01-0458
Income Tax
Signed 9/5/02
BEFORE
THE UTAH STATE TAX COMMISSION
____________________________________
)
PETITIONERS, ) FINDINGS OF FACT,
) CONCLUSIONS
OF LAW,
Petitioners, ) AND FINAL DECISION
)
v. ) Appeal No. 01-0458
)
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
PETITIONER’S REP
For Respondent: Laron Lind, Assistant Attorney General
Brent Taylor, Manager Income Tax Auditing
Becky McKenzie, Senior Auditor
STATEMENT
OF THE CASE
This matter came before the Utah State Tax Commission for a Formal
Hearing on June 6, 2002. Petitioner was
granted the right to file a post-hearing brief in this matter and did so on
June 28, 2002. Respondent did not file
a response. Based upon the evidence and
testimony presented at the hearing, and considering Petitioner's post hearing
filing, the Tax Commission hereby makes its:
FINDINGS
OF FACT
1. Petitioners
are appealing audit deficiencies of income tax, penalty and interest for the
tax year 1997.
2. The
amount of the deficiency determined by Respondent was $$$$$$ in income tax,
$$$$$$ in penalty and $$$$$$ in interest as of the time the Statutory Notice of
Audit Change was issued. Interest
continues to accrue on the unpaid balance.
The Statutory Notice of Audit Change was issued on February 21,
2001.
3. The
penalty assessed was a $$$$ penalty for filing a frivolous return pursuant
to Utah Code Ann. §59-10-401(7).
4. Petitioners
had filed a Utah Individual Income Tax Return for the tax year 1997 in February
1998. They claimed $$$$$$ taxable
income on their return. Later, sometime
prior to September 1, 2000, Petitioners filed a document titled Legal Notice. In this notice Petitioners claimed to have
no federal income tax liability for the tax year 1997. The notice indicates that they had earned
$$$$$$ in net income from self employment.
However, the same notice indicates that this self-employment income was
excluded from their taxable income.
5. Respondent's
audit deficiency was based on information Respondent obtained form the Internal
Revenue Service.
("IRS"). One of the
documents presented by Respondent was the Department of the Treasury-Internal
Revenue Service Income Tax Examination Changes ("Tax Examination
Changes"). The Tax Examination
Changes clearly indicated the adjustments the IRS had made to Petitioners'
income, including the type of income and dollar amount. This IRS document indicated that a large
portion of Petitioners' federal taxable income had come from the sale of real
estate. Three separate real estate
transactions were noted and together they totaled $$$$$. This document indicated that Petitioners had
received a total of $$$$$ in federal adjusted gross income during the tax year
1997. From this Respondent determined that
Petitioners had received $$$$$ in Utah taxable income.
6. Respondent
also submitted a document titled IMF MCC Transcript-Specific
("IMF"). Petitioners objected
to the IMF arguing that it contains cryptically coded information or "secretly
coded" information and that they were entitled to a literal translation in
English. Some of the information on the
IMF is obvious like the line "TAXABLE INC- $$$$$," but certainly
there are notations on the IMF which are not self-explanatory. However, Respondent presented un-refuted
information with the IRS' Tax Examination Changes to support the audit in this
matter as Petitioners did not provide evidence that refuted the amount of
income listed by the IRS. In fact, the
Legal Notice which Petitioners submitted in this matter indicated that they
received more in business income during 1997 than as was claimed by
Respondent. Petitioners' contention was
a legal argument, that the income they received was not subject to income tax.
7. During
the tax years Petitioners were
"resident individuals" for the purposes of Utah Code Ann.
'59-10-104. Petitioners resided and
maintained a residence in Utah during 1997.
They did not claim to maintain a residence outside the geographical
boundaries of Utah or claim to be a domiciliary of another state.
