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
) Judge: Phan
Jane Phan, Administrative Law Judge
For Petitioner: PETITIONER
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.
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.
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. 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.
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. 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, is not subject to tax. There have been numerous cases, 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. 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.
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
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).
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).
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).
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).
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.@
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."