BEFORE THE UTAH STATE TAX COMMISSION
PETITIONER, ) FINDINGS OF FACT,
) CONCLUSIONS OF LAW,
Petitioner, ) AND FINAL DECISION
v. ) Appeal No. 01-1399
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
STATEMENT OF THE CASE
This matter came before the Utah State Tax Commission for a Formal Hearing on October 7, 2002. Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. Petitioner is appealing an income tax, penalty and interest deficiency issued against him by Respondent for the 2000 tax year. The Statutory Notice of Audit Change was issued to Petitioner on September 25, 2001. Petitioner timely filed a Petition for Redetermination with the Utah Tax Commission and the matter proceeded to the Formal Hearing.
2. As of the date of the Statutory Notice of Audit Change, the amount of the deficiency was $$$$$ in tax, $$$$$
in interest and a penalty of $$$$$. Interest continues to accrue on the unpaid balance.
3. The penalty was assessed pursuant to Utah Code Ann. '59-1-401 (7).
4. Petitioner filed a Utah Individual Income Tax Return for the tax year 2000 on which he claimed $$$$$ federal adjusted gross income and $$$$$ total adjusted income. On the return Petitioner requested a refund of $$$$$ for the total amount of withholding Petitioner's Utah employer had paid to the Utah Tax Commission on Petitioner's behalf. Petitioner also filed a U.S. Individual Income Tax Return for the 2000 tax year on which he claimed $$$$$ in total income and requested a full refund of all federal withholding. These returns were both erroneous as Petitioner received taxable income during the tax year at issue.
5. Petitioner received $$$$$ in federal adjusted gross income during the tax year 2000. This amount is supported by W-2s and a 1099-G filed with the Internal Revenue Service by the payor. Petitioner provided no evidence to dispute this amount.
6. Petitioner was only a part year resident of Utah during 2000. He resided in Utah in January and February. During the time he was a resident of Utah he worked in Utah for COMPANY A. Petitioner acknowledges that he received $$$$$ from COMPANY A as compensation for his services.
7. The audit deficiency tax amount was based on the Utah portion of Petitioner's income during the year 2000. Respondent determined the amount to be the $$$$$ earned from his employment in Utah as well as a Utah tax refund of $$$$$. The Utah tax deficiency does not include income he earned from his employment out of state.
8. Returns such as the one filed by Petitioner, which are clearly erroneous and request a refund when one is not due, impede the administration of the tax law.
9. Before filing his returns in the manner in which he did, Petitioner states that he researched the matter and gave it serious consideration. He acknowledges that he did not read all of the cases which he cites as supporting his position, merely reading only excerpts from the cases. He testified that he had spoken with a professional tax preparer about Petitioner's position. The tax professional disagreed with Petitioner. However, Petitioner disregarded the tax professional's advice. Petitioner states that he considered cases cited in which the courts held against his position but he disregarded those cases because they were lower court decisions and it was his opinion that his position was supported by United States Supreme Court cases which he had not fully read.
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; ...
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 . . .
The Utah Legislature has determined that a $500 penalty is necessary in the following
circumstances as set out in Utah Code Ann. '59-1-401(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.
Petitioner acknowledges that he received wage income for his employment while a Utah resident and does not dispute the amount of the income he received. He argues instead that the wage income was not subject to income tax. The courts have directly considered whether wages are included in federal taxable income and have clearly concluded that wages are taxable income. Petitioner rejects these cases even though they directly consider the issue at hand. Petitioner argues that prior United States Supreme Court Cases take precedence over the lower court cases. Only on this last point is Petitioner correct. The lower courts cannot ignore the holdings of the United States Supreme Court. However, Petitioner is wrong in his assertion that the United States Supreme Court has held that wages are not subject to income tax. Petitioner is relying on only excerpts from cases, acknowledging that he has not read the entire case. He is taking information out of context or misunderstanding the case altogether.
Petitioner also argues that the word "income" has not been sufficiently defined. This argument has been rejected by the Tenth Circuit Court in Lonsdale v. Untied States, 919 F.2d 1440, 1448 (1990). In fact, the statutes and case law clearly support individual income tax.
Petitioner also indicated that although he rejected the advice of a professional tax preparer, he was relying on information from PARTY 1. Petitioner argues that there is no section in the Internal Revenue Code that makes one liable for tax. He stated that he knew PARTY 1 and alleges that PARTY 1 won the case that there was no section in the Internal Revenue Code that made one liable. Petitioner misunderstands the holding of the case. PARTY 1 did win a breach of contract case. However, this victory was not because he was correct that there was no Internal Revenue Code section, as the court found that there was a specific section which required individuals to file a return.
