00-1449
Income Tax
Signed 4/22/03
BEFORE THE UTAH STATE TAX COMMISSION
____________________________________
PETITIONERS, ) AMENDED
AND PETITIONERS, ) ORDER GRANTING
Petitioners, ) RECONSIDERATION IN PART
)
v. ) Appeal Nos. 00-1449 & 00-1450
)
AUDITING DIVISION )
OF THE UTAH STATE TAX ) Tax Type: Income
COMMISSION, )
)
Respondent. ) Judge: Phan
)
______________________________________
STATEMENT
OF CASE
This matter came before the Utah State Tax Commission
upon a Request for Reconsideration, dated February 10, 2003, filed by
Respondent as a result of the Commission's Findings of Fact, Conclusions of Law
and Final Decision, dated January 21, 2003 ("Final Decision"). Petitioners were given the opportunity to
respond to Respondent's Request by Order dated February 20, 2003. However, Petitioners did not submit a
response within the period allowed.
It its
Request, Respondent argues that the Tax Commission should reverse its
conclusions that the STATE income from Petitioners' S-corporations should be
added to the amount of the taxpayers STATE source income as reported on the
taxpayers' return for the purposes of computing the credit limitation pursuant
to Utah Admin. Rule R865-9I-3(E). In
its Final Decision concerning the credit limitation the Tax Commission held
that, "The percentage is determined by dividing the total federal adjusted
gross income into the amount of the federal adjusted gross income taxed in the
other state. As noted above, the $500
tax paid by the S Corporation to STATE should be included in the credit and the
corresponding income claimed on the S Corporation return should be included in
the percentage." (Final Decision, pg. 8 pg. 5.) Respondent indicates that this income had already been included
in Petitioner's federal and STATE returns and included in the percentage which
it had calculated to determine the credit limitation used in the audit. Respondent interpreted the Tax Commission's
statement to mean that the Commission ordered the income be added again which
Respondent points out would result in the inclusion of the same income
twice. Certainly, it was not the Tax
Commission's intent that the income be added twice.
From the
explanation in Respondent's Request for Reconsideration, the calculation of the
credit limitation applied in the audit indicates that the income from the S
Corporation returns had already been included in the percentage calculation. Petitioner did not file a response to
Respondent's Request, and the Commission has no information to the
contrary. Based on Respondent's
explanation, the Commission now clarifies and revises its Final Decision to the
extent that it finds that the S Corporations income should not be included a
second time in determining the percentage for the credit limitation applied to
the taxes paid to STATE. Respondent
had correctly calculated the amount of the credit limitation in the audits.
As second assertion made by Respondent in its Request
for Reconsideration is that the Tax Commission reverse its conclusion that,
under the facts of these cases, a credit for taxes paid to another state be
allowed for the $$$$ tax paid by each Petitioner's S corporation to STATE. Based on the Tax Commission's decision that
Respondent's credit limitation amount used in the audit was appropriate,
Petitioners have already received credit for the full amount to which they are
entitled pursuant to statute and rule. Although
the Commission does not necessarily agree with Respondent's argument that
Petitioner would not be entitled to a credit regardless of the limitations
amount, the Commission agrees with Respond that it is moot as to whether credit
should be allowed for the $$$$ taxes paid to STATE for the S corporations under
Utah Code Ann. Sec. 59-10-106 and 59-7-702, because even if allowed under these
provisions, it would be prohibited under the credit limitation.
APPLICABLE
LAW
Utah Administrative Rule R861-1A-29 provides that a
Petition for Reconsideration "will allege as grounds for reconsideration
either a mistake in law or fact, or the discovery of new evidence" that
could not, with due diligence, have been discovered and produced at trial.
Under this rule, the Tax Commission may exercise its discretion in granting or
denying a Petition for Reconsideration.
DECISION
AND ORDER
Based on the
forgoing, the Commission withdraws that portion of its Final Decisions ordering
that Petitioners be given a credit for the income taxes of $$$$ paid by each
Petitioner's S corporation to the state of STATE. In addition the Commission clarifies its Final Decision to the
extent that it did not intend for the income from the S corporation to be
included a second time in determining the credit limitation amount. The Commission now finds that the Respondent
correctly calculated the credit limitation for each Petitioner in the audits. It is so ordered.
DATED this 22nd day of April , 2003.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
Pam Hendrickson R.
Bruce Johnson
Commission Chair Commissioner
Palmer DePaulis Marc
B. Johnson
Commissioner Commissioner
00-1449
Income Tax
Signed 2/20/03
BEFORE THE UTAH STATE TAX COMMISSION
____________________________________
PETITIONERS, )
) ORDER
Petitioners, )
) Appeal No. 00-1449
v. )
) Account No. XXXXXXXXX
AUDITING DIVISION OF THE )
UTAH STATE TAX COMMISSION, ) Tax Type: Income Tax
STATE OF UTAH, ) Tax Year: 1999
)
Respondent. ) Judge: Phan
_____________________________________
The Commission acknowledges receipt of Respondent’s Request for Reconsideration. The Petitioner is granted thirty (30) days to respond to this petition. Thereafter, the Commission will rule on the petition.
