BEFORE THE UTAH STATE TAX COMMISSION
PETITIONER 1 AND )
PETITIONER 2, ) ORDER
) Appeal No. 01-0316
v. ) Account No. #####
AUDITING DIVISION OF ) Tax Type: Income Tax
THE UTAH STATE TAX )
COMMISSION, ) Judge: Phan
Jane Phan, Administrative Law Judge
For Petitioner: PETITIONER REP 1
PETITIONER REP 2
For Respondent: Gale Francis, Assistant Attorney General
Becky McKenzie, Senior Auditor
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 September 24, 2001.
Petitioner is appealing the assessments of Utah individual income tax, penalties and interest for the tax years 1995 through 1998. The Statutory Notices of Audit Change for all four years were issued on January 26, 2001.
The amount of the tax assessed for 1995 was $$$$$, the penalty $$$$$$ and the interest as of the date of the assessment $$$$$. The amount of the tax assessment for 1996 was $$$$$, the penalty $$$$$ and the interest as of the date of the assessment was $$$$$. The amount of the tax assessment for 1997 was $$$$$, the penalty was $$$$$ and the interest as of the date of the assessment was $$$$$. The amount of the tax assessment for 1998 was $$$$$, the penalty $$$$$ and the interest $$$$$. Interest continues to accrue on the unpaid balances. The penalties assessed were 100% fraud penalties pursuant to Utah Code Ann. Sec. 59-1-401(5).
Petitioner had filed amended Utah Individual Income Tax Returns on Form TC-40 for each year at issue in September 1999. On each of the returns Petitioners claimed $$$$$ in taxable income. Respondent audited the returns and determined that they were incorrect. Respondent concluded in its audit that Petitioners had received taxable income during each year at issue in the amounts listed on the Statutory Notices of Audit Change. The amount of taxable income apparently came from returns originally filed by Petitioners. Petitioners appealed the audit assessments. Petitioner did not dispute receipt of income during the years at issue, nor did Petitioner present receipts, accounting books or any financial information to contest the amounts listed in the Statutory Notices. Petitioners have the burden of proof on this issue pursuant to Utah Code Ann. Sec. 59-10-543 and they failed to prove that they did not actually receive the amounts of income claimed by Respondent.
Although throughout all years at issue Petitioners lived in Utah and were Utah "resident individuals" for the purposes of Utah Code Ann. Sec. 59-10-104, and PETITIONER 1 received compensation for his services as a PROFESSIONAL, Petitioners claims that they had no Utah state income tax liability for the years at issue. Petitioners' arguments are without merit.
Petitioners acknowledge that the 16th Amendment of the United States Constitution states that Congress has the power to lay and collect taxes on incomes, from whatever source derived. However, Petitioners argue that the United States Supreme Court has confirmed that no new powers of taxation were conferred upon Congress by virtue of the 16th Amendment. For support of this contention Petitioners' representative cites to Stanton v. Baltic Mining Co., 240 U.S. 103, 112 (1916) and Brushauber v. Union Pacific Railroad Co., 240 U.S. 1 (1916), among other cases. Petitioners' representative is apparently assuming, in error, that an income tax was unconstitutional prior to the adoption of the 16th Amendment and Petitioners' representative has taken the Court's words out of context, to argue that if there was no new taxing power provided by the 16th Amendment than income tax is unconstitutional.
Petitioner's representative has clearly misinterpreted these cases. Congress already had the power to levy an income tax prior to the enactment of the 16th Amendment. That is what the Court held in both Stanton and Brushaber. In Stanton, at 240 U.S. 103, 112, the Supreme Court states that Congress' power of income taxation was "complete and plenary . . . from the beginning." In Brushaber, at 18, the Court stated, "It is clear on the face of this text [the 16th Amendment] that it does not purport to confer power to levy income taxes in a generic sense - an authority already possessed and never questioned." 240 U.S. 1, 18. Congress had the power to levy an income tax both before and after the adoption of the 16th Amendment. The 16th Amendment explicitly recognizes this power.
