BEFORE THE UTAH STATE TAX COMMISSION
) Appeal No. 02-0605
v. ) Account No. #####
AUDITING DIVISION OF ) Tax Type: Income Tax
THE UTAH STATE TAX )
COMMISSION, ) Judge: Phan
Jane Phan, Administrative Law Judge
For Petitioner: Mr. Petitioner
For Respondent: Tim Bodily, Assistant Attorney General
Dan Engh, Manager Income Tax Auditing
Brenda Salter, Senior Auditor Income Tax Auditing
STATEMENT OF THE CASE
This matter came before the Utah State Tax Commission for an Initial Hearing pursuant to the provisions of Utah Code Ann. '59-1-502.5, on October 24, 2002.
Petitioner is appealing an audit deficiency of $$$$$ in tax and the interest accrued thereon, for the tax year 1998. Petitioner had filed with the Utah Tax Commission on, or prior to, April 15, 1999, an extension request along with a prepayment of $$$$$ for the 1998 tax year. Subsequently, but within the extension period, Petitioner filed his 1998 Utah Individual Income Tax return. The return indicated a refund due to Petitioner and the Tax Commission paid to Petitioner the refund as indicated on the return. Some time later the Internal Revenue Service made a correction at the federal level to his federal taxable income, revising the amount upward by $$$$$ for some income that had not been reported, but also allowing a child tax credit so that Petitioner was entitled to a refund at the federal level. The revised federal adjusted gross income was reported to the State Tax Commission by the IRS which triggered a state tax audit of the state return because the IRS revised amount did not match what Petitioner had reported on his Utah Individual Income Tax Return. In the audit, Respondent revised upward Petitioner's state taxable income based on the IRS's revised federal adjusted gross income. The result was the small income tax audit deficiency at issue. No penalty was issued. Petitioner was notified of the audit and tax deficiency by Statutory Notice of Audit Change, dated March 20, 2002.
Petitioner had a number of arguments as to why he felt the audit was unlawful or otherwise inappropriate. First, Petitioner argued that an assessment has not been made against him and that Respondent failed to follow statutory provisions. Technically Petitioner is correct about the assessment, a final assessment has not been made. However, Petitioner is in error on his assertion that statutory provisions have not been followed. All the statutory requirements have been appropriately followed. The Statutory Notice of Audit Change, dated March 20, 2002, is the notice of deficiency required by Utah Code Ann. Sec. 59-10-524. If a timely appeal of the deficiency is not filed, the deficiency becomes the "final assessment of the deficiency" upon thirty days after the date the Statutory Notice was mailed. See Utah Code Ann. Sec. 59-10-525(1). In this matter, however, Petitioner did timely file a redetermination of the deficiency, basically an appeal. Once an appeal is filed the deficiency is not assessed until after the Commission has issued its final decision on the appeal. See Utah Code Ann. Sec. 59-1-503 and Utah Code Ann. Sec. 59-1-504. After the final decision of the Commission on the appeal and the assessment becomes final, the assessment goes into the collection process and collection notices are sent pursuant to Utah Code Ann. Sec. 59-10-528. Respondent followed each of the statutory provisions that were applicable prior to the hearing. Secondly Petitioner makes the statement that Respondent and the Utah Tax Commission say they have adopted the Internal Revenue Code but only apply it when they want or when its in their favor. Petitioner is in error. The State of Utah has not adopted the entire Internal Revenue Code. Instead Utah has incorporated by reference a specific section which provides the definition of 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" (with some modifications and adjustments) as defined in Section 63, Internal Revenue Code of 1986. When the definitional links are followed, federal 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). The Internal Revenue Code is relevant to Utah tax purposes to the extent that Utah state taxable income is based on federal taxable income as defined at the specified code section.
Utah individual income tax is governed by Utah state statute. Utah Code Ann. '59-10-104 imposes a tax on every "resident individual." AResident individual@ is defined at Utah Code Ann. '59-10-103(1)(k) as an individual who is domiciled in this state for any period of time during the taxable year or 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. Thirdly, Petitioner argues that the administrative appeal process is not impartial, object or fair and points out that Respondent's representatives, the Administrative Law Judge and the Assistant Attorney General are all from the same source, state employees. The Commission disagrees with Petitioner as this process does provide an impartial and fair review of Respondent's actions. Petitioner has been provided the statutory administrative appeal process which is set out in the Utah Tax Code and the Utah Administrative Procedures Act. A change of this process would require a statutory revision. Petitioner does have appeal rights into the state court system, before state court judges, after he has exhausted his administrative appeal rights.
Lastly, Petitioner objects to what he terms being guilty in a state tax setting until he proves himself innocent and argues that the Respondent did not really audit him, Respondent merely relied on information from the IRS. Petitioner is correct in that he has the burden of proof in this matter. The Utah Legislature for various reasons has adopted a statute which places the burden of proof on the Petitioner. See Utah Code Ann. Sec. 59-10-543. The Tax Commission must follow the laws as they are written by the legislature.
The statutes and case law clearly support individual income tax. 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.
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 except for the following issues, as to which the burden of proof shall be upon the commission:
(1) whether the petitioner has been guilty of fraud with intent to evade tax . . .
DECISION AND ORDER
Based on the foregoing, the audit deficiency of additional income tax and the interest accrued thereon for the 1998 tax year is sustained. It is so ordered.
This decision does not limit a party's right to a Formal Hearing. However, this Decision and Order will become the Final Decision and Order of the Commission unless any party to this case files a written request within thirty (30) days of the date of this decision to proceed to a Formal Hearing. Such a request shall be mailed to the address listed below and must include the Petitioner's name, address, and appeal number:
Utah State Tax Commission
210 North 1950 West
Salt Lake City, Utah 84134
Failure to request a Formal Hearing will preclude any further appeal rights in this matter.
DATED this 13th day of November , 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 13th day of November , 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);
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); 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);