DATED this 20th day of February , 2003.
_______________________________
Jane Phan
Administrative Law Judge
00-1449
Income Tax
Signed 1/21/03
BEFORE THE UTAH STATE TAX COMMISSION
____________________________________
PETITIONERS, ) FINDINGS OF FACT,
) CONCLUSIONS
OF LAW,
Petitioners, ) AND FINAL DECISION
)
v. ) Appeal No. 00-1449
) Account No. XXXXXXXXX
AUDITING DIVISION OF )
THE UTAH STATE TAX ) Tax Type:
Income Tax
COMMISSION, )
) Judge: Phan
Respondent. )
_____________________________________
Presiding:
Jane Phan, Administrative Law Judge
Appearances:
For Petitioner: PETITIONER’S,
Attorney
PETITIONER’S, CPA
For Respondent: Mark
Wainwright, Assistant Attorney General
Dan Engh, Manager, Income Tax Auditing
Steve Nelson, Senior Auditor
Julie Halvorson, Assistant Director Taxpayer Services
Division
STATEMENT
OF THE CASE
This
matter came before the Utah State Tax Commission for a Formal Hearing on August 20, 2002. Based upon the evidence and testimony presented at the hearing,
the Tax Commission hereby makes its:
FINDINGS
OF FACT
1. Petitioners
are appealing an individual income tax audit adjustment which reduced the
amount allowed as a credit for taxes paid to another state.
2. The
tax year in question is 1999.
3. Petitioners
were Utah residents during 1999 and they filed a joint Utah Resident Individual
Income Tax Return on which they claimed a credit for taxes and fees they or
various entities paid to the states of STATE and STATE 2. Petitioners also filed an individual STATE
Nonresident Income Tax Return for 1999 claiming income earned in STATE through
limited liability companies, a limited partnership and an S-corporation. Some of these entities also paid franchise
taxes or other types of taxes or fees in California. In addition, COMPANY A LLC, for which Petitioner was indirectly a
50% owner, paid corporate franchise tax to the State of STATE 2 in the amount
of $$$$$.
4. Petitioner is a consultant who has
structured his personal services business using a number of business
entities. One entity is COMPANY A, LLC
("A"). At the beginning of
1999 “A” was owned 50% by PETITIONER personally and 50% by another individual
personally. Prior to the end of the
year this was restructured so that COMPANY B AND Associates, LLC("B LLC") became a 50% owner of COMPANY A. The other 50% ownership interest was held by
COMPANY C, LLC. B, LLC is not owned
directly by PETITIONER, but is instead owned by three other entities which are
owned by PETITIONER. The three entities
which own D LLC are: 1) COMPANY E., an
S-Corporation; 2) COMPANY F Corporation, a C-Corporation; and 3) COMPANY G
Limited Family Partnership. All of the
entities paid some type of corporate tax or fee to STATE during 1999. COMPANY A was the only entity which paid a
tax or fee to the State of STATE 2 during 1999.
5. On
Petitioners’ 1999 Utah Individual Income Tax Return, they claimed $$$$$$$ on
Line 4, federal adjusted gross income, and this comports with line 33 of
Petitioners' U.S. Individual Income Tax Return for 1999. On Line 30 of the Utah return, they claimed
$$$$$$ as a credit for income taxes paid to another state. This amount is from Schedule A of the Utah
individual return. On Schedule A
Petitioners indicate that the portion of their federal adjusted gross income
taxed to STATE was $$$$$$$ and the actual income tax paid to STATE was
$$$$$$. Because of the credit
limitations the amount of credit claimed on their Utah individual return for
taxes paid to California was $$$$$.
Petitioners also indicated that $$$$$$$ of their federal adjusted gross
income was taxable to the state of STATE 2 and from this calculated a credit
for income tax paid to STATE 2 in the amount of $$$$$$. The credits for the two states, $$$$$$ and
$$$$$$ added together equals the $$$$$$ credit claimed by Petitioners on their
Utah individual return.
6. On Petitioners’ individual STATE
Nonresident Return for 1999 they indicated the same amount as federal adjusted
gross income. However, on their
individual STATE return they claim only $$$$$$ as income taxable to STATE and
the amount of the total STATE tax indicated was $$$$$$. Both of these amounts are different from
what was reported on their Utah Individual Income Tax Return, Schedule A.
7. For the tax year 1999, COMPANY A filed
a STATE Limited Liability Company Return.
