85-0088 - Corporate Franchise

 

BEFORE THE UTAH STATE TAX COMMISSION

_____________________________________

XXXXX )

:

Petitioner, )

: INFORMAL DECISION

v. )

: Appeal No. 85-0088

AUDITING DIVISION OF THE )

UTAH STATE TAX COMMISSION :

)

Respondent. :

_____________________________________

STATEMENT OF CASE

This matter comes before the Utah State Tax Commission on a Petitioner for Redetermination of the Auditing Division the Utah State Tax Commission. Refund and amended returns for the years XXXXX through XXXXX were filed by XXXXX as a result of excluding from taxable income municipal bond interest and interest from securities of the United States Government.

An oral hearing was not held. No disputed factual issues arise between the parties. Therefore, the parties have waived an oral hearing and filed a Stipulation of Facts and Briefs on the legal issues.

Based upon the pleadings before it, the Commission makes the following determinations:

1. The tax years in question are XXXXX through XXXXX.

2. Petitioner is a banking corporation, organized under the laws of the state of Utah. On XXXXX, Petitioner filed a claim for tax refund for the years in question. On XXXXX, Respondent denied Petitioner's claim for refund. Petitioner's Petition for Redetermination was filed XXXXX.

During XXXXX through XXXXX, Petitioner received $$$$$ in interest on obligations of the United States Government, and $$$$$ in interest on obligations of the State of Utah and its municipalities. Year by year, the interest income is summarized in the following table.

Interest on Interest on

Year Federal Obligations State Obligations

XXXXX $$$$$ $$$$$

XXXXX $$$$$ $$$$$

XXXXX $$$$$ $$$$$

Petitioner's claim for refund is computed in two parts. First, Petitioner's taxable income for the years XXXXX through XXXXX was recomputed by excluding therefrom the amount of income consisting of interest on federal obligations. The following table accurately summarizes the refund claim with respect to XXXXX through XXXXX:

Income as

Originally Corrected Corrected

Year Filed Tax Paid Income (Loss) Tax Refund

XXXXX $$$$$ $$$$$ $$$$$ $$$$$ $$$$$

XXXXX $$$$$ $$$$$ $$$$$ $$$$$ $$$$$

XXXXX $$$$$ $$$$$ $$$$$ $$$$$ $$$$$

The second part of Petitioner's refund claim involves carrying back of the XXXXX through XXXXX losses to offset income earned in prior years, pursuant to Utah Code Ann. 59-13-7(14)(c). The XXXXX net operating loss (NOL) was applied to completely offset XXXXX and XXXXX income, and to partially offset XXXXX income. The remaining XXXXX income was offset using part of the XXXXX NOL, as summarized below in the table.

Income as

Originally Corrected Corrected

Year Filed Tax Paid I ncome (Loss) Taxed Refund

XXXXX $$$$$ $$$$$ (XXXX NOL) $$$$$ $$$$$

XXXXX $$$$$ $$$$$ (XXXX NOL) $$$$$ $$$$$

XXXXX $$$$$ $$$$$ (XX-XX NOL) $$$$$ $$$$$

Based upon the foregoing computations, the total claimed refund is $$$$$.

The Petition for Redetermination was not timely filed. Pursuant to rule A12-01-4.2, Petitioner had 60 days after it had received notice of the last Commission action in which to file the Petition. Respondent's letter of XXXXX was the last Commission action. Therefore, the Petition should have been filed by XXXXX. The Petition was, in fact, filed on XXXXX. Nevertheless, the Commission waives the timely filing requirement in this case since neither party objects, and because the issues raised in the appeal are recurring issues.

Federal law exempts interest o obligations of the United States form state taxation unless the tax is a "non-discriminatory franchise tax." 31 U.S.C. 3124 provides:

Stocks and obligations of the United States Government are exempt from taxation by a State or political subdivision of a State. The exemption applies to each form of taxation that would require the obligation, or both, to be considered in computing a tax, except -

(1) a non-discriminatory franchise tax or other non-property tax instead of a franchise tax, imposed on a corporation; and

(2) an estate or inheritance tax.

Utah code Ann. 59-13-3 imposes a franchise tax on holders of both federal and state obligations. The tax is equal and does not favor one holder over another. Therefore, the tax does not violate Section 3124 of the United States Code. Utah Code Ann. 59-13-3.5 provides a credit against franchise taxes imposed by 59-13-2. The credit has a maximum application determined by the among of tax on the state obligations. This may treat the holders of federal obligations differently. However, when dealing with credits rather than a franchise tax, 31 U.S.C. 3124 does not apply.

