01-1006 and 02-0005
BEFORE THE UTAH STATE TAX COMMISSION
PETITIONER, ) FINDINGS OF FACT,
) CONCLUSIONS OF LAW,
Petitioner, ) AND FINAL DECISION
v. ) Appeal Nos. 01-1006 & 02-0005
AUDITING DIVISION & TAXPAYER )
SERVICES DIVISION, UTAH STATE ) Tax Type: Income Tax
TAX COMMISSION, )
) Judge: Phan
Jane Phan, Administrative Law Judge
For Petitioner: PETITIONER
For Respondent: Timothy Bodily, Assistant Attorney General
Dan Engh, Manager Income Tax Auditing
Brenda Salter, Senior Auditor
Mike Davis, Tax Compliance Agent
STATEMENT OF THE CASE
This matter came before the Utah State Tax Commission for a Formal Hearing on March 12, 2003. Based upon the evidence and testimony presented at the hearing the Tax Commission hereby makes its:
FINDINGS OF FACT
1. Appeal 01-1006 is Petitioner's appeal of income tax, penalty and interest deficiencies against him for the tax years 1992 through 1995 and the years 1998 and 1999. Appeal 02-0005 had originally been filed by Petitioner to contest a transferee assessment so that the tax, penalties and interest at issue in Appeal 01-1006 could be collected from the COMPANY A, ("COMPANY A") a business trust set up by Petitioner and his spouse. At the hearing Petitioner indicated that he no longer contested the transferee assessment but he did contest the underlying tax, penalty and interest liability which was the subject of Appeal No. 01-1006.
2. The amount of the deficiencies determined by Respondent are as follows:
Year Tax Penalty Interest as of Notice Date
1992 $$$$$$ $$$$$$ $$$$$$
1993 $$$$$$ $$$$$$ $$$$$$
1994 $$$$$$ $$$$$$ $$$$$$
1995 $$$$$$ $$$$$$ $$$$$$
1998 $$$$$$ $$$$$$ $$$$$$
1999 $$$$$$ $$$$$$ $$$$$$
3. Interest continues to accrue on the unpaid balance. The penalties assessed were 10% failure to pay and 10% failure to file penalties pursuant to Utah Code Ann. '59-10-539 and '59-1-401.
4. The Statutory Notices of Estimated Income Tax were issued on October 26, 2001, for tax years 1992, 1993, 1994 and 1995. For tax years 1998 and 1999 the Statutory Notices of Estimated Income Tax were issued on November 8, 2001. Petitioner appealed the Statutory Notices of Estimated Income Tax and the matter proceeded to the Formal Hearing. Prior to the Formal Hearing, Petitioner had filed a Motion to Dismiss, requesting that the tax deficiency be dismissed on the basis that he objected to being designated as the Petitioner which shifted the burden of proof to him. An Order Denying Motion to Dismiss was issued by the Commission on March 7, 2002, finding that he had properly been designated as Petitioner with its corresponding burden of proof.
5. Petitioner had not filed either a Federal or Utah Individual Income Tax Return for any of the tax years at issue in this appeal.
6. Respondent's audit deficiency for the years 1992 through 1995 is based on information provided by the Internal Revenue Services in the form of a document titled Department of the Treasury-Internal Revenue Service Income Tax Examination Changes. These documents indicate that the IRS audited Petitioner and determined the amount of his federal taxable income for each of those years. The state audit is based on the federal taxable income as determined by the IRS. The Income Tax Examination Changes document is a document routinely provided by the IRS to Respondent and is relied on by Respondent in its regular course of business.
7. Respondent did not have audit information from the IRS for the tax years 1998 and 1999. Instead, Respondent relied on information Petitioner reported on loan applications to determine the amount of Petitioner's state taxable income. On each of these documents, Petitioner indicated that he received a certain monthly income and his claimed income is the basis of the state audit deficiency.