APPLICABLE
LAW
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:
(i) an individual who is domiciled in this
state for any period of time during the taxable year, but only for the duration of such period; 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 mores days of the
taxable year in this state. For
purposes of this Subsection (1)(k)(ii), a fraction of a calendar day shall be
counted as a whole day.
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 U.S.C. 63 as:
Except as provided in subsection (b), for
purposes of this subtitle, the term Ataxable 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 U.S.C. 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; ...
A $500 penalty for filing a frivolous return
is imposed at Utah Code Ann. '59-1-401(7) as follows:
(7) If any taxpayer, in furtherance of a
frivolous position, has a prima facie intent to delay or impede administration
of the tax law and files a purported return that fails to contain information
from which the correctness of reported tax liability can be determined or that
clearly indicates that the tax liability shown must be substantially incorrect,
the penalty is $500.
ANALYSIS
Petitioners' position, that the income they received was not subject to
state income tax, is without merit.
The statutes and case law clearly support individual income tax.[1] Petitioners argue that the Tax Commission
has no authority or jurisdiction to issue the tax deficiency against
Petitioners, to hear the appeal or issue the assessment. The Tax Commission's authority, in part, is
set out at Utah Code Ann. §59-10, Part 5 as well as general provisions of the
Utah Tax Code at Part 1 and the Utah Administrative Procedures Act. Clearly the Tax Commission has statutory
authority to issue an income tax assessment and jurisdiction over this
appeal. Petitioners also argue that the
evidence of taxable income presented by Respondent, which consisted of
information from the IRS, was insufficient to establish liability.
However, Petitioners did not provide evidence to refute the fact that
they received income during the year or that would tend to establish a lessor
dollar amount than that determined by Respondent.
A second argument offered by Petitioners is that they are not the type
of citizen or resident of Utah to be subject to Utah tax laws. Petitioners' argument that they are somehow
not the type of citizen of the Untied States to be subject to federal tax, has
been rejected by the Courts on so many occasions as to constitute a frivolous
argument and has often resulted in sanctions.[2]
However, for state tax purposes, the federal definition of citizen or
resident is largely irrelevant as a resident subject to Utah income tax is
defined by Utah state statute. Utah
Code Ann. §59-10-104 imposes a tax on every "resident
individual." “Resident individual”
is defined at Utah Code Ann. §59-10-103(1)(k)
which states, ""Resident individual" means: (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."
Petitioners argue that although they reside in Utah they are not
residents of "this state,"
that "this state" in Utah Code Ann. '59-10-103(1)(k) refers to
something other than Utah. There is no
support in the Utah statutes, case law, or rules of statutory construction for
Petitioners' allegation that "this state" is a separate entity from
Utah. In fact, the plain reading of
this statute indicates that Petitioners are incorrect in their
interpretation. The plain and obvious
reading of this section in the Utah Code is "this state," refers to
Utah. There have been a number of cases
in Utah that have gone before the Utah Supreme Court or Utah Court of Appeals
determining whether someone is a "resident individual" for state tax
purposes.[3] Petitioners were clearly "resident
individuals" during the period at issue, subject to Utah income tax. They resided full time in Utah during the
audit period, they worked in Utah. They
do not claim to have a domicile outside the boundaries of Utah. Petitioners' argument is frivolous and lacks
merit.
Petitioners also use this same type of contorted interpretative
technique with the phrase "any tax."
Part 5 of the Individual Income Tax Act uses at times the term "any
tax" to refer to taxes imposed
under that chapter. For example Utah Code
Ann. §59-10-528(3) states, "If any person liable under this chapter for
the payment of any tax, . . . refuses to pay the same . . . the
Commission may issue a warrant . . . " (Emphasis Added.) Although the chapter in which this section
is located is the Individual Income Tax Act, Petitioners do not interpret
income tax to be included in "any tax" under this chapter. Instead of considering the plain and direct
meaning of this phrase, Petitioners argue that Utah Code Ann. Sec. 59-10-103(2)
requires that the definition of
"any tax" is the Internal Revenue definition. They argue that under the Internal Revenue
Code "any tax" is a "qualified tax." Petitioners' representative then points to
some irrelevant sections in the Internal Revenue Code which have been repealed
for the proposition that the state no longer has the authority to collect an
income tax deficiency. Petitioners call
this theory "new evidence" but it is merely a new legal argument. Again the Tax Commission rejects
Petitioners' argument in its entirety.
