Income Tax

Signed 8/14/03





: Initial Hearing Decision and Order

Petitioners, :

: Appeal No. 02-0464

v. :

: Acct. No. #####

Taxpayer Services Division of the Utah State :

Tax Commission, : Tax Type Income


Respondent. : Tax Period 2000





Irene Rees, Administrative Law Judge



For Petitioner: PETITIONER REP, CPA, taxpayer representative

For Respondent: Mark Wainwright, Assistant Attorney General, and Julie Halvorson, Taxpayer Services Division





This matter came before the Commission on Petitionerís appeal of a decision by the Taxpayer Services Division to disallow Petitioners a credit on their 2000 return for taxes paid to another state. This matter was argued in an Initial Hearing on June 24, 2002. Because the same issue has been pending before the Commission in other appeals, the Commission expected to have an opportunity to hear one of the cases in a Formal Hearing and issue a decision that would resolve the other cases. To date, no Petitioner has taken the issue to a Formal Hearing. Therefore, the Commission is in the process of issuing Initial Hearing decisions that establish or clarify the Commissionís point of view regarding the credit for tax paid to another state by an S Corporation.



Petitioners are Utah residents who filed a Utah return for tax year 2000. Petitioners are shareholders in COMPANY of STATE, an S Corporation. COMPNAY paid STATE franchise tax as required by STATE law. Petitioners then claimed a credit against their Utah income tax for the franchise tax paid to the STATE. The Division disallowed the credit on the theory that the credit applies only to income taxes paid to another state. Because the STATE tax is a franchise tax, according the Respondent, the credit does not apply.


Section 59-10-106 of the Utah Code allows a credit for tax paid to another state on income derived from sources within that state. It is the Commissionís position that the credit for tax paid to another state applies to any tax on income paid by an S Corporation or its shareholders, whether the tax is applied at the corporate or individual level. The credit may apply, for instance, in cases where the S Corporation is subject to corporate income tax in another state. The question, then, is whether the tax paid to another state is a tax on income or if it is more appropriately characterized as something other than an income tax.


The STATE franchise tax is calculated either on the basis of net capital or earned surplus, whichever is greater. Petitioners argue that when, as in their case, the tax is calculated against a taxpayerís earned surplus, the tax is calculated on earned income. In that case, it is an income tax that qualifies for the Utah tax credit under section 59-10-106. We disagree. In 1991, The STATE Legislature added the earned surplus component to the stateís franchise tax provisions to offer an alternative basis for calculating tax, thereby equalizing the impact of the tax between service industries and capital-intensive industries by offering.[1] The provision does not allow the state to tax capital or income. It allows the state to use either capital or earned surplus as the basis for measuring the value of the privilege granted each corporation doing business in that state. Furthermore, the STATE tax does not set a minimum tax due. Under section 171.002 (d), a corporation is not required to pay any tax if its gross receipts are less than $$$$$. If the tax were truly based on income, we would expect some minimum tax to apply.


Where a tax provision offers alternative bases for calculating the tax, and where one or more bases for the tax is something other than income, it is not an income tax and it is not eligible for a credit under the Utah income tax provisions of section 59-10-106.







On the basis of the foregoing explanation, we sustain the Divisionís decision and deny Petitionersí request for relief.


DATED this 14th day of August , 2002.



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] See Upjohn Co. v. Rylander, 38 S.W.3d 600 (Texas Ct. App. 2000). Prior to the enactment of the earned surplus provision the tax was measured only by a corporationís taxable capital, so companies in service industries sustained less of the tax burden than companies in capital-intensive industries.