The Petitioner has not argued that either 59-13-3 or 59-13-3.5 is unconstitutional, but even if petitioner had taken such a position, the court cases are clear that this Commission does not have authority to hold any statute to be unconstitutional.

Petitioner asserts that, pursuant to 31 U.S.C. 3124, its income from federal obligations is exempt from the Utah Corporate Franchise Tax. Petitioner claims that the Commission should find in its favor without ruling on constitutionality of Utah Code Ann. 59-13-3. The Commission must "prepare and adopt formal written rules, regulations, and policies not in conflict with the constitution and laws of this state to serve as guidelines for the conduct of the Commission. . . . Utah Code Ann. 59-5-46(2).

The legal incidence of the corporate franchise tax does to fall upon the federal government. Any credit would not insure to the benefit of the federal government. One such rule is rule A12-02-F14:1 which states that:

It is the policy of the Utah State Tax Commission, in matters involving he determination of net income for Utah corporation franchise tax purposes, to follow as closely as possible federal requirement with respect to the same matters. In some instances, of course, the federal and state statutes differ , and due to such conflict, the federal rulings, regulations and decisions cannot be followed. Furthermore, in some instances, the Commission may disagree with the federal determinations and will not consider them controlling for Utah corporation franchise purposes . . . (Emphasis added).

The Commission is bound to follow the state statutes. "The Tax Commission must of necessity interpret the taxing statutes and make determinations as to their applicability." State Tax Commission vs. Wright, 596 P2d 634, 636 (Utah 1979). The Commission determines that 59-13-3 is directly applicable to Petitioner. The Tax Commission is not a judicial body established under the constitution of Utah, not is it empowered or authorized to determine the legality of legislative enactments. Shea v. State Commission, 120 P2d 274, 275 (Utah 1941); State Tax Commission v. Wright, 596 P. 2d 634, 636 (Utah 1979); Belco Petroleum Corporation v. State board of equalization, 587 P. 2d 204 (Wyoming 1978).

DECISION

THEREFORE, IT IS HEREBY DECIDED:

1. The Commission will waive the timely filing requirement for the Petition for Redetermination, although not timely filed and will review the matter.

2. The Commission is obligated to follow the Utah statute.

3. The franchise tax imposed by the Respondent is not in violation of federal legislation. The tax is imposes in a uniform and consistent manner on interest income from both federal and state obligations.

4. The federal legislation does not apply to credits against the franchise tax. However, if it were determined that the supremacy clause of the United States constitution required wither 59-13-3 or 59-13-3.5 to be either ignored or held unconstitutional, then it is the opinion of the Commission that 59-13-3.5 is the statute which creates the distinction between interest on federal and state obligations and would therefore be the stature to either be ignored or held unconstitutional. The result of such a ruling would be to impose additional franchise taxes on Petitioner instead of granting refunds.

5. If any refunds were to be granted, it would not be done retroactively for any period prior to XXXXX as provided by Utah Code Ann. 59-13-3.5, so the carry back to periods prior to XXXXX as claimed by Petitioner would not be allowed even if Petitioner's interpretation of the law was otherwise correct.

6 The Commission has no authority to determine the constitutionality of Utah Code Ann. 59-13-3.

7. Even if the Commission found for the Petitioner on the bases set forth in the Petition, the amounts of refunds requested are erroneous. The credit would have to be redetermined bases on the facts present in this case. The redetermination should be computed using an allowance of "one half of the highest marginal corporate franchise tax rates applicable in section 59-7-102 Utah Code, as determined by the Commission". This would result in a substantially smaller credit than that requested by the Petitioner.

8. If the allegations of Petitioner's Petition were determined to be correct, then the interest expense deducted by Petitioner on its Corporation Franchise Tax Return would have to be adjusted, i.e., if the income on those funds become non-Utah business income, then the expense on that portion of the funds would be non-Utah business expense.

9. Respondent's decision to deny Petitioner's Claims for a refund and amended returns is hereby sustained. The Petition for Redetermination is denied.

DATED this 10 day of September, 1987.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

R. H. Hansen Roger O. Tew

Chairman Commissioner

Joe B. Pacheco G. Blaine Davis

Commissioner Commissioner