The state tax provisions are clear.
They are not difficult or ambiguous.
Utah "resident individuals" are subject to state income tax on
their state taxable income.
"State taxable income" is defined at Utah Code Ann. §59-10-112
and Utah Code Ann. §59-10-111 as "federal taxable income" as defined
in Section 63, Internal Revenue Code of 1986.
When the definitional links are followed, state taxable income is income
from whatever source derived and specifically includes compensation for services. See Internal Revenue Code at 26 U.S.C. 63
and 61(a). The Commission acknowledges
that there are some statutory exemptions and deductions, for instance certain
business expenses are deductible, but Petitioners have not substantiated any
allowable business expenses and there is no exemption that would exclude all of
Petitioners' income as they had claimed on their income tax return.
Petitioners' representative argues that the state can not tax a
fundamental right like the right to labor or the pursuit of happiness. The Tax Commission points out to Petitioners
that there is no case that supports Petitioners' contention that compensation
for services, whether in the form of wage or income earned from self
employment,[4]
is not subject to tax. There have been
numerous cases,[5]
a number cited herein, that have looked at the issue and they all have upheld
the constitutionality of the individual income tax on wages or income from self
employment. In Charles C. Steward
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."
Petitioners’ argument that the individual income tax is
unconstitutional is both frivolous and lacking merit because the 16th Amendment
directly provides for an individual income tax without apportionment between
the states.[6] In short, the income tax is constitutional,
and Petitioners' argument that they have a constitutional right to be free of
tax on earnings generated from their labor is baseless. To borrow from the
United States Supreme Court, "Taxes are what we pay for civilized
society." Cohn v. Graves,
300 U.S. 308 (1937).
Turning to the issue of the $$$$$ penalty for filing a frivolous
return, the Utah individual income tax return filed by Petitioners for the tax
year at issue clearly failed to contain information from which the correctness
of the reported tax liability could be determined. This was done in furtherance of a frivolous position and the
penalty in this matter was appropriate.
CONCLUSIONS
OF LAW
1. The Commission has made
a finding of fact that Petitioners were Utah resident individuals throughout
the tax years at issue. For this reason
the Commission concludes that Petitioners are liable for Utah individual income
tax on their state taxable income. Utah
Code Ann. §59-10-104.
2. Petitioners did not
dispute that they had received income during the years at issue, nor provide
any significant rebuttal as to the dollar amount of the income as determined by
Respondent. Petitioners' income is
clearly included in Utah taxable income.
Utah Code Ann.§59-10-112; Utah Code Ann. §59-10-111; 26 U.S.C. 63; 26
U.S.C. 61(a). Petitioners' arguments
that their income was not subject to state income tax are without merit and
have no basis in statute or case law.
3. Petitioners are
entitled to deduct legitimate business expenses and may be entitled to certain
itemized deductions. They have,
however, refused to either identify or substantiate any such expenses or
deductions. The audit deficiencies
are, accordingly, sustained in full.
4. The $$$$$ penalty for filing a frivolous return was clearly
appropriate in this matter pursuant to Utah Code Ann. §59-1-401(7). Petitioners filed a Utah Income Tax Return
claiming $$$$$ in Utah taxable income.
Petitioners had received substantial income during the tax year. Petitioners offer frivolous arguments
claiming that the income they received during the tax year was exempt. Their actions impeded the administration of
the tax laws.
DECISION
AND ORDER
Petitioners' claims have no merit.
