02-0373 and 02-1151

Income Tax

Signed 6/3/03

 

BEFORE THE UTAH STATE TAX COMMISSION

 

PETTIONER, :

: Initial Hearing Decision and Order

Petitioner, :

: Appeal No. 02-0373 & 02-1151

v. :

: Acct. No. #####

Auditing Division of the Utah State :

Tax Commission, : Tax Type Income

:

Respondent. : Tax Period 1994-1998

 

_______________________________________________

 

Presiding:

Irene Rees, Administrative Law Judge

 

Appearances:

For Petitioner: PETITIONER

For Respondent: Tim Bodily, Assistant Attorney General, and Brent Taylor, Auditing Division

 

 

STATEMENT OF THE CASE

 

Petitioner appeals from audit assessments issued for tax years 1994 through 1998. Appeal number 92-0373 is an appeal of assessments for tax years 1994, 1996, 1997 and 1998. Appeal number 02-1151 is an appeal of an assessment for tax year 1995. The underlying issues are the same in both cases, and the parties agreed to have them heard in the same proceeding. The Initial Hearing was held on September 18, 2002.

 

As a preliminary jurisdictional matter, Respondent raised a motion to dismiss appeal 02-0373 pertaining to tax years 1994, 1996, 1997, and 1998 because it was not timely filed. In a prehearing status conference, Petitioner stated he could show by the postmark on the envelope that the assessment notices were actually mailed after the date that Auditing Division claimed. That envelope was presented at the hearing. The envelope indicates that the mailing was by registered mail. It is unlikely that the assessment notices were mailed in this envelope because assessment notices are never sent by registered mail. However, Respondent withdrew its motion to dismiss and agreed to have that appeal heard with appeal 02-1151, since the same legal arguments apply in both cases. Therefore, appeals of all years proceeded to hearing.

 

At the hearing, Petitioner stated that he was not prepared to make oral argument or give testimony. Instead, he submitted a written brief outlining his position. The hearing was adjourned for a short period to give opposing counsel an opportunity to review Petitioner’s submission. When the hearing resumed, Respondent’s counsel made its arguments and responded to Petitioner’s written submission.

 

DISCUSSION

Petitioner filed federal and state returns for all tax years in question, and he does not dispute that he received income for those periods. The Auditing Division received information from the IRS indicating that it had corrected and adjusted Petitioner’s returns to reflect Petitioner’s true income. Accordingly, the Auditing Division made corresponding adjustments to Petitioner’s state returns and issued assessment notices for the unpaid amounts due, plus interest. Petitioner offered no rebuttal to the evidence of his income submitted by Respondent. Nor did he challenge the determinations and calculations underlying the assessment issued against him. He offers only his legal theory that the assessment issued against him is not authorized by law.

 

Petitioner submitted an appeal application accompanied by documents that seem to indicate Petitioner’s contention that the Utah State Tax Commission is required to prove that the adjustments reported by the IRS are valid. That is, Petitioner cites to the federal tax code and states that the state’s assessment notices do “not identify which particular statue and implementing regulation was used to make the assessment in this particular case.” Petitioner’s appeal application also states that the Auditing Division appears to be “working on the presumption that MR. PETITIONER and MRS. PETITONER is [sic] a taxpayer who had income,” then goes on to claim that he had no taxable income under Utah law.

 

Petitioner’s initial issue is easily addressed. A Utah resident is subject to the income tax laws of this state, and his “state taxable income” is his federal taxable income with specific adjustments as set out in the Utah Tax Code. Utah Code Ann. §59-10-112. Every Utah resident who is required to file a federal income tax return is also required to file a state return. Utah Code Ann. §59-10-502. If a change is made in a taxpayer’s net income on his federal income tax return, either by an amended return filed by the taxpayer or due to an action by the federal government, the taxpayer must report that change to the Utah State Tax Commission within 90 days, Utah Code Ann. §59-10-536 (5) (a). Failure to report the change does not relieve the taxpayer from his obligations for the tax, and the Commission is authorized by law to issue a deficiency assessment for any increase in the amount of tax due and attributable to the change or correction. Utah Code Ann. 59-10-536(5) (b). There is no provision imposing on the Utah State Tax Commission a duty to weigh or judge the actions of the IRS.[1] There is, however, a duty to act on reliable evidence of unreported income that is taxable in this state; to notify the taxpayer of the adjustments to the state return; and, if the taxpayer believes the changes to the state return are in error, to allow the taxpayer a due process hearing on that issue.

