01-1398, 01-1447 & 02-0262
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
) Judge: Phan
Jane Phan, Administrative Law Judge
For Petitioner: PETITIONER 1
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 $$$$$ $$$$$$
1995 $$$$$ $$$$$$
For PETITIONER 3
1994 $$$$ $$$$$
1995 $$$$ $$$$$
For PETITIONER 4
1995 $$$$$$ $$$$$
3. Interest continues to accrue on the unpaid balance.
4. Petitioners had originally filed Utah Individual Income Tax returns for the years in question. As a result of the audit, Respondent increased Petitioners 1 and 2íS Utah state taxable income from $$$$$ to $$$$$$ for the 1994 tax year and from $$$$$$ to $$$$$$ for the 1995 tax year. Also for both tax years, Respondent increased the exemptions claimed on PETITIONER1 and PETITIONER 2íS returns from 4 to 6. For the audit of PETITIONER 3, for 1994, Respondent increased the Utah taxable income from $$$$$ to $$$$$ and for 1995 increased the Utah taxable income from $$$$$ to $$$$$. For both tax years Respondent changed the exemptions from 1 to 0 exemptions. On the audit of PETITIONER 4, his Utah taxable income was increased from $$$$$ to $$$$$ 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.
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 . . .
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 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. 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.
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.
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
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).
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.@ 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).