The Tax Commission sustains the audit deficiencies and assesses the
additional income tax, $$$$$ penalty and interest against Petitioners as listed
in the Statutory Notice of Audit Change for the tax year 1997. It is so ordered.
DATED this 5th day of September , 2002.
_____________________
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 5th day of September , 2002.
Pam Hendrickson R. Bruce
Johnson
Commission Chair Commissioner
Palmer DePaulis Marc B.
Johnson
Commissioner Commissioner
[1]See United States v. Mann, 884 F.2d 532 (10th Cir. 1989). In that case, Mann offered many theories as to why he was not required to file income tax returns. The court stated, AHis many theories include the asserted beliefs that 1) the United States Supreme Court has declared that the sixteenth amendment applies only to corporations, 2) the Internal Revenue Service (IRS) has no jurisdiction over him, 3) he is not a Aperson@ within the meaning of 26 I.R.C. '7203, 4 ) wages are not income, 5) federal reserve notes are not legal tender, and 6) the income tax is voluntary.@ The court in Mann responded to these assertions as follows, A. . . 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.@
See also United States v. Collins, 920 F.2d 619 (10th Cir. 1990), cert. denied, 500 U.S. 920, (1991); United States v. Lonsdale, 919 F.2d 1440 (10th Cir. 1990); Cox V. Commissioner of Internal Revenue, 99 F.3d 1149 (10th Cir. 1996); Baker v. Towns, 849 F. Supp. 775 (D.Utah 1993); United States v. Hanson, 2 F.3d 942 (9th Cir. 1993); United States v. Koliboski, 732 F.2d 1328 (7th Cir. 1984)and Granzow v. C.I.R., 739 F.2d 265, 267 (7th Cir. 1984).
[2]See Lonsdale v. United States, 919 F.2d 1440, 1448 (10th
Cir. 1990); United States v. Collins, 920 F.2d 619, 629 (10th Cir. 1990); United States v. Hanson, 2 F.3d 942,945 (9th Cir. 1993); United States v. Studley, 783 F.2d 934, 937, n. 3 (9th Cir. 1986); United States v. Sloan, 939 F.2d 499, 501 (7th Cir. 1991), cert. den. 112 S.Ct. 940 (1992); United States v. Kruger, 923 F.2d 587, 587-588 (8th Cir. 1991); United States v. Gerads, 999 F.2d 1255 (8th Cir. 1993); United States v. Slater, 96 F.R.D. 53, 55-56 (D. Del. 1982); and United States v. Mundt, 29 F.3d 233,237 (6th Cir. 1994).
[3]The issue of domicile for Utah individual income tax purposes has been considered by the Utah Supreme Court and the Court of Appeals in the following cases: Lassche v. State Tax Comm=n 866 P.2d 618 (Utah Ct. App. 1993); Clements v. State Tax Comm=n, 839 P.2d 1078 (Utah Ct. App. 1995), O=Rourke v. State Tax Comm=n, 830 P.2d 230 (Utah 1992), and Orton v. State Tax Comm=n, 864 P.2d 904 (Utah Ct. App. 1993).
[4]The Utah Supreme Court has affirmed tax assessments against individuals on their income earned from self employment. See Nelson v. Auditing Div., 903 P.2d 939 (Utah 1995) and Jensen v. State Tax Commission, 835 P.2d 965 (Utah 1992).
[5]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, AIt 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, 1329 fn 1 (1984), the Seventh Circuit stated Athe 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.@
[6]The constitutional right to tax income has never been invalidated. Rather, the tax had previously been held unconstitutional because it was a direct tax that was not apportioned among the states according to their population, as required by Article I, Section 2. The Sixteenth Amendment authorized a direct tax on incomes without apportionment among the states according to population. In Stanton v. Baltic Mining Co., at 240 U.S. 103, 112, the Supreme Court states that Congress' power of income taxation was "complete and plenary . . . from the beginning."