On that return $$$$$ in gross receipts and $$$$$ in ordinary income was
claimed. The return indicated taxes due
to STATE in the amount of $$$$$ along with a "Limited Liability Company
Fee" of $$$$$.
8. COMPANY B, LLC (AB@), a 50% owner
of COMPANY A, filed a 1999 STATE Limited Liability Company Return of Income
which stated $$$$$ in gross receipts and $$$$$ in ordinary income. The return indicated an $$$$$ limited
liability tax and a $$$$$ limited liability fee.
9. COMPANY E, an owner of COMPANY B, filed
a 1999 STATE S Corporation return which indicated $$$$$ in ordinary income and
tax due of $$$$$.
10. COMPANY F, a C corporation and second
owner of COMPANY B, filed a 1999 STATE Corporation Franchise or Income Tax
Return. Claimed on the return was $$$$$
in net income, however, of that amount $$$$$ was claimed to be STATE net
income. The total STATE tax from the
return was $$$$$.
11. COMPANY G, the third owner of COMPANY B,
filed a 1999 STATE Partnership Return of Income, claiming on the return $$$$$
in ordinary income and $$$$$ in tax due.
12. Petitioners did not individually file or
pay income tax to STATE 2, as STATE 2 has no individual income tax. COMPANY B filed a STATE 2 Corporation
Franchise Tax Report which indicated $$$$$ in STATE 2 corporate franchise
tax. One half of this amount, $$$$$,
was the amount claimed by Petitioners on their Utah return as taxes paid to STATE
2. Petitioners, through the various
entities own only 50% of COMPANY
B.
13. Respondent allowed a credit for taxes
paid to another state for only $$$$$.
This was based on the tax claimed by Petitioners on their individual STATE
income tax return of $$$$$ limited by the percent of STATE income to the total
federal adjusted gross income pursuant to Utah Admin. Rule R865-9I-3 (E). Respondent disallowed the portion of the
credit claimed for tax or fees paid by the other entities to STATE or STATE 2.
APPLICABLE
LAW
A
credit is provided to an individual for income tax paid to another state at
Utah Code Ann. Sec. 59-10-106 as follows:
(1) A resident individual shall be allowed a credit against the tax
otherwise due under this chapter equal to the amount of the tax imposed on him
for the taxable year by another state of the Untied States, the District of
Columbia, or a possession of the United States, on income derived from sources
therein which is also subject to tax under this chapter.
(2) The application of the credit provided under this section shall not
operate to reduce the tax payable under this chapter to an amount less than
would have been payable were the income from the other state disregarded.
(3) The credit provided by this section shall be
computed and claimed in accordance with rules prescribed by the
commission. (Utah Code Ann. Sec.
59-10-106)
The Credit is limited by the provisions of Utah Admin.
Rule R865-9I-3 (E) as follows:
The credit allowable on the Utah return for taxes paid
to any other state shall be the smaller of the following: 1. the amount of tax
paid to the other state; or 2. a percentage of the total Utah tax. This percentage is determined by dividing
the total federal adjusted gross income into the amount of the federal adjusted
gross income taxed in the other state.
(Utah Admin. Rule R865-9I-3).
The Utah Code provides for the taxation of limited
liability companies at Utah Code Ann. 59-10-801 as follows:
For purposes of taxation under this title, a limited
liability company or a foreign limited liability company transacting business
in the state shall be classified in the same manner as it is classified for
federal income tax purposes. (Utah Code
Ann. 59-10-801)
Utah Code provides the following for the tax treatment
of S Corporations at Utah Code Ann. 59-7-701 and 702:
An S corporation, except on described in Subsection
59-7-102-(2) shall be taxed for state purposes in the same manner as taxed for
federal purposes as provided in Subtitle A, Chapter 1S, Internal Revenue Code
and as modified by this chapter. The
tax rate for S corporations shall be the rate provided for corporations under
Section 59-7-104. Taxes owned under
this section shall be subject to the estimated tax payments as provided in
Section 59-7-504. (Utah Code Ann. Sec.
59-7-701.)
(1) Except as provided in Subsection (2), items of
Utah taxable income, expenses, losses and credits shall be passed through to
the shareholders and be taxed as provided in Subtitle A, Chapter 1S, Part 2,
Internal Revenue Code. . . . (Utah Code
Ann. Sec. 59-7-702.)
The
Utah Legislature has specifically provided that the taxpayer bear the burden of
proof in proceedings before the Tax Commission. Utah Code Ann. '59-10-543
provides the following:
In any proceeding before the commission under this chapter, the burden
of proof shall be upon the petitioner . . .
