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 Respondentís 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: PETITIONERíS, Attorney

PETITIONERíS, 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 ďAĒ 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 Petitionersí 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 Petitionersí 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

 



[1]See Utah Tax Commission Orders, Appeal Nos. 00-1474 & 01-1250.