 

In this case, the deficiency assessment arose from IRS notices of adjustments to Petitioner’s federal returns. Because Petitioner failed to amend his state returns as required by law, the Auditing Division adjusted his returns pursuant to section 59-10-536(5) (b) of the Utah Code. Petitioner has not prevailed upon the IRS to reverse its adjustments, and the IRS’s adjustments, along with documentary supporting evidence, constitute prima facie evidence that Petitioner had unreported taxable income for all years in question. The actions of the Auditing Division were in accord with Utah law.

 

In challenging the adjustments to his federal returns and, by implication, the adjustments to his state returns, Petitioner submitted a document at the hearing, which raises additional legal arguments. These arguments are not new. They have been reviewed and rejected by the Tax Commission and the courts alike. For instance, to Petitioner’s argument that “wages are not income,” perhaps a federal circuit court put it best in its decision in United States v. Koliboski, 732 F.2d 1328, (7th Cir. 1984) where it proclaimed “WAGES ARE INCOME.” (Emphasis in original.)

 

Next, Petitioner argues that the IRS instructions for form 1040 address only “foreign income,” and makes no reference to “domestic” income. Therefore, Petitioner seems to conclude that income tax is an “international” tax, so he is not required to file a return or report income earned in the United States. The Utah Supreme Court put this argument to rest in Nelson v. Auditing Division, 903 P.2d 939 (Utah 1995), and there is no reason to address them further here.

 

Petitioner next argues “there can be no federal or state tax on the right to work for a living or the fruits thereof.” (Emphasis in original.) He also offers up theories that citizens cannot be taxed on their wages, except in “federal zones;” that he cannot file a tax return without perjuring himself; and that state and federal tax imposed on the same basis is a “doubling up” or duplicate tax. Again, these theories are not new or original, and although they have been addressed time and again by the courts, Petitioner has not referred us to a single decision that cuts in his favor.

 

Petitioner may benefit from seeking advice from a competent tax professional so he does not unwittingly and unnecessarily place his own interests at risk. Alternatively, we point Petitioner to a few legal references so he can become acquainted with prior decisions on theories like the theories he raises here. The decisions in Nelson v. Auditing Division, 903 P.2d 939 (Utah 1995); Jensen v. State Tax Commission, 835 P.2d 965 (Utah 1992); Van Stafford v. United States, 208 F.3d 1177 (10th Cir. 2000); and U.S. v. Hartung, 879 F.2d 765 (10th Cir. 1989) offer a good foundation. In just a few moments on the Internet, Petitioner can unearth hundreds of other relevant court decisions. Together they comprise a body of law that spans more than three decades. A general review of this body of law may help Petitioner better assess his likelihood of prevailing in this action.

 

Meanwhile, we find that the definition of taxable income is stated clearly in both the state and federal tax codes and we find that for all tax years at issue, Petitioner had unreported income that is taxable under Utah law. Petitioner does not dispute that he received the income in question and he has not challenged the amounts of the adjustments. He has not shown any statutory tax exemption for which he is eligible, nor has he provided any other valid statutory, constitutional or other legal reference in support of his claim that he is not subject to tax. Therefore, we uphold the deficiency assessment issued against him.

 

DECISION

Petitioner’s request for relief from the assessment issued against him is denied.

 

 

 

BY ORDER OF THE COMMISSION:

DATED this 3rd day of June, 2003.

_________________________

Administrative Law Judge

 

The undersigned Commissioners have reviewed this matter and concur in this decision.

 

Pam Hendrickson R. Bruce Johnson

Commission Chair Commissioner

 

 

 

 

Palmer DePaulis Marc B. Johnson

Commissioner Commissioner

02-0373

Income Tax

Signed 3/12/03

 

BEFORE THE UTAH STATE TAX COMMISSION

 

PETITIONER, :

: Order and Decision from Formal Hearing

Petitioner, :

: Appeal No. 02-0373

v. :

: Acct. No. #####

Auditing Division of the Utah State :

Tax Commission, : Tax Type Income

:

Respondent. : Tax Period 1994, and 1995 - 1998

 

_______________________________________________

 

Presiding:

Irene Rees, Administrative Law Judge

 

Appearances:

For Petitioner: PETITIONER, Petitioner

For Respondent: Tim Bodily, Assistant Attorney General, and Brent Taylor, Auditing Division

 

 

STATEMENT OF THE CASE

 

Petitioner appeals from an Initial Hearing order issued October 28, 2002. This matter was argued before the Commission in a Formal Hearing held February 27, 2003.