CONCLUSIONS
OF LAW
1. Utah
Code Ann. Sec. 59-10-106 provides a Utah resident individual a credit for
income tax imposed on the individual by another state. The Commission concludes that where the
corporation qualifies and files as an S Corporation for both Utah and federal
tax purposes, the Utah resident is entitled to claim on his or her return a
credit for "income" taxes paid by the corporation in other
states. Utah Code Ann. Sec. 59-7-702
and the Internal Revenue Code provision to which it refers, dictate that if the
corporation files and qualifies for S Corporation treatment on the Utah resident
individual return and for federal tax purposes, a shareholder's pro-rata
distributable share of corporate income, loss, deduction or credit is to be
treated in all respects as if it were income, loss, deduction or credit
accruing directly to the shareholder, as if the corporation itself had no
involvement in the generation thereof.
However, the Commission concludes that in order to qualify for the
credit, the tax paid to the other state must be an 'income' tax. The S Corporation tax paid to STATE,
although it was the minimum tax, is measured based solely on income and is
'income' tax which qualifies for the credit on Petitioner's Utah individual
return. Respondent's denial of a credit
for this amount was in error.
2. Additionally, a credit would be allowed
on the Utah return for income based taxes paid by a limited partnership to
another state. However, in this
instance the amount paid by the COMPANY G to STATE was not an income-based
tax. It was instead a flat fee charged
for the privilege of doing business in STATE regardless of income. Respondent appropriately disallowed the
credit for this amount.
3.
In looking at the taxes and fees paid by the limited liability companies
to the state of STATE, the statutory provisions for their taxation are not identical
to those for S Corporations and Petitioner did not provide an argument as to
why they should be given similar treatment.
However, it is clear that the credit would be precluded for fees or
taxes which were not income-based taxes.
Respondent provided the STATE Forms & Instructions, 1999 Limited
Liability Company Tax Booklet, as well as Petitioners' STATE tax returns for
the two limited liability companies at issue.
From this it is clear that the limited liability companies are charged both
a tax and a fee in STATE. The tax is a
flat $$$$$ tax for doing business in the state which is charged to all limited
liability companies regardless of income.
Although the "fee" appears to be based on income it is not
characterized by STATE as a tax but rather a "fee." There is no Utah statutory provision to give
credit for the fee. Respondent properly
disallowed the credit for the taxes and fees paid by the limited liability
companies to the state of STATE.
4. Turning to the tax paid by COMPANY A to
the state of STATE 2, the Commission notes that in prior decisions it has
determined that the taxes paid by an S Corporation to STATE 2 were not
"income" based taxes and disallowed the credit.[1] It appears from the STATE 2 Franchise Tax Report
filed by COMPANY A that like the S Corporation tax, the tax for the limited
liability company is not an "income" based tax as a substantial
component may be measured by net taxable capital. Petitioner presented no information to indicate that the S
Corporation and limited liability corporation taxes were treated dissimilarly
by the state of STATE 2. Without
sufficient evidence to the contrary, Respondent has appropriately disallowed
the taxes paid by the limited liability company to the state of STATE 2.
5. Petitioner
argues that at the very least the credit limitation allowable on the Utah
return for taxes paid to any other state should be calculated using the gross
income from the various business entities that paid tax in STATE and not be
limited to the amount reported by Petitioners on their individual STATE income
tax return. However, there is no
support in the statute or rule for Petitioners argument. The limitation is the smaller of the
following: either the amount of tax paid to the other state, or a percentage of
the total Utah tax. The percentage is
determined by dividing the total federal adjusted gross income into the amount
of the federal adjusted gross income taxed in the other state. (Utah Admin. Rule R865-9I-3). As noted above, the $$$$$ tax paid by the S
Corporation to STATE should be included in the credit and the corresponding
income claimed on the S Corporation return should be included in the
percentage.
6. Lastly,
Petitioners argue that disallowing the credit will result in double taxation
and an equitable adjustment should be made.
Respondent has allowed Petitioners credit against their Utah individual
income tax, subject to the limitation, for individual income taxes paid to STATE. Respondent=s disallowance of credit for various taxes and fees paid by limited
liability companies, the C corporation, and limited partnership to the state of
STATE, as well as paid by the limited liability company to STATE 2, does not
rise to double taxation. These are
taxes paid by entities which are legally separate from Petitioners individually
and separate from each other.
Presumably Petitioners had some purpose behind structuring their
businesses in the manner described herein. However, additional taxes and fees
resulting from this structure do not support a double taxation claim.
DECISION
AND ORDER
Based
upon the foregoing, the Tax Commission orders that Petitioner be given a credit
for the income tax of $$$$$ paid by COMPANY E, Petitioners' S Corporation, to
the state of STATE and include the income from the S Corporation in determining
the credit limitation pursuant to the rule.
The remainder of the audit deficiency is sustained for the tax year
1999. It is so ordered.
DATED
this 21st day of January , 2003.
_____________________
Jane Phan
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 21st day of January , 2003.
Pam Hendrickson R.
Bruce Johnson
Commission Chair Commissioner
Palmer DePaulis Marc
B. Johnson
Commissioner Commissioner