BEFORE THE UTAH STATE TAX
COMMISSION
__________________________
XXXXX )
: FINDINGS
OF FACT,
Petitioners, : CONCLUSIONS OF LAW,
: AND FINAL
DECISION
v. :
: Appeal
Nos. 91-0427 &
COLLECTION
DIVISION OF THE : 91-0428
UTAH STATE TAX COMMISSION : Account
Nos. XXXXX
Respondent :
_____________________________________
STATEMENT OF CASE
This
matter came before the Utah State Tax Commission for a formal hearing on
XXXXX. Paul F. Iwasaki, Presiding Officer,
heard the matter for and on behalf of the Commission. Present and representing the Petitioners was XXXXX, Attorney at
Law. Present and representing the
Respondent was XXXXX, Assistant Utah Attorney General.
Based
upon the evidence and testimony presented at the hearing, the Tax Commission
hereby makes its:
FINDINGS OF FACT
1. The tax in question is income tax.
2. The audit period in question is XXXXX
through XXXXX.
3. The Petitioners are husband and wife. They were married on XXXXX. The Petitioners also have three children who
were born in XXXXX.
4. On XXXXX, law enforcement officials executed
a search warrant at the Petitioners' home.
The search warrant was based upon information that the Petitioners had
been involved in the illegal distribution of controlled substances.
5. During the execution of the search warrant,
XXXXX had stated to law enforcement officers that she and her husband had been
selling cocaine. XXXXX further stated that they had not filed tax returns for
the five years prior to the date of the execution of the search warrant. She also stated that she and her husband had
made at least $$$$$ selling cocaine and that they spent more than they had
received.
6. As a result of an audit prepared by the
auditing division, it was determined that the Petitioners had failed to file
income tax returns for the years XXXXX through XXXXX. Therefore, the assessment was based upon the best information
available to the auditor.
7. The adjusted gross income of the Petitioners
was estimated by taking the $$$$$ which the Petitioners claimed they had made
in illegal drug sales and then dividing that figure by five. This resulted in a figure of $$$$$. The $$$$$ was set as the base year of XXXXX
and thereafter a 10% increase was projected through the remainder of the audit
period.
8. The auditor also estimated other income by
reviewing the Petitioners checking accounts which revealed deposits in the
amount of approximately $$$$$ to $$$$$ per year. The auditor then set other income at $$$$$ per year for the base
year of XXXXX and projected a XXXXX increase for each of the subsequent years
during the audit period.
9. The auditor discovered that in XXXXX the
Petitioners had realized $$$$$ in income from the sale of stock. The auditor then projected back from XXXXX
through XXXXX at a XXXXX decrease for each year. The auditor also projected forward a XXXXX increase for each of
the years subsequent to XXXXX.
10.
The auditor testified that a XXXXX increase (or decrease as in the case of the
stock income for the years XXXXX through XXXXX) was appropriate based upon the
nature of the illegal drug business. No
other support was given for the decision to use the XXXXX figure.
11. After the adjusted gross incomes for each of
the years in question was established, deductions were made for a married
couple filed jointly; for two exemptions; and for the payment of federal income
tax. This resulted in taxable income in
the amount of $$$$$.
12. The audit assessed a tax deficiency for the
audit period in question of $$$$$.
Penalty in the amount of $$$$$ was imposed as well as interest as of
XXXXX in the amount of $$$$$. The total
amount of the assessment was $$$$$.
13. In addition to selling cocaine the
Petitioners held legitimate jobs. From
XXXXX through XXXXX the Petitioner, XXXXX, did carpentry work for his father
for which he was paid, at most, XXXXX per year.
14. In addition to purchasing a house during the
audit period, the Petitioners also purchased a BMW 635 CSI and a boat.
15. When the Petitioners purchased the house,
they made a down payment of $$$$$. The
monthly mortgage payments were $$$$$.
16. The purchase price of the automobile was
$$$$$. The Petitioners made a down
payment of $$$$$, leaving a balance of $$$$$.
