BEFORE THE UTAH STATE TAX COMMISSION
) Appeal No. 02-1369
) Account No. #####
TAXPAYER SERVICES DIVISION )
OF THE UTAH STATE TAX ) Tax Type: Sales Tax
) Judge: Chapman
Kerry R. Chapman, Administrative Law Judge
For Petitioner: Representative for Petitioner
Attorney for Petitioner
Attorney for Petitioner
For Respondent: Mr. Mark Wainwright, Assistant Attorney General
Ms. Julie Halvorson, from Taxpayer Services Division
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 September 18, 2002.
PETITIONER has appealed a statutory notice issued by Taxpayer Services Division (the “division”) in which the division denied an application filed by PETITIONER for a sales tax exemption number. PETITIONER, organized in September 2000, is a Utah single member limited liability company COMPANY that is managed by its sole member, COMPANY2.
COMPANY2 is a Utah non-profit corporation that the Internal Revenue Service (“IRS”) recognizes as a tax-exempt charitable organization within the meaning of Section 501(c)(3) of the Internal Revenue Code (“IRC”). COMPANY2 Articles of Incorporation identify one of its corporate purposes as providing “charitable relief, support or benefit to or for persons who are physically or mentally disabled and/or handicapped.”
PETITIONER Amended Articles of Incorporation identify that its purpose is “to operate the PETTIONER, a charitable, non-profit residential home for adults with learning disabilities[.]” PETITIONER represents that its only activity is the operation of a residential facility for handicapped adults that serves this stated purpose. COMPANY2 created PETITIONER as a separate entity from itself for liability and management purposes.
In connection with the creation of PETITIONER, COMPANY2 availed itself of the prerogative to have PETITIONER qualify for the default entity classification of “disregarded entity,” within the meaning of Federal. Reg. §§301.7701-2 and 301.7701-3. It did so by not electing any other entity classification for PETITIONER on the federal Form 8832. The two treasury regulations cited above provide that an entity is to be “disregarded” as an entity separate from its single owner when that owner does not file such an election. The regulations further provide that a disregarded entity’s “activities are treated in the same manner as a sole proprietorship, branch, or division of its owner.”
By reason of PETITIONER classification as a “disregarded entity,” its operations are treated as a branch or division of COMPANY on the latter’s annual federal information return. IRS Announcement 99-102 (October 25, 1999). In addition, under similar circumstances to those at issue, the IRS has ruled that an SMLLC is not required to submit an application in accordance with Section 508 of the IRC to obtain IRS recognition of its status as part of an entity described in Section 501(c)(3). IRS Private Rulings 200134025 (May 22, 2001) and 200150027 (August 7, 2001).
The division rejected the Petitioner’s application for a sales tax exemption number because PETITIONER did not document Section 501(c)(3) status either on its own or as a sub-unit of a central Section 501(c)(3) organization. Utah State Tax Commission Form TC-160 (“Form TC-160”), Application for Sales Tax Exemption Number for Religious or Charitable Institutions, requires that such documentation be attached to the application for a sales tax exemption number.
PETITIONER appealed the division’s rejection, asserting that, for “disregarded” entities, the specific documents required on Form TC-160 do not exist. PETITIONER further contends that it has adequately demonstrated to the division that PETITIONER is a branch or division of an entity that has qualified for recognition as a Section 501(c)(3) entity and, as such, is eligible for recognition as a charitable organization for purposes of Utah’s Sale and Use Tax Act.
1. Utah Code Ann. §59-12-104 provides that certain sales and uses are exempt from the taxes imposed by Utah’s Sales and Use Tax Act. One of this section’s exemptions is for sales made to or by religious or charitable institutions, as follows:
(8)(a) except as provided in Subsection (8)(b), sales made to or by religious or charitable institutions in the conduct of their regular religious or charitable functions and activities, if the requirements of Section 59-12-104.1 are fulfilled.