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. See Internal Revenue Code at 26 U.S.C. 63 and 61(a).
Turning to the issue of the $$$$$ penalty, Petitioner filed a return for the tax year 2000 which clearly indicated that the tax liability shown was incorrect. Petitioner intentionally filed this type of return in furtherance of a frivolous position and it impeded the administration of the income tax laws. Petitioner states that he did some research, but he disregarded all the information that indicated his wage income was taxable, relying instead on excerpts from cases he did not read and PARTY 1 who had been convicted criminally on tax related charges.
CONCLUSIONS OF LAW
1. The Commission has made a finding of fact that Petitioner was a Utah resident during the two months when the income at issue was earned. For this reason the Commission concludes that Petitioner is liable for Utah individual income tax on his state taxable income. Utah Code Ann. '59-10-104.
2. Petitioner did not dispute that he had received income during the first two months of 2000, nor did he dispute the amount of the income as determined by Respondent. Petitioner's income was wage income and was compensation for services which he rendered. Compensation for services is clearly included in Utah taxable income. Utah Code Ann.'59-10-112; Utah Code Ann. '59-10-111; 26 U.S.C. 63; 26 U.S.C. 61(a). Petitioner's arguments that his income was not subject to state income tax are without merit and have no support in statute or case law.
3. The $$$$$ penalty assessed in this matter is appropriate pursuant to Utah Code Ann. '59-1-401(7).
DECISION AND ORDER
Petitioner's claims have no merit. The Tax Commission sustains the audit assessments of additional income tax, $$$$$ penalty and interest against Petitioner for the 2000 tax year. It is so ordered.
DATED this 19th day of December , 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 19th day of December , 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. Lonsdale, 919 F.2d 1440 (10th Cir. 1990)
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 United States v. Collins, 920 F.2d 619 (10th Cir. 1990), cert. denied, 500 U.S. 920, (1991); 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). Cox V. Commissioner of Internal Revenue, 99 F.3d 1149 (10th Cir. 1996); Baker v. Towns, 849 F. Supp. 775 (D.Utah 1993);and United States v. Hanson, 2 F.3d 942 (9th Cir. 1993);
Petitioner is apparently referring to a case that went before the Eighth Circuit Court of Appeals, Newman v. Schiff, 778 F.2d 460 (1985). Irwin Schiff (ASchiff@), on the television program CBS News Nightwatch (ANightwatch@), announced that the Internal Revenue Code did not require any individual to file a return, and that if anyone could call the show and cite to a section of the code that said an individual is required to file a tax return, Schiff would pay that caller $100,000. Schiff=s Nightwatch segment aired live from approximately 3:00 a.m. to 4:00 a.m. Eastern time. When the part of the segment of Nightwatch in which Schiff made his $100,000 offer was rebroadcast on CBS Morning News later that day, it caught the eye of John A. Newman (ANewman@). Newman called CBS Morning News with code sections which mandated individual income tax filing and payment, hoping to claim the $100,000. However, Schiff would not pay Newman. Not satisfied with Schiff=s position, Newman sued Schiff for breach of contract.
The dispute between Newman and Schiff eventually made it to the Eighth Circuit United States Court of Appeals. The court held that Schiff was not obligated to pay Newman because the offer ended when the original broadcast did, at 4:00 a.m., but that Aif anyone had called the show and cited the code sections that Newman produced, a contract would have been formed and Schiff would have been obligated to pay the $100,000 reward, for his bluff would have been properly called.@ Newman v. Schiff, 778 F.2d 460 at 466 (Eighth Cir. 1985). Moreover, the court reaffirmed the district court=s holding that Schiff=s argument was Ablatant nonsense.@ Id.at467. Finally, the court commended Newman for challenging Schiff=s argument and correctly finding Internal Revenue Code section 6012, which Aprovides that individual s having a gross income in excess of a certain amount >shall= file tax returns for the taxable year.@ Id, at 467.
It is also worth noting that Irwin Schiff was convicted of criminal federal income tax violations. See Schiff v. Untied States, 919 F.2d 830 (2nd Cir. 1990); U.S.v. Schiff, 800 F.2d 930 (2d Cir. 1986); and U.S. v. Schiff, 875 F2d 228 (2d Cir. 1989).