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