In his post hearing brief, titled Official Notice and Memorandum Brief in Support of Theory of No Tax Liability, Petitioner's representative spends a great deal of time and cites a number of cases to support his contention that the right to labor is a fundamental or inalienable right of a United States Citizen. The Commission has no dispute with this contention. However, the Commission disputes the unsupported and baseless leap that Petitioner's representative then makes from the right to labor to his claim that a person has a right not to be taxed on the income earned from his or her labor. Petitioner fails to support the second prong of this argument, the right to no tax on income from earned from labor. In fact there are cases that address the issue of whether income from labor is subject to tax, but they go directly against Petitioner. In Charles C. Stewart Machine Co. v. Davis, 301 U.S. 548, 580-581 (1937) the United States Supreme Court stated:
"But natural rights, so called, are as much subject to taxation as rights of lesser importance. An excise is not limited to vocations or activities that may be prohibited altogether. It is not limited to those that are the outcome of a franchise. It extends to vocations or activities pursued as of common right."
Certainly there are several more recent cases which have rejected challenges to the taxation to compensation for services. The 5th Circuit stated "it is clear beyond peradventure that the income tax on wages is constitutional." Stelly v. Commissioner, 761 F.2d 1113, 115 (1985). See also Granzow v. C.I.R., 739 F.2d 265, 267 (1984) in which the Seventh Circuit stated, "It is well settled that wages received by taxpayers constitute gross income within the meaning of Section 61 (a) of the Internal Revenue Code . . . and that such gross income is subject to taxation.” In United States v. Koliboski, 732 F.2d 1328 (1984), the Seventh Circuit stated “the defendant’s entire case at trial rested on his claim that he in good faith believed that wages are not income for taxation purposes. Whatever his mental state, he, of course, was wrong, as all of us already are aware. Nonetheless, the defendant still insists that no case holds that wages are income. Let us now put that to rest: WAGES ARE INCOME.”
In short the income tax is constitutional, and Petitioner's argument that he has a constitutional right to be free of tax on earnings generated from his labor is baseless. The assertion that income tax is unconstitutional is nonsensical because the 16th Amendment explicitly recognizes the power to tax incomes, a power which Congress had already possessed.
Utah law is also clear on this issue. Utah law provides that a state income tax is imposed on "state taxable income." See Utah Code Ann. '59-10-104. In the case of a resident individual, "state taxable income" is defined in Utah Code Ann. §59-10-112 as "federal taxable income," with some modifications, subtractions, and adjustments. For Utah individual income tax purposes, the Utah code incorporates the definition of federal taxable income from the Internal Revenue Code. Utah Code Ann. §59-10-111 defines "federal taxable income" as "taxable income as currently defined in Section 63, Internal Revenue Code of 1986." "Taxable income" is defined in the Internal Revenue Code at 26 USC 63 as "gross income" minus certain deductions. "Gross income" is defined in the Internal Revenue Code at 26 USC 61(a) as all income from whatever source derived, including compensation for services. The most clear and direct interpretation of these code sections is that Petitioner's income is subject to Utah income tax.
Petitioners offered other arguments which are also without merit. Petitioners argue that the Statutory Notices do not fulfill statutory requirements for making the assessment. The Commission disagrees and finds that Respondent has complied with statutory requirements. Petitioners also argue that the Internal Revenue Code provides a basis to exempt all of Petitioner's income from his federal taxable income as expenses for "necessaries." Petitioner's representative argues that Petitioner is really self employed in the pursuit of the "domestic management of household affairs." Petitioners argue that 26. U.S.C. Sec. 62(c)(1) permits a "non-reimbursed arrangement" as a reasonable allowance pursuant to Sec. 162(a)(1) from gross income for an employee's household work in lieu of hiring other professionals. In the returns which Petitioners filed for each audit year Petitioners had deduct from their federal gross income nearly all income that they received during each of the audit years. Petitioners also argue that their labor is property and a capital asset. All of these arguments are without merit and Petitioners or his representative have clearly misinterpreted the code. Petitioner's representative presents no case law or legal treatise which supports these novel theories as there are none.