2. Utah Code Ann. §59-12-104.1(1) and (2) provide that sales made to or by “religious or charitable organizations” are exempt “if the sale is made in the conduct of the institution’s or organization’s regular religious or charitable functions or activities.”
3. Utah Admin. Rule R865-19S-43 (“Rule 43”) states:
A. In order to qualify for an exemption from sales tax as a religious or charitable institution, an organization must be recognized by the Internal Revenue Service as exempt from tax under Section 501(c)(3) of the Internal Revenue Code.
. . . .
C. Every institution claiming exemption from sales tax under this rule must submit form TC-160, Application for Sales Tax Exemption Number for Religious or Charitable Institutions, along with any other information that form requires, to the Tax Commission for its determination.
4. When applying for a sales tax exemption number, Section C. of Rule 43 requires the submission of a Form TC-160. That form requires the attachment of “a copy of the IRS determination letter exempting [the] organization from federal income tax as an IRC Section 501(c)(3) nonprofit organization,” or, if claiming exemption as a subunit of a central organization, “a copy of the central organization’s 501(c)(3) determination letter and IRS group exemption letter specifically naming [the] organization as a subunit.”
PETITIONER has provided evidence that it is an SMLLC solely owned by COMPANY and that COMPANY is an entity recognized by the IRS as a Section 501(c)(3) tax-exempt organization. PETITIONER has also provided its Amended Articles of Incorporation, which indicate that its purposes are limited to religious or charitable functions or activities. In addition, PETTIONER has offered an affidavit from one of its officers certifying that it has elected to be classified as a “disregarded entity” for federal taxation purposes. However, because PETITIONER is a “disregarded entity,” a determination letter listing PETITIONER as an organization or a subunit of an organization that has qualified for recognition as an exempt entity under Section 501(c)(3) does not exist. As a result, PETITIONER could not present such a letter when applying for a Utah sales tax exemption number, as required on Form TC-160.
At issue is whether, under these circumstances, the Tax Commission should approve a sales tax exemption number for PETITIONER, even though the documentation required on Form TC-160 has not been satisfied. Section A of Rule 43 provides that “in order to qualify for an exemption from sales tax as a religious or charitable institution, an organization must be recognized by the Internal Revenue Service as exempt from tax under Section 501(c)(3) of the Internal Revenue Code.” Ordinarily, the submission of a Form TC-160, along with the information currently required on the form, adequately demonstrates that an applicant is recognized by the IRS to be a tax-exempt under Section 501(c)(3) and satisfies Section A of Rule 43.
However, for a “disregarded entity,” the documentation specified on the Form TC-160 has never existed. Nevertheless, it is apparent that the IRS recognizes such an entity to be tax-exempt when its sole owner is a tax-exempt, Section 501(c)(3) entity. For these reasons, the Commission finds that the absence of a determination letter listing a “disregarded entity” as an organization or a subunit of an organization that has qualified as an exempt, Section 501(c)(3) entity does not preclude the “disregarded entity” from proving with other evidence that it is such an exempt entity. Upon reviewing the documents and evidence submitted by PETITIONER, the Commission finds that PETITIONER has sufficiently demonstrated that it is a “disregarded entity” that satisfies Section A of Rule 43, even though the specific documentation required on the Form TC-160 was not submitted.
DECISION AND ORDER
Based upon the foregoing, the Commission finds that PETITIONER has adequately documented that it is an entity recognized by the IRS as tax-exempt under Section 501(c)(3) of the IRC, even thought the documentation specified on the Form TC-160 was not submitted. Accordingly, the Commission hereby orders the division to reconsider the Petitioner’s application for a sales tax exemption number and, if PETITIONER has met all other requirements, to issue PETITIONER a sales tax exemption number. 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 27th day of November , 2002.
Kerry R. Chapman
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 27th day of November , 2002.
Pam Hendrickson R. Bruce Johnson
Commission Chair Commissioner
Palmer DePaulis Marc B. Johnson