01-1398, 01-1447 &
02-0262
Income Tax
Signed 1/21/03
BEFORE THE UTAH STATE
TAX COMMISSION
____________________________________
)
PETITIONERS, ) FINDINGS OF FACT,
) CONCLUSIONS OF LAW,
) AND FINAL DECISION
)
Petitioners, ) Appeal Nos. 01-1398, 01-1447
v. ) 02-0262
)
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 1
PETITIONER 2
PETITIONER 3
PETITIONER 4
For Respondent: Tim Bodily, Assistant Attorney General
Brenda Salter, Senior
Auditor
Becky McKenzie, Senior
Auditor
STATEMENT
OF THE CASE
This matter came before the Utah State Tax
Commission for a Formal Hearing on November 21, 2002. Based upon the evidence and testimony presented at the hearing,
the Tax Commission hereby makes its:
FINDINGS
OF FACT
1. Petitioners 1, 2 and 3 are appealing
audit deficiencies of additional income tax and interest for the tax years 1994
and 1995. Petitioner 4 is appealing an
audit deficiency of additional income tax and interest for the tax year 1995. No penalties were assessed with the audit.
2. The amount of the deficiencies
determined by Respondent for each Petitioner are as follows:
For PETITIONER 1 and
PETITIONER 2 Jointly
Year
Tax Interest as of Notice Date
1994
$$$$$ $$$$$$
1995
$$$$$ $$$$$$
For PETITIONER 3
1994
$$$$ $$$$$
1995
$$$$ $$$$$
For PETITIONER 4
1995 $$$$$$ $$$$$
3. Interest
continues to accrue on the unpaid balance.
4. Petitioners
had originally filed Utah Individual Income Tax returns for the years in
question. As a result of the audit,
Respondent increased Petitioners 1 and 2’S Utah state taxable income from $$$$$
to $$$$$$ for the 1994 tax year and from $$$$$$ to $$$$$$ for the 1995 tax
year. Also for both tax years, Respondent
increased the exemptions claimed on PETITIONER1 and PETITIONER 2’S returns from
4 to 6. For the audit of PETITIONER 3,
for 1994, Respondent increased the Utah taxable income from $$$$$ to $$$$$ and
for 1995 increased the Utah taxable income from $$$$$ to $$$$$. For both tax years Respondent changed the
exemptions from 1 to 0 exemptions. On
the audit of PETITIONER 4, his Utah taxable income was increased from $$$$$ to
$$$$$ for the 1995 tax year.
5. The
Audit deficiencies are based solely on information provided to the Utah Tax
Commission from the Internal Revenue Service ("IRS"). This information is regularly provided by
the IRS to the Respondent and the Utah Tax Commission and is relied on by the
Respondent in its regular course of business.
The information came in two formats.
The IRS had provided for each Petitioner a copy of a report titled
Income Tax Examination Changes. These
reports had been signed by the IRS Examiner.
They indicated that the IRS had determined that each Petitioner had more
federal taxable income than was previously reported or determined and owed
additional federal tax, penalties and interest. The second set of documents was a computer generated report that
the IRS provided to Respondent upon a written Request for Return/Information
submitted by Respondent. The documents
requested were the IMFOLT and IMFOLR ("IMF") for each of the
Petitioners. The Request form was
signed by both Respondent and the Exchange Representative of the IRS. The IMF's themselves were computer generated
documents that were not signed. The
IMF's also indicated that the IRS had determined that Petitioners received
additional federal taxable income then the amount Petitioners reported on their
federal returns and that additional federal income tax, penalties and interest
had been assessed. The IRS information
indicated that PETITIONER 1 AND PETITIONER 2 had received during the years at
issue income from S corporations, interest income and wage income. Both PETITIONER 4 and PETITIONER 3 received
income from S corporations.
6. Respondent
did not submit an official assessment from the IRS against the Petitioners, nor
could Respondent's witness testify as to whether an official assessment had
been issued.
7. Petitioners
1, 2 and 3 were residents of Utah for tax purposes throughout the audit period
at issue. They acknowledged that they
resided in CITY, Utah and did not claim to be domiciled in any other
state. PETITIONER 1 was a chiropractor
who worked in CITY and received compensation for the services he performed
there.
