98-1185 & 99-0552

Income Tax

Signed: 2/25/02

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

PETITIONER, )

) ORDER

Petitioner, )

) Appeal No. 98-1185, 99-0552

v. ) Account No. #####

)

AUDITING DIVISION OF ) Tax Type: Income Tax

THE UTAH STATE TAX )

COMMISSION, ) Judge: Davis

)

Respondent. )

_____________________________________

Presiding:

G. Blaine Davis, Administrative Law Judge

Appearances:

For Petitioner: PETITIONER

For Respondent: Mr. Brian Tarbet, Assistant Attorney General

Mr. Dan Engh, from the Auditing Division

Mr. Steve Nelson, from the Auditing Division

STATEMENT OF THE 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 May 30, 2000.

The wife of Petitioner is a member of the armed forces of the United States, and was stationed in Utah during the years 1993 through 1996. The home of record of the wife of Petitioner, as recorded with the military, is the State of STATE.

Petitioner filed his 1994 Utah income tax return as married filing separate, and claimed that he was a resident of the State of Utah but his wife was a non-resident of the State of Utah, and he therefore attempted to use the special instructions.

Petitioner's 1994 income tax return was audited by Respondent, and he was denied the right to file as a Utah resident, and a Statutory Notice of Audit Change was mailed to him on March 17, 1998.

Petitioner timely filed a Petition for Redetermination. Petitioner's primary contention is that he should be allowed 100% of the dependency exemption for the son of the parties, as well as being permitted to deduct 100% of the itemized deductions of the parties.

The position of Respondent is that because Petitioner is in Utah only to be with his military spouse, he is not a resident of Utah, and is not entitled to use the special instruction. Instead, Respondent claims, Petitioner must file a Utah income tax return as a non-resident, and must allocate the personal dependency exemption for the son of the parties, and the itemized deductions among the total income of the parties, with the portion allocable to the Utah income of Petitioner being deductible in Utah, but the balance which would be allocated on a pro rata basis to the income not taxable in Utah being non-deductible to Petitioner in the State of Utah. Respondent claims that to do otherwise would permit Petitioner to have only a portion of the income of the parties taxable in Utah, but to permit deduction of all of the deductions based upon the total income deducted in Utah.

Petitioner argues that to permit Respondent to require an allocation of the dependency exemption and itemized deductions in effect makes a portion of the military pay of his wife taxable in Utah.

APPLICABLE LAW

Utah Code Ann. §59-10-119, provides as follows:

(1) If the federal taxable income of husband and wife (both nonresidents of this state) is reported or determined on separate federal returns, their state taxable incomes in this state shall be separately determined.

(2) If the federal taxable income of husband and wife (both nonresidents) is reported or determined on a joint return their tax shall be reported or determined in this state on a joint return.

(3) If either husband or wife is a nonresident and the other a resident, separate taxes shall be determined on their separate state taxable incomes on such forms as the commission shall prescribe, unless both elect to determine their state taxable income as if both were residents. If a husband and wife (one being a resident, the other a nonresident) file a joint federal income tax return, but determine their state taxable income separately, they shall compute their taxable incomes in this state as if their federal taxable incomes had been determined separately.

Utah Administrative Code Rule R865-9I-2(E)(3), provides:

E. A person in active military service shall not lost his domicile in Utah solely by reason of being absent under military orders. A person in active military service stationed in Utah solely by reason of military orders does not thereby establish a new domicile in this state for income tax purposes.

. . . .

3. The spouse of a person in active military service generally is considered to have that person's domicile and is subject to income tax laws and rules that apply to the service person.

Utah Administrative Code Rule R865-9I-6, provides in relevant part as follows:

A. With reference to Utah Code Ann. Section 59-10-119, in cases where either husband or wife is a nonresident and the other is a resident and they have filed a joint federal return, they shall:

1. determine their state taxable income as if both were residents and file a joint return, or

2. file separate state returns and each shall determine state taxable income and tax as follows:

a. The amount of the total federal adjusted gross income pertaining to each spouse shall first be determined. If any adjustments apply jointly to both spouses, they shall be divided in proportion to the respective incomes of the individuals before deduction of adjustments.

b. The amount of federal taxable income for each spouse shall next be determined by subtracting each individual's part of the deduction and exemptions. Each spouse's percentage of the standard or itemized deductions shall be the same as that which each individual's federal adjusted gross income (FAGI) bears to their total FAGI. Both individuals shall claim their own exemptions plus a percentage of the exemptions for dependents.

DISCUSSION

Based upon the applicable statute and rules, Petitioner is not a resident or domicle of Utah, and must file his return by calculating it either with both husband and wife filing separate federal returns, or they must file a joint return. Further, the rules require that the tax be calculated in the manner which has been done by Respondent in its audit assessment. Pursuant to those rules, the total federal adjusted income must first be determined, and then the proportion of exemptions and deductions available to each taxpayer are determined based upon their relative contribution to the overall adjusted gross income.

Regarding Petitioner's argument that this method of calculation results in an income tax scheme which levies a Utah State tax upon military income, that issue has been decided in United State of America v. State of Kansas, 810 F 2d 935 (1987). In that case, the taxpayer argued the Kansas Income Tax Statute violated the Soldiers and Sailors Relief Act by taking military pay of non-residents into account in determining the rate of income tax to be levied on the parties non-military income earned in the State of Kansas. The United States Tenth Circuit Court of Appeals determined that this was not the case, and that the inclusion of military compensation in a formula determining the rate of tax on income from Kansas sources did not constitute a tax on military income. That same reasoning is applicable to the statute and rules in this case.

DECISION AND ORDER

Based upon the foregoing, the Commission sustains the audit assessment made by Respondent, and denies the Petition for Redetermination filed by Petitioner. It is so ordered.

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 appeal rights in this matter.

DATED this 25^th day of February , 2002.

____________________________________

G. Blaine Davis

Administrative Law Judge

BY ORDER OF THE UTAH STATE TAX COMMISSION.

The Commission has reviewed this case and the undersigned concur in this decision.

DATED this 25^th day of February , 2002.

Pam Hendrickson R. Bruce Johnson

Commission Chair Commissioner

Palmer DePaulis Marc B. Johnson

Commissioner Commissioner