BEFORE THE UTAH STATE TAX COMMISSION
PETITIONERS, ) FINDINGS OF FACT,
) CONCLUSIONS OF LAW,
Petitioners, ) AND FINAL DECISION
v. ) Appeal No. 01-1220
) Account No. #####
AUDITING DIVISION OF )
THE UTAH STATE TAX ) Tax Type: Income Tax
COMMISSION, ) Tax Years: 1997
Respondent. ) Judge: Davis
G. Blaine Davis, Administrative Law Judge
For Petitioner: PETITIONER
For Respondent: Mr. Mark Wainwright, Assistant Attorney General
Mr. Dan Engh, from the Auditing Division
Mr. Steve Nelson, from the Auditing Division
STATEMENT OF THE CASE
This matter came before the Utah State Tax Commission for a Formal Hearing on August 29, 2002. Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. The tax in question is income tax.
2. The year or period in question is 1997.
3. Petitioners claim a mistake was made when they filed their 1997 federal income tax return. Petitioners have attempted to file an amended federal income tax return reducing their income. Petitioners allege it was an error to include the income on both their corporate income tax return and their individual income tax return. The Internal Revenue Service has rejected the amended individual income tax return because it was not filed within the statute of limitations period.
4. Respondent has acknowledged that a small portion of the audit reflects the Internal Revenue Service's adjustment of the federal adjusted gross income of Petitioners to include two items which Petitioners had improperly treated as gross receipts of a corporation rather than as income of PETITIONER 1, but Respondent further asserts that such improper treatment is inconsequential to the determination of this matter and to the audit assessment, and further asserts that the relevant facts are as follows:
“(a) Petitioners formed a corporation, COMPANY A, federal identification no. #####, for the stated purpose of having the corporation employ PETITIONER and enter into consulting contracts with third parties. In a letter to the Auditing Division, Petitioners indicate that family members in STATE advised them that they could “save a lot in taxes by basing the company there” since STATE did not impose an income tax and “the only taxes [they] would have to pay would be federal.
(b) Petitioners provided the Auditing Division with a copy of the 1997 federal Form 1120 Corporation Income Tax Return of COMPANY A, which listed an address in CITY, STATE for the corporation. The return reported gross receipts of $$$$$ (which, according to Petitioners, consisted of $$$$$ received from COMPANY B and $$$$$ received from NAME). The return included a deduction for salaries and wages of $$$$$ (wages of PETITIONER). The return reported a 1997 taxable loss of $$$$$ for the corporation.
(c) The Auditing Division has no record of any Utah corporate franchise tax returns having been filed by Technical Specialties Software Corporation.
(d) COMPANY C had issued a 1997 Form W-2 to PETITIONER 2 reporting wages of $$$$$. NAME had issued a 1997 Form 1099-MISC listing PETITIONER 2 as the recipient of $$$$$.
(e) By notice dated March 8, 1999, the Internal Revenue Service proposed changes to Petitioners’ 1997 Form 1040 Individual Income Tax Return. The Internal Revenue Service notice proposed increasing taxable wages from $$$$$ as reported on Petitioners’ federal return to $$$$$, or an increase of $$$$$. Petitioners had reported $$$$$ of W-2 income from COMPANY A, $$$$$ of W-2 income from COMPANY C, and $$$$$ of W-2 income from COMPANY D (for PETITIONER 1). The proposed increase represents the W-2 income from COMPANY B referenced above. The Internal Revenue Service notice also proposed the inclusion of $$$$$ of “other income” which had not been reported on Petitioner’s federal Form 1040. This represents the Form 1099-MISC income received from NAME.
(f) Petitioners’ original 1997 Form TC-40 Utah Individual Income Tax Return dated April 13, 1999 reported $$$$$ of federal adjusted gross income on line 4.
(g) The Auditing Division issued a Statutory Notice of Audit Change on November 24, 2000 revising the federal adjusted gross income figure from $$$$$ to $$$$$.
(h) Petitioners filed an amended Form TC-40 Utah Individual Income Tax Return dated December 11, 2000 in which they reported $$$$$ of federal adjusted gross income on line 4. Petitioners also completed the nonresident worksheet portion of the return, claiming that only $$$$$ of the federal adjusted gross income was attributable to Utah sources.
(i) The Auditing Division issued a Statutory Notice of Audit Change dated July 19, 2001, revising federal adjusted gross income to $$$$$, and disallowing the nonresident filing treatment.
(j) Petitioners also submitted a second amended Form TC-40 Utah Individual Income Tax Return dated June 11, 2001 which reports $$$$$ of federal adjusted gross income on line 4. This second amended return has not been posted to the Tax Commission’s computer system.”
(See Request for Reconsideration Or In The Alternative, Request For Formal Hearing filed May 20, 2002.)