8. During each of the years at issue Petitioner received income from either COMPANY A or COMPANY B. These were related entities and were businesses owned by Petitioner and his extended family. For tax years 1992 through 1995 Petitioner received 1099 and/or K-1's from these entities. At the hearing Petitioner testified that much of the income he received was to reimburse him for business expenses. However, Petitioner did not claim a specific dollar amount of business expenses for each year and did not submit sufficient information from which an amount could be determined. Since Petitioner had not filed federal individual income tax returns for any of the years at issue he had not established a proper amount of business expense deduction.
9. Petitioner stated that he and his wife and minor children had resided in COUNTRY for seven months in 1992. They had decided to go to COUNTRY so he could promote COMPANY A’s products in Japan. Prior to their departure, Petitioner and his immediate family had been living in an apartment unit in an apartment building which they owned. They rented out their unit to another tenant, put their car and other personal belongings and furniture in storage in Utah and went to COUNTRY. Petitioner indicated they went there with the intent to stay 3 months to one year or longer depending on what happened. Both Petitioner and his wife obtained COUNTRY drivers licenses, although they retained their Utah licenses. Petitioner went to COUNTRY with a temporary Visa and did have it extended. While in COUNTRY they resided with relatives. Petitioner did not pay income tax to COUNTRY. When they returned to Utah, they resided again in the same apartment complex which they owned for a period of time, until they purchased another residence in Utah.
10. Concerning the tax year 1992, the facts as presented by Petitioner indicate that although temporarily in COUNTRY, Petitioner and his immediate family remained domiciled in Utah throughout the year and were "resident individuals" for the purposes of Utah Code Ann. '59-10-104.
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.
For purposes of determining whether an individual is domiciled in this state the Commission has defined "domicile" in Utah Administrative Rule R865-9I-2(D) as follows:
"Domicile@ means the place where an individual has a true, fixed, permanent home and principal establishment, and to which place he has (whenever he is absent) the intention of returning. It is the place in which a person has voluntarily fixed the habitation of himself or herself and family, not for a mere special or temporary purpose, but with the present intention of making a permanent home. After domicile has been established, two things are necessary to create a new domicile: first, an abandonment of the old domicile; and second, the intention and establishment of a new domicile. The mere intention to abandon a domicile once established is not of itself sufficient to create a new domicile; for before a person can be said to have changed his or her domicile, a new domicile must be shown.
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; ...
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 . . .
Utah Code Ann. '59-1-401 in relevant part states:
The penalty for failure to file a tax return within the time prescribed by law including extensions is the greater of $20 or 10% of the unpaid tax on the return. (Utah Code Ann. '59-1-401(1)(a).)
The penalty for failure to pay tax due shall be the greater of $20 or 10% of the unpaid tax for: (a) failure to pay any tax as reported on a timely filed return; (b) failure to pay any tax within 90 days of the due date of the return, if there was a late filed return subject to the penalty provided under Subsection (1)(a); (Utah Code Ann. '59-1-401(2)(a)-(b).)
Petitioner argues that the income he earned was not taxable income, relying in part on an article he obtained from the Internet apparently written by PERSON A. He also indicates that he did have legitimate business expenses and also argues that the information upon which Respondent relied to determine the amount of deficiency was insufficient evidence. In addition to these arguments, for the 1992 tax year, Petitioner argues that he was a resident of Japan, not of Utah. Petitioner's arguments are without merit. The statutes and case law clearly support individual income tax.
The Tax Commission acknowledges that certain business expenses are legitimately deductible from taxable income if they are properly claimed on the federal tax return and supporting documentation is retained. Petitioner may have incurred expenses which he could have deducted from his income in this manner. However, Petitioner did not file federal returns claiming the deductions and did not support a specific dollar amount of the proper deductions for each year at issue in this appeal. As has been explained to Petitioner earlier in these administrative proceedings, he has the burden of proof in this matter pursuant to Utah Code Ann. Sec. 59-10-543. A taxpayer needs to document and keep track of the allowable deductions on a yearly basis. This information is in the possession and under the control of the Petitioner. As for the sufficiency of the documentation relied on by Respondent in determining the amount of the audit deficiency is was the best information available at the time of the audit and in fact Petitioner has not provided any better evidence that would support a different dollar amount of income received during any year in question.
