91-0027

Income

Signed 2/25/97

BEFORE THE UTAH STATE TAX COMMISSION

____________________________

XXXXX )

)

Petitioner ) FINDINGS OF FACT,

) CONCLUSIONS OF LAW,

v. ) AND FINAL DECISION

)

COLLECTION DIVISION OF THE ) Appeal No. 91‑0027

UTAH STATE TAX COMMISSION )

) Account No. XXXXX

Respondent )

_______________________________

STATEMENT OF CASE

This matter came before the Utah State Tax Commission for a formal hearing on XXXXX. Alan Hennebold, Presiding Officer, heard the matter for and on behalf of the Commission. The Petitioner was personally present with her attorney, XXXXX. The Respondent was represented by XXXXX, Assistant Utah Attorney General.

Based upon the evidence and testimony presented at the hearing, the Commission hereby makes its:

FINDINGS OF FACT

1. The tax in question is individual income tax.

2. The periods in question are the years XXXXX through XXXXX.

3. Petitioner is a 60 year old widow residing in XXXXX, Utah. Her only known source of regular income is $$$$$ per month in social security benefits.

4. On XXXXX, pursuant to a warrant, police officers searched Petitioner's residence for illegal drugs. During their search, the officers discovered records showing that Petitioner had substantial funds on deposit at a local bank.

5. The police officers notified Respondent of Petitioner's bank accounts. Respondent ascertained that Petitioner had not filed state income tax returns for any of the years in question. Respondent then obtained copies of Petitioner's bank records for those years.

6. Petitioner's bank accounts consisted of a savings account and several certificates of deposit, all held jointly with other family members. The savings account was held with an adult daughter, XXXXX. Transactions in that account are summarized below:

Number of Number of

Deposits deposits Withdrawals Withdrawals

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

In addition to her savings account, the Petitioner also held the following certificates of deposit:

DATE NAME OF DEPOSITOR(S) ACCOUNT # AMOUNT MATURITY

XXXXX XXXXX

XXXXX XXXXX XXXXX XXXXX

XXXXX XXXXX

XXXXX XXXXX XXXXX XXXXX

XXXXX XXXXX

XXXXX XXXXX XXXXX XXXXX

XXXXX XXXXX

XXXXX

XXXXX XXXXX XXXXX XXXXX

7. During XXXXX, XXXXX, Petitioner's daughter living in XXXXX, received an insurance settlement of $$$$$ which she sent to Petitioner for safe keeping. Petitioner placed the funds in her bank account, then purchased certificates of deposit during XXXXX.

8. Petitioner received several thousand dollars in XXXXX as a lump sum payment of her deceased husband's social security disability benefits. In XXXXX, she received an insurance payment of approximately $$$$$ for damage to her home.

9. Based on the bank records in its possession, Respondent concluded that deposits to Petitioner's bank accounts were income, and that Petitioner had failed to report and pay tax on that income. Respondent calculated Petitioner's tax liability as follows:

XXXXX and XXXXX were selected as a test period. Respondent calculated the average monthly deposits made to Petitioner's accounts during those months, including a certificate of deposit purchased in XXXXX. Only one half the deposits were considered Petitioner's income, because the accounts were held jointly with other individuals. The resulting estimated monthly income was then applied to the entire year, resulting in an estimate of Petitioner's income for XXXXX of XXXXX. Respondent then assumed Petitioner had received equivalent income during XXXXX through XXXXX. Her estimated XXXXX income was therefore projected back to those years, after reductions to reflect growth in the Consumer Price Index.

10. After Respondent estimated Petitioner's income for each of the years in question, it computed her income tax liability, interest and penalty as follows:

YEAR INCOME Tax Assessed Interest Penalty Total

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

XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX

CONCLUSIONS OF LAW

Under Utah's Individual Income Tax Act (Utah Code Ann. '59‑10‑101 et seq.) Utah residents must file state income tax returns if they are required under federal law to file federal income tax returns. Federal income tax returns were required from individuals with income exceeding $$$$$ in XXXXX. By XXXXX, the amount at which a federal return was required had increased to $$$$$.

If any person fails to file a return required by the Individual Income Tax Act, the Commission is required to make such a return from its own knowledge and from such information as it can obtain. Utah Code Ann. '59‑10‑506(2).

Tax returns prepared by the Commission pursuant to Section 59‑10‑506 are "prima facie good and sufficient" for all legal purposes. Utah Code Ann. '59‑10‑506(2)(b).

A penalty of 10% of the tax due is imposed for failure to file a tax due return within the time prescribed by law. If the tax is not paid within 90 days of the due date of the return, an additional penalty of 10% is imposed. An additional penalty of 50% is imposed for underpayment with intent to evade tax. Utah Code Ann. '59‑1‑401.