8. PETITIONER
4 did not reside in Utah during the 1995 tax year, which is the only year at
issue in his case. His domicile and
resident status for tax purposes, however, remained in Utah. He was serving a church mission in STATE
from January 1994 through January 1996.
He was clearly domiciled and a resident of Utah for state tax purposes
prior to his mission and upon his return from his mission. His intent in going to STATE was not to make
it his permanent place of abode, it was to stay there for the length of the
mission. Absence from the state for a
special or temporary purpose is not sufficient to change ones domicile.
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 follows:
(k) "Resident
individual" means: (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 more 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:
ADomicile@ 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 . . .
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 them or to
hear the appeal or issue the assessment.
The Tax Commission's authority comes from the Utah Constitution and, 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 authority to
issue an income tax assessment and has jurisdiction over this appeal.
Petitioners also argue that the Tax Commission
does not have jurisdiction over PETITIONER 4 as he did not reside in Utah
during the year in question in his appeal.
Although, PETITIONER 4 did not reside in Utah during the year at issue,
he was domiciled in Utah and a Utah resident for tax purposes. He did not go to STATE with the intent that
he would make it his permanent home. He
went there for a temporary purposes and once that purpose had been fulfilled he
returned to Utah.
A second argument offered by Petitioners is that
since they had not received an official assessment from the IRS, the Tax
Commission could not issue an assessment against them. Respondent pointed to the Utah case law
that is relevant on this point and it supports Respondent's contention that the
State may issue an assessment regardless of whether one has been done by the
IRS.[2] Although Petitioners indicated that they
disagree, Respondent's position is well supported.
A third argument offered by Petitioners is that the
type of income that they received was not included in taxable income. Petitioners argue that compensation for
services is not included in taxable income.
Although Petitioners argue sincerely on this point, both the law and
case law are clearly against them. The
state law, through links to the Internal Revenue Code, clearly defines taxable
income as "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; ... " (Internal
Revenue Code at 26 U.S.C. 61(a)) Curiously Petitioners point in support of
their contention, that compensation for services is not included in taxable
income, to the longstanding provision of statutory construction that when a
statute is unambiguous it means what it says.
In the matter at hand the statues are clear and unambiguous. They say compensation for services is included
in taxable income. In addition, the
courts have considered this issue and have unequivocally held that income is
includable in taxable income.[3]
A further argument made by Petitioners is a
question of burden of proof. They argue
that Respondent's reliance on the information from the Internal Revenue Service
is insufficient to sustain an assessment against them which is in excess of the
amount that they claimed on their Utah Individual Income Tax returns. Because they felt that Respondent's
information was insufficient, they argue that they did not present evidence,
which they assert they have, to contradict the numbers and dollar amounts
indicated on the IRS information.
However, the legislature has determined that Petitioners have the burden
of proof in this matter and there are a number of policy reasons which support
this position, including the fact that generally the information is in the
possession of the taxpayer. If Petitioners had evidence which refuted the
information from the IRS they should have presented it at the hearing. They did not do so and failed to meet their
burden of proof in this matter.
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 statutory links
are followed, state taxable income is income from whatever source derived and
specifically includes compensation for services. The Commission acknowledges that there are some statutory
exemptions and deductions but Petitioners have failed to provide evidence that
they are entitled to any of these in addition to the ones allowed by Respondent
in the audit.
CONCLUSIONS
OF LAW
1. The
Commission has made a finding of fact that all four 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. Compensation
for services as well as the other income indicated in the audit 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 assessments are,
accordingly, sustained in full.
DECISION AND ORDER
Petitioners' claims have no merit. The Tax Commission sustains the audit
assessments of additional income tax and interest against Petitioners 1, 2 and
3 for the years 1994 and 1995 and against 4 for the year 1995. It is so ordered.
DATED this 21st day of January , 2003.
_____________________
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 21st day of January , 2003.
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. 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).
[2]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).
[3]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.@ See also United States v. Mann, 884 F.2d 532
(10th Cir. 1989) and United States v. Lonsdale 919 F.2d 1440 (10th Cir.
1990).