In fact this is not the first time that Petitioner has argued before the Tax Commission or the Courts that his income is not subject to income tax. There were two appeals before the State Tax Commission, Appeal No. 99-0793 and 96-0684 for years prior to the audit years at issue in this case. In both the prior appeals Tax Commission rejected Petitioners' arguments stating they were without merit and upheld the state income tax assessments against Petitioners. PETITIONER 1 then argued his case in the Third District Court and was convicted on December 18, 2000, on five counts of failure to make, render, sign or verify a proper tax return and tax evasion for the years 1995 through 1998. Petitioner appealed the conviction to the Utah Court of Appeals and again argued his point. The Utah Court of Appeals, in State of Utah v. Gauruder, 2001 Ut. App. 188, in a Memorandum Decision issued on June 7, 2001, held "In 1995 and 1996, the years in which he made the most money, Gauruder willfully evaded payment of taxes." The Court of Appeals went on to state, "Gauruder's novel tax theories do not overcome the fact that he failed to meet his tax obligations under state law. The decision of the trial court is affirmed."
Despite the fact that Petitioners' arguments have been rejected twice in two prior hearings at the Tax Commission, one as early as 1997, and by the Third District Court and the Utah Court of Appeals, Petitioners continue to ignore the various tribunals findings and attempt to argue the point again at this proceeding. The Commission again rejects Petitioners' arguments and find they have no merit. In addition at the point in time of the audit assessment the fraud penalties were clearly appropriate. Petitioners have intentionally and deliberately ignored the laws of the state of Utah pertaining to income tax.
The state of Utah imposes income tax on individuals who are residents of the state, in Utah Code Ann. §59-10-104 as follows:
...a tax is imposed on the state taxable income, as defined in Section 59-10-112, of every resident individual...
Resident individual is defined in Utah Code Ann. §59-10-103(1)(k) 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.
State taxable income is defined in Utah Code Ann. §59-10-112 as follows:
"State taxable income" in the case of a resident individual means his federal taxable income (as defined by Section 59-10-111) with the modifications, subtractions, and adjustments provided in Section 59-10-114 . . .
Federal taxable income is defined in Utah Code Ann. §59-10-111 as follows:
"Federal taxable income" means taxable income as currently defined in Section 63, Internal Revenue Code of 1986.
Taxable income is defined in the Internal Revenue Code at 26 USC 63 as:
Except as provided in subsection (b), for purposes of this subtitle, the term “taxable income” means gross income minus the deductions allowed by this chapter (other than the standard deduction).
Gross income is defined in the Internal Revenue Code at 26 USC 61(a) as:
Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items; ...
The Utah Legislature has provided for failure to file and failure to pay penalties at Utah Code Ann. §59-1-401(5)(a):
Additional penalties for underpayments of tax are as follows:... (vi) If the underpayment is due to fraud with intent to evade the tax, the penalty is the greater of $500 per period or 100% of the underpayment.
DECISION AND ORDER
Based on the foregoing, the Commission sustains the assessment of income tax, fraud penalties, and interest against Petitioners for the tax years 1995 through 1998. 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
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 23rd day of July , 2001.
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 23rd day of July , 2001.
Pam Hendrickson R. Bruce Johnson
Commission Chair Commissioner
Palmer DePaulis Marc B. Johnson
Petitioners clearly were domiciled in Utah and were resident individuals pursuant to Utah Code Ann. Sec. 59-10-103(1)(k). In addition the Utah Court of Appeals specifically found Mr. Gauruder to be a Utah resident for income tax purposes during the audit period at issue in State of Utah v. Gauruder, 2001 UT App 188 (2001)
The Utah Supreme Court has affirmed the Utah income tax assessments on self employment income. See Nelson v. Auditing Div., 903 P.2d 939 (Utah 1995) and Jensen v. State Tax Commission, 835 P.2d 965(Utah 1992).
The contention that wages were not income was one of the arguments rejected by the Tenth Circuit in United States v. Mann, 884 F.2d 532 (10th Cir. 1989). In that case the court stated, "each of the views offered by Mann, whether found in his published materials or articulated additionally at trial, falls somewhere on a continuum between untrue and absurd.@
To support the contention that labor is property, Petitioner cites a quotation from In Re Slaughter-House Cases, 83 U.S. 36, at 127(1872). However, the quotation to which Petitioner cites is from the dissent and has no legal weight.
This is not the first time the Commission has heard this argument. The argument had been proffered to the Tax Commission on several previous occasions by Petitioner=s original representative in this appeal, Gary A. Demott and was rejected each time by the Tax Commission. At the time of the Initial Hearing Mr. Demott was incarcerated in federal prison on tax related convictions and the Commission does not find him to be an expert on tax matters.
Petitioners maintain that they have filed an appeal of this decision with the Utah Supreme Court.