5. Petitioner does not dispute the above relevant facts set forth in the Petition for Reconsideration, Or In The Alternative, Request For Formal Hearing. However, Petitioner believes that they have been taxed twice on the same income, once on the corporate level, and once as individuals.
6. The Commission is not in a position to determine what has happened on the federal returns filed with the Internal Revenue Service. However, the Commission determines that the corporate return was not filed in the State of Utah, and was apparently filed with the State of STATE, or at least the Federal return was filed with a STATE address. Nevertheless, Respondent has no record of a corporation return being filed with the State of Utah.
The taxable income on a Utah Individual Income Tax Return is the same amount as the federal taxable income with modifications, subtractions, and adjustments as set forth in Utah Code Ann. §59-10-114. (Utah Code Ann. §59-10-112.)
The doctrine of equitable recoupment is applicable to a limited number of circumstances.
In this matter, Petitioner is a Utah domicile and is to be taxed on all of the income as determined on his federal return. The determination of income by Respondent is based upon the income determined in the federal return. There is a question as to whether Petitioner really received cash payments for part of the income shown on his W-2 form on the federal return, but it was clearly included on his federal return. Therefore, it is taxable by the State of Utah unless there is some reason to change that decision.
In Bull v. United States, 295 U.S. 247 (1935) the doctrine of equitable recoupment was first adopted. In that case, the executor of an estate included some partnership distributions in the taxable estate and paid estate tax. Four years later, the IRS determined that those payments should have been included in the estate’s income tax return and assessed an income tax deficiency. The IRS refused to allow a credit for the estate taxes paid. The taxpayer paid the income tax deficiency and filed a timely claim for refund. The Supreme Court allowed a credit for the excess estate taxes paid on the ground that a tax deficiency is essentially a claim by the government for a debt. If the taxpayer has overpaid other taxes on the same transaction, there is, in reality, no debt. In the Court’s words:
If the claim for income tax deficiency had been the subject of a suit, any counter demand for recoupment of the overpayment of estate tax could have been asserted by way of defense and credit obtained notwithstanding the statute of limitations had barred an independent suit against the government therefore. This is because recoupment is in the nature of a defense arising out of some feature of the transaction upon which the plaintiff’s action is grounded. Such a defense is never barred by the statute of limitations so long as the main action itself is timely.
This doctrine may also prevent some refunds. In Stone v. White, 301 U.S. 532 (1937), a trust paid the income it received to its sole beneficiary and also paid tax on that income. After the statute of limitations had run on the government’s right to assert a tax against the beneficiary, the trust filed a timely refund claim, asserting that the beneficiary, not the trust, was the proper taxpayer. The Court held that because of the identity of interest between the trust and the beneficiary, the Government could invoke equitable recoupment to assert its claim against the beneficiary as a defense to the refund claim.
The Court has also held that the doctrine is only a “shield” and not a “sword.” In other words, it can be raised as a defense to an assessment, but will not create jurisdiction for a refund claim when there is no timely case before the court. In United States v. Dalm, 494 U.S. 596(1990), the taxpayer, the administrator of her employer’s estate, had received gifts from her employer’s brother because he believed his brother “wanted her to share in the estate.” She paid a gift tax on some of those receipts. The IRS later argued that those receipts were additional taxable income for administering the estate. The case was settled, for a substantial additional tax payment. The taxpayer then sought a refund of the gift tax. The IRS denied the refund because it was barred by the statute of limitations. The Supreme Court upheld the denial, because there was no existing case in which a court could have jurisdiction. The estate tax claim was time-barred and the income tax claim had been settled. The Court seemed to acknowledge, however, that either the IRS or a court could have granted a credit if Dalm had claimed it when disputing the income tax liability.
Accordingly, if a taxpayer has overpaid taxes in one area and then is found to be deficient in another area, the time-barred overpayment may be used to offset the claimed underpayment.
However, in this case, the corporation return was not filed in the State of Utah, and was filed with the Revenue Service from a STATE address. Therefore, the doctrine of equitable recoupment would not apply to a State of Utah return where only one of those returns was filed in the State of Utah, and the other return was not filed in the State of Utah. Accordingly, there was no payment of tax on the corporation return in a year that is now barred by the statute of limitations, there has been no overpayment of tax, and no item of income has been subjected to two taxes by the State of Utah. Therefore, the doctrine of equitable recoupment does not apply to this case. This is a change and modification from the decision following the Initial Hearing because it was not clear at the Initial Hearing that the corporate return was not filed in the State of Utah.
DECISION AND ORDER
Based upon the foregoing, the Tax Commission sustains the audit assessment imposed by Respondent, and denies the Petition for Redetermination. It is so ordered.
DATED this _____ day of ____________________, 2002.
G. Blaine Davis
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 _____ day of ____________________, 2002.
Pam Hendrickson R. Bruce Johnson
Commission Chair Commissioner
Palmer DePaulis Marc B. Johnson