BEFORE THE UTAH STATE TAX COMMISSION
XXXXX ) AMENDED
Petitioner, : FINDINGS OF FACT,
: CONCLUSIONS OF LAW
v. : AND FINAL DECISION
: Appeal No. 87-0011
AUDIT DIVISION OF THE :
STATE TAX COMMISSION OF UTAH, )
STATEMENT OF CASE
This matter came before the Utah State Tax Commission for a Formal Hearing on XXXXX. XXXXX, Presiding Officer, heard the matter for and in behalf of the Tax Commission. Present and representing the Petitioner was XXXXX. Present and representing the Respondent was XXXXX, Assistant Attorney General.
After reviewing the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. The tax in question is franchise tax.
2. Petitioner is a Utah company incorporated under the laws of Utah on XXXXX.
3. From XXXXX, and subsequent thereto, Petitioner had been and remained in good standing under Utah corporate law and had not had its authority to do business in the state suspended and subsequently reinstated.
4. Petitioner's taxable year had been from XXXXX, to XXXXX.
5. Petitioner dissolved and legally terminated its existence as a Utah corporation on XXXXX, prior to the end of its taxable year XXXXX.
6. At the time of dissolution, Petitioner had a balance of deferred and unreported gain arising out of certain installment sale transactions which had been entered into in prior years that Petitioner had been properly reporting on the installment sale method.
7. Petitioner had filed all franchise tax returns required under the laws of the state of Utah, including, without limitation, its franchise tax return based on income for its taxable year ending XXXXX and paid all taxes shown as due.
8. Petitioner's payment of the franchise tax based on income for its taxable year ending XXXXX, constituted a payment of franchise tax for the privilege of exercising its corporate franchise or of doing business in the state of Utah in the taxable year ending XXXXX.
9. As a result of the Petitioner's dissolution prior to the end of its taxable year ending XXXXX, the Respondent assessed a tax deficiency of $$$$$ against the Petitioner for the taxable period XXXXX which was based upon the amount of deferred gain from installment sale transactions remaining unreported as of the end of such period.
CONCLUSIONS OF LAW
A corporation incorporated or qualified to do business in this state prior to XXXXX is not liable for filing a return or paying tax measured by income for the taxable year in which it legally terminates its existence. Utah Code Ann. §59-7-123(5).
When the entire income arising from the sale or other disposition of property on a deferred or installment basis has not been reported prior to the year-end that the taxpayer ceases to be subject to the tax imposed under the Utah Corporation, Income, and Franchise Tax Acts, the unreported income is included in the return for the last year in which the taxpayer is subject to the tax. (Utah State Tax Commission Administrative RuleR865-6F-15).
In the present case, the Petitioner argued that the assessment by the Respondent of the $$$$$ deficiency was improperly attributed to the XXXXX tax year. It was the Petitioner's position that under the Utah State Tax Commission Administrative RuleR865-6F-15 (Rule 15F), any unreported income is to be included in the last year in which the taxpayer is subject to the tax. The Petitioner went on to argue that in this case, XXXXX was the year of dissolution of the corporation and was the last year in which the Petitioner was subject to the tax. Therefore, under Section 59-7-123(5), they are not liable for filing a return or paying a tax measured by income for XXXXX which was the year it legally terminated its existence.
Alternatively, the Petitioner argued that if Rule 15F is interpreted to include deferred income in the year prior to the year in which a corporation is dissolved, then the regulation is in conflict with Section 59-7-123, and to the extent that it is, it is preempted by the code.
Upon first impression, Section 59-7-123, and Rule 15F seem to indicate that in this case a deficiency assessed should be attributed to the year in which the Petitioner terminated its corporate existence thus releasing the Petitioner from liability for paying taxes thereon. A closer reading of the two provisions of the law show that a contrary result is correct. RuleR865-6F-15 states in relevant part: A rule allowing deferment of reporting such income is only one of postponement of the tax and not one of exemption from the tax otherwise lawfully due. . . . When the taxpayer elects to report income arising from the sale or other disposition of property as provided in Utah Code Ann. § 59-7-119, and the entire income therefrom has not been reported prior to the year that the taxpayer ceases to be subject to the tax imposed under the Utah Corporation Income and Franchise Tax Acts, the unreported income is included in the return for the last year in which the taxpayer is subject to the tax. (Emphasis added.)
Under the terms of Rule 15F it is clear that the last year in which the taxpayer is subject to the tax is the year preceding the year it terminates its existence. In the present case, the Petitioner ceased its existence in XXXXX and thereby was not liable for paying tax measured by income for that year as provided for by Utah Code Ann. §59-7-123. However, they were liable for the amount of installment income not previously reported and such income should be included in the term for XXXXX.
The Commission finds that there is no conflict between Section 59-7-123 and Rule 865-6-15F. When read together, the two provisions of the law are in harmony with each other.
It should be noted that the statutory provision which allows taxpayers to defer reporting gain from installment sale transactions is found in Section 59-7-119, which in effect states that such treatment of deferred installment gains are governed by rules prescribed by the Tax Commission. Section 59-7-119(1) states: "Under rules prescribed by the Commission a taxpayer who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit realized, or to be realized when the payment is completed, bears to the total contract price." It was pursuant to that statute, the Commission promulgated Rule 15F.
Since Rule 15F is specifically provided for by statute, if there is as the Respondent suggests, a conflict between Rule 15F and Section 59-7-123 then such conflict is actually between §§59-7-119 and 59-7-123 of the code. If this is so, then it is a well recognized rule of statutory construction that when two statutes are in apparent conflict with one another then the statute specifically dealing with the issue at hand governs over the more general statutory provision.
In the present case, the treatment of income received from installment sales is specifically dealt with by Section 59-7-119. Therefore, Section 59-7-119 and the properly promulgated rule arising therefrom would control the issues in this case.
As a final argument, the Petitioner contends that application of Rule 15F violates the tax accounting rule that each tax year stands on its own as a closed accounting period. The Petitioner maintained that the dissolution of the Petitioner's corporation was a taxable event subsequent to the close of the accounting period for XXXXX which, if application of Rule 15F were followed, improperly triggered additional tax consequences for the year in question.
The Commission finds the Petitioner's argument that the dissolution of the Petitioner's corporation was a subsequent event which had an impact on the determination of tax for prior year and therefore impermissible, is without merit. The dissolution of the corporation did not have an effect on the amount of taxes owed by them since that amount had been previously determinated at the time the installment was made. Rule 15F clearly indicates that deferment of reporting the income from installment sales is only an allowance for the postponement of tax but not one of exemption. Therefore, the dissolution of the corporation did not increase the tax liability of the Petitioner, it only changed the time in which the payments on such liabilities had to be made.
Based on the foregoing, the Utah State Tax Commission hereby finds that in the present case, the unreported income arising from installment sales is properly included in the Petitioner's XXXXX tax year which was the last year in which the Petitioner was subject to the corporation franchise tax and the Auditing Division's determination of a tax deficiency in the amount of $$$$$ plus interest for the period XXXXX is affirmed. It is so ordered.
DATED this 8 day of February, 1990.
BY ORDER OF THE STATE TAX COMMISSION OF UTAH.
R. H. Hansen Roger O. Tew
Joe B. Pacheco G. Blaine Davis