DECISION AND ORDER

The issue before the Commission is whether Respondent properly assessed income tax, penalty and interest against Petitioner for the years XXXXX through XXXXX. Respondent based its assessment upon deposits to Petitioners bank account during a two month test period in XXXXX, assuming that such deposits were representative of Petitioner's taxable income during the years in question. Petitioner contends that the funds in her bank account came from nontaxable sources; either gambling winnings, monthly social security payments, lump sum insurance or disability payments, or from members of her family. Regarding winnings from gambling, such winnings must be reported as income. While the Petitioner might be entitled to deduct gambling losses from gambling winnings, she has not documented such a deduction. Likewise, she has not established that her disability benefits, insurance settlement, or her deceased husband's social security payment were deposited to the accounts in question, nor do the bank records show such deposits. While such funds would not be subject to tax, the Commission concludes that no such funds are included in Petitioner's bank accounts.

As to Petitioner's claim that some of the funds in her accounts were held for other family members, the evidence persuades the Commission that Petitioner received $$$$$ during XXXXX from her daughter, XXXXX. That sum cannot be considered as income to Petitioner. Beyond the money received from XXXXX, Petitioner has failed to prove that other funds in her accounts were obtained from family sources.

Based on the foregoing, the Commission concludes that Petitioner received sufficient income during the years in question to require her to file state income tax returns for each of those years. Because Petitioner did not file the required returns, Respondent properly filed them for her, pursuant to Utah Code Ann. '59‑10‑506(2).

The Commission will now review the Respondent's method of estimating Petitioner's tax liability for the years in question.

As noted, Respondent obtained Petitioner's bank records for the period from XXXXX through XXXXX. However, rather than using those records to determine income for each year, Respondent instead assumed that Petitioner's bank deposits during XXXXX and XXXXX were typical of all other months during the years in question. Respondent accordingly estimated Petitioner's XXXXX income based on XXXXX and XXXXX deposits, then projected Petitioner's XXXXX income back to the years in question, adjusted only for changes in the Consumer Price Index. Using the above‑described method, Respondent attributed income of $$$$$ to Petitioner for XXXXX, when bank records reflect total deposits of only $$$$$. For XXXXX, Respondent attributed income of $$$$$ to Petitioner, when bank records reflect total deposits of only $$$$$.

Respondent's use of XXXXX and XXXXX bank deposits to estimate income for XXXXX through XXXXX has the effect of increasing Petitioner's income beyond what is shown by the bank data for those years. While it is Petitioner's failure to file tax returns that compels the use of income estimates, such estimates should be based upon the most direct evidence of Petitioner's income. In this case, the bank deposits for each year are the best evidence of Petitioner's income. The Commission therefore remands this matter to Respondent for recomputation of Petitioner's tax liability for XXXXX through XXXXX, based upon income as shown in bank deposits for those years. Because the bank records begin in late XXXXX, Respondent will estimate Petitioner's income for that year based upon her income for XXXXX.

Finally, Petitioner asks that penalty and interest charges be waived.

Interest is simply a charge for use of tax funds between the time such funds should have been paid to the Commission and the time they were actually received. As Petitioner had use of such funds for several years, it is appropriate that interest be assessed against her based upon the recomputed amount of her tax liability.

Three separate penalties have also been imposed against Petitioner. A 10% penalty was imposed for failure to file the income tax returns by their due dates. A second 10% penalty was imposed for failure to pay the tax within 90 days of the due dates. Both penalties are appropriate under the facts of this case.

The third penalty of 50% was imposed on the grounds Petitioner intended to evade such taxes. The Petitioner's failure to file returns, coupled with her evasive testimony in these proceedings, is evidence that she intended to evade income tax for the years in question, thereby supporting imposition of a 50% penalty.

Based on the foregoing, the Commission affirms Respondent's determination that Petitioner was required to file state individual income tax returns for the years XXXXX through XXXXX, but failed to do so. The Commission also affirms Respondent's filing of returns on Petitioner's behalf for those years. However, the Commission remands this matter to Respondent with instructions that Petitioner's tax liability for the years in question be calculated on the basis of bank records for each such year. With respect to XXXXX, income should be estimated on the basis of XXXXX records. In recalculating Petitioner's tax liability, Respondent will not include the sum of $$$$$ received from XXXXX as part of Petitioner's income for XXXXX.

After the foregoing recalculations of tax are completed, Respondent will recompute interest and penalty charges and notify Petitioner of her resulting tax liability. It is so ordered.

DATED this 25 day of February, 1992.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

R. H. Hansen Roger O. Tew

Chairman Commissioner

Joe B. Pacheco S. Blaine Willes

Commissioner Commissioner

NOTICE: You have twenty (20) days after the date of the final order to file a request for reconsideration or thirty (30) days after the date of final order to file in Supreme Court a petition for judicial review. Utah Code Ann. ''63‑46b‑13(1) 63‑46b‑14(2)(a).