 

FINDINGS OF FACT

 

1.                   Petitioner was a Utah resident for all tax years in question.

 

2.                   Petitioner worked in Utah as a chiropractor for all years at issue and received compensation in those years for services rendered.

 

3.                   Petitioner filed state and federal returns and reported income for all tax years in question.

 

4. The IRS made adjustments to Petitioner’s reported federal income for tax years 1994, 1996, 1997 and 1998. The IRS reported those changes to the Tax Commission’s Auditing Division. The Division made corresponding changes to Petitioner’s state returns and assessed Petitioner for all deficiencies. Petitioner did not challenge the changes reported by the IRS.

 

5. Petitioner’s only issue before the Tax Commission is whether his income is subject to Utah individual income tax.

 

APPLICABLE LAW

 

1. Every Utah resident is subject to the provisions of the Utah Individual Income Tax Act. See Utah Code Ann. §59-10-104.

2. In the case of Utah residents, Utah state taxable income is his federal taxable income with additions, subtractions and other adjustments set out in section 59-10-114 of the Utah Code. See Utah Code Ann. §59-10-112. Federal taxable income is defined by federal law in Section 63 of the Internal Revenue Code. See Utah Code Ann. §59-10-111.

3. Whenever the IRS makes a change to a taxpayer’s net federal income tax, the taxpayer is required to report that change to the Utah State Tax Commission within 90 days. See Utah Code Ann. §59-10-536 (5) (a).

4. A taxpayer’s failure to report a change to his federal income tax does not relieve the taxpayer from his liability for underpayments or unreported state income. The Commission is required by law to issue a deficiency assessment for any increase in the amount of state tax due and attributable to the change or correction. See Utah Code Ann. §§59-10-536(5) (b), 59-10-524 and 59-10-527.

 

DISCUSSION

Petitioner filed state and federal returns for all tax years in question, reporting income for all years. The IRS discovered unreported income for all years and adjusted Petitioner’s income tax calculations for each year to reflect the unreported income and other changes. The IRS reported its changes to the Tax Commission. Because Petitioner failed to report the changes as required by section 59-10-536 (5) (a) of the Utah Code, the Auditing Division recalculated Petitioner’s state income taxes for those years to correspond with the corrections made by the IRS.

 

Petitioner did not file an appeal with the IRS or otherwise object to its actions. Petitioner did file an appeal with the Tax Commission upon receiving an assessment for additional tax due. On appeal, Petitioner does not deny that he received compensation the amounts reported by the IRS. Instead, Petitioner argues that the state has no authority to tax his income at all.

At the hearing, Petitioner presented a “position paper” and read a portion of that paper into the record. To synthesize and summarize his main points, Petitioner argues as follows:

 

1. The IRS instructions for Form 1040 indicate that citizens must only report their foreign source income. The instructions booklet does not require him to report his “domestic” income.

2. There can be no federal or state tax on Petitioner’s right to work or on the fruits of his labor.

3. Petitioner argues both that the federal government cannot tax wages within the states except wages earned in federal zones,[2] and that the state is attempting to tax income that is taxable by the federal government.[3] The crux of this argument seems to be that his income is not taxable at all, and even if it is, the state and federal government cannot both tax it.

4. The state cannot tax obligations of the United States, including the federal reserve notes that he receives as compensation for his work.

 

Respondent points out that there is no factual dispute here. Petitioner admitted to being a Utah resident. Petitioner set up a number of entities or trusts and his compensation flowed through them. Nevertheless, Petitioner admits to receiving compensation for his work as a chiropractor. The IRS discovered unreported income for all years in question and made changes to Petitioner’s federal returns for those years. Petitioner did not challenge the IRS action through its appeal process, nor did he present evidence here to refute the IRS claims of unreported income. Petitioner presents only his legal argument that the state cannot tax his income. We turn, then, to Petitioner’s legal arguments.

