. Also whether the 10% penalty for failure to file should be waived.

There was no dispute that Petitioners were Utah residents for all of 1995. In 1994 they had moved to Utah from Texas. For 1995 Petitioners filed a U.S. Individual Income Tax Return reporting federal adjusted gross income of $$$$$. However, on their Utah Resident Income Tax Return Petitioners reported federal adjusted gross income of only $$$$$. When Respondent caught the discrepancy, Respondent adjusted Petitioners’ 1995 Utah return to include the $$$$$ of retirement income. This resulted in an increase of Utah income tax from $$$$$ to $$$$$. Interest and a 10% penalty had also been assessed.

In addition to the $$$$$ in retirement income, Petitioners also received $$$$$ of deferred compensation. Petitioner had earned these funds during 1981 through 1988 but had elected to postpone receipt of these funds until five years after retirement. Petitioners had also received $$$$$ in life insurance premium reimbursements.

Petitioners argue that the retirement income, deferred compensation and insurance premium reimbursements were for compensation of personal services rendered outside the State of Utah and were not derived from Utah sources. Petitioners assert that Utah Code Ann. §59-10-117 provides an exemption from taxation by the State of Utah for compensation earned outside of Utah. Petitioner’s interpretation of this statute is clearly erroneous as the statute specifically states that it applies to nonresidents of Utah. Petitioners were residents of Utah during all of 1995. Utah residents are subject to tax pursuant to Utah Code Ann. §59-10-104. Utah residents are subject to Utah income tax based on their federal taxable income, regardless of the source of the income.

Petitioners also argue that they should receive credit for sales taxes and property taxes paid to the State of Texas during the years when Petitioners were working and earning the retirement income and deferred compensation. The Commission finds this argument to be without merit.

As for the penalty at issue the Commission notes that this was the first income tax return that Petitioners had filed as Utah residents and based on the first time filing error criteria finds this to be reasonable cause for waiver of the penalty. The interest was assessed at the statutory rate. Interest is waived only in the event of Tax Commission error as the State of Utah is denied the benefit of the use of the funds and taxpayers retain the benefit of the use of the funds until the taxes are paid.

DECISION AND ORDER

Based upon the information presented at the hearing, and the records of the Tax Commission, the Commission finds that Petitioners are liable for Utah income tax on their retirement income, deferred payment income and insurance premium reimbursement for the year 1995. The Commission sustains the assessment of additional tax and the interest thereon. The Commission waives the 10% penalty.

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 7 day of AUGUST, 1997.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

W. Val Oveson Richard B. McKeown

Chairman Commissioner

Joe B. Pacheco Pam Hendrickson

Commissioner Commissioner