Turning to the issue of residency for the tax year 1992, it is clear that Petitioner remained domiciled in Utah throughout the year regardless of the fact that he was out of the country for seven months. Utah Code Ann. '59-10-104 imposes a tax on every "resident individual." AResident individual@ is defined at Utah Code Ann. '59-10-103(1)(k) , which provides two separate tests for determining residency. The statute 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." Utah Code Ann. '59-10-103(1)(k). Domicile is defined by Utah Admin. Rule R865-9I-2(D). In his argument Petitioner focuses only on the test at Utah Code Ann. '59-10-103(1)(k)(ii) arguing that he spent less than 183 days in Utah. Petitioner, however, remained domiciled in the state through the year and was a "resident individual" for tax purposes pursuant to the first test at Utah Code Ann. '59-10-103(1)(k)(I).
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" means taxable income as currently defined in Section 63, Internal Revenue Code of 1986." Section 63 refers to Section 61 and when the statutory links are followed, state taxable income is defined at Section 61 as 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 Utah Individual Income Tax Act specifically incorporates the definition of taxable income from these specified sections of the Internal Revenue Code. The Utah Code does not refer to definitions from other sections of the Internal Revenue Code and the Commission finds that Petitioner's article from NAME is not relevant for state tax purposes. Although not relevant to the appeal, for Petitioner's benefit, the Commission finds no merit in the position espoused in the PERSON A article for federal tax purposes as the definition that pertains to Petitioner for purposes of his federal income tax calculations is the definition of gross income at Internal Revenue Code 26 U.S.C. 63 and 61.
Turning to the issue of the failure to pay and failure to file penalties, they were clearly properly imposed. Petitioner did not file or pay his taxes for the years in question as they became due. No reasonable cause has been provided by Petitioner that would justify their waiver.
CONCLUSIONS OF LAW
1. The Commission has made a finding of fact that Petitioner was a Utah resident individual throughout all the tax years at issue. For this reason the Commission concludes that Petitioner is liable for Utah individual income tax on his state taxable income. Utah Code Ann. '59-10-104.
2. Petitioner earned income during the years in question and did not provide any significant rebuttal as to the dollar amount of the income as determined by Respondent. This income came primarily from compensation for services in connection with the business COMPANY B and COMPANY A. Compensation for services 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). Petitioner's argument that his income was not subject to state income tax is without merit and has no basis in statute or case law.
3. Petitioner is entitled to deduct legitimate business expenses and may be entitled to certain itemized deductions. Petitioner has, however, refused to claim on a return or substantiate any such expenses or deductions. The assessments are, accordingly, sustained in full.
4. The failure to file and failure to pay penalties at issue were properly imposed pursuant to Utah Code Ann. '59-1-401.
DECISION AND ORDER
Petitioner's claims have no merit. The Tax Commission sustains the audit assessments of additional income tax, penalties and interest against Petitioner for the years 1992 through 1995 and 1998 and 1999. It is so ordered.
DATED this 9th day of April , 2003.
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 9th day of April , 2003.
Pam Hendrickson R. Bruce Johnson
Commission Chair Commissioner
Palmer DePaulis Marc B. Johnson
See Commissioner v. Kowalski,434 U.S. 77 (1977). In Kowalski the Untied States Supreme Court held that a cash meal allowance was included in gross income under 61(a) and therefore subject to income tax. 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 Nelson v. Auditing Div., 903 P.2d 939 (Utah 1995) and Jensen v. State Tax Commission, 835 P.2d 965 (Utah 1992). 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).
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).