 

Petitioner claims that the IRS instructions for 1040 state that only foreign source income is taxable. In support of that position, Petitioner submitted the portion of the instructions that deal with foreign source income. Not only has Petitioner overlooked relevant statements in the instruction booklet, he also overlooks the fact that the IRS Code, not the 1040 instructions, establishes federal tax law.[4]

 

Under 26 USC §6012 (a), every resident individual having gross income during a tax year that equals or exceeds the federal exemption amount must file a federal return unless otherwise specifically exempted. Gross income, for federal purposes, includes, among other things, compensation for services and all income or gain from capital or labor. See 26 USC §61. The code provides for additions and subtractions from gross income to arrive at the individual’s federal adjusted gross income. An individual’s federal adjusted gross income is tied to state income provisions. Under section 59-10-104 of the Utah Code, “a tax is imposed on the state taxable income, as defined in Section 59-10-112, of every resident individual as provided in this section.” “State taxable income” is defined as “federal taxable income (as defined by Section 59-10-1110 with the modifications, subtractions, and adjustments provided in Section 59-10-114.” Utah Code Ann. §59-10-112. “Federal taxable income” is an individual’s taxable income as defined by Section 63 of the Internal Revenue Code. Utah Code Ann. §59-10-111. In summary, the Utah Income Tax Act applies to every resident of Utah who has taxable income. The Utah resident’s taxable income is calculated on his federal adjusted gross income, plus or minus specific adjustments for items set out in Utah law.

 

With regard to Petitioner’s contention that the products of his labor are not subject to tax, we reject that argument and refer Petitioner to the IRS Code provisions outlined in this opinion. See also, e.g., United States v. Connor, 898 F.2d 942, 943-44 (3d. Cir.), cert. Denied, 497 U.S. 1029 (1990). As to Petitioner’s contention that the state cannot tax the federal reserve notes in which he is paid because they represent U.S. obligations is also without merit. The federal courts have addressed and rejected this argument in, for instance, United States v. Condo, 741 F.2d 238 (9th Cir. 1984); United States v. Rickman, 638 F.2d 182 (10th Cir. 1980); and United States v. Rifen, 577 F.2d 1111 (8th Cir. 1978).

 

The Utah State Tax Commission is bound to enforce the Utah Individual Income Tax Act regarding the taxation of Utah residents’ income. It is clear that Petitioner was a Utah resident for all tax years at issue, and it is clear that Petitioner had compensation or wages within the meaning of the relevant state and federal provisions. The IRS notified the Tax Commission that it discovered unreported income for all tax years in question. Petitioner did not challenge the IRS on its position, nor has he presented evidence to refute the amounts reported. Petitioner was required to report the changes to the Tax Commission within 90 days, Utah Code Ann. §59-10-536 (5) (a), but failed to do so. Therefore, the Auditing Division made corresponding changes to Petitioner’s state returns for all years and assessed the resulting deficiencies as required by law. Utah Code Ann. §§59-10-536(5) (b), 59-10-524 and 59-10-527.

 

Petitioner had an opportunity to challenge the unreported income with the IRS, but did not do so. Petitioner has not successfully shown that all or part of the unreported income is exempt from taxation by the State of Utah.

 

DECISION

The assessment is affirmed.

 

 

BY ORDER OF THE COMMISSION:

DATED this 12th day of March , 2003.

_________________________

Administrative Law Judge

 

The undersigned Commissioners have reviewed this matter and concur in this decision.

 

Pam Hendrickson R. Bruce Johnson

Commission Chair Commissioner

 

 

 

Palmer DePaulis Marc B. Johnson

Commissioner Commissioner

 


[1] If the taxpayer disagrees with the underlying actions of the IRS, the taxpayer must pursue his appeal rights with that agency. The Utah State Tax Commission has no jurisdiction over those issues.

 

[2] Petitioner’s position paper, p. 1 and p. 2, para. #1.

[3] Petitioner’s position paper, p. 2, para. #2.

[4] The instruction booklet begins with the assumption that U.S. Citizens must file tax returns if their income reached specified levels or if they meet other specified conditions. Therefore, even if Petitioner relied only upon the instruction booklet, he could not escape the fact that he had federal reportable income.