17. The purchase price of the boat was $$$$$.
18. The Petitioners claimed that the money
required for the down payments and monthly payments for the house, automobile,
and boat were given to them by XXXXX.
19. The Petitioners testified that all monies
received from the drug sales were turned over to XXXXX. They further testified that they did not
receive, nor was there any agreement that they were entitled to receive, any
proceeds from the drug sales.
20. XXXXX testified that he and his wife did not
file their income tax returns for the period in question because of laziness.
CONCLUSIONS OF LAW
There
is imposed on each non-resident individual for each taxable year a tax measured
by the amount allocable to this state of his "taxable income" for such
year, as determined for federal income tax purposes, subject to certain
adjustments. (Utah Code Ann.
§59-10-102(2).)
If
any person fails to make and file any return required at the time prescribed
therefore, or makes, willfully, or otherwise, a false or fraudulent return, the
Commission shall make such return from its own knowledge and from such
information as it can obtain through testimony or otherwise.
Any
return so made and subscribed by the Commission shall be prima facia good and
sufficient for all legal purposes.
(Utah Code Ann. §59-10-506(2)(a)(b).)
If
the underpayment of tax is due to fraud with intent to evade the tax, the
penalty is the greater of $500 per period or 100% of the underpayment. (Utah
Code Ann. §59-1-402(3)(d)).
DECISION AND ORDER
In
the present case, the issue to be decided by the Commission is whether the
deficiency assessed by the Collection Division for the tax years XXXXX through
XXXXX is correct. Central to that issue
is whether or not the Petitioners realized taxable income during those years.
The
Petitioners seem to argue that during the period in question the money they
supported themselves with was given to them as a gift by XXXXX. The sole source of support for this argument
was the testimony of each of the Petitioners.
Under the circumstances of the present case, such testimony is not the
most credible type of evidence. In this
case the Petitioners have a great motive to testify in a manner that would show
them in the most favorable light.
Additionally, XXXXX admitted to having engaged in stock transactions
which he believed would aid other parties in avoiding tax consequences.
What
is known about the Petitioners, their activities, and their life-style show a
couple who were engaged in the illegal distribution of controlled substances
for value, who had mortgage payments, and who spent great sums of money on an
automobile and a boat, yet only were able to demonstrate a legitimate income of
a few thousand dollars a year.
The
reasonable inference to be drawn from the evidence presented is that the
Petitioners either directly received the proceeds from the unlawful drug sales
or were paid by XXXXX father for their services in arranging the unlawful drug
transactions. The Petitioners self
serving testimony that all monies received by them from XXXXX were gifts and
not conditioned upon their participation in any drug transactions, simply is
not believable. This is particularly true when one considers XXXXX testimony
that he had tried to stop selling drugs for XXXXX but had always gone back to
doing so because, "XXXXX always had his thumb over him in some way".
The
Commission thus finds that the Petitioners received taxable income during the
audit period in question, and further sustains the determination of the Collection
Division which established the amount of income from drug sales to be $$$$$.
The Commission does not sustain the findings of the audit with respect to other
income which was projected from a base figure of $$$$$ nor does it sustain the
finding with respect to stock income which projected stock sales in each of the
years in question from the amount of stock sold in XXXXX. The other income and
stock income figures should be adjusted to reflect known or demonstrable
transactions for the years in question.
To project those using the methodology and reasons given by the auditor
is too speculative to be included.
The
Commission further finds that the audit should be adjusted to reflect the
exemption allowed for the Petitioners' XXXXX children for the years they were
eligible for the exemptions.
Additionally, the commission finds that deducting federal tax paid from
the Petitioners' adjusted gross income to arrive at the Petitioners' taxable
income was inappropriate inasmuch as the Petitioners' did not file federal
income tax returns for the years in question.
Having
decided the Petitioners received taxable income during the period in question,
the Commission next turns to the issue of the penalty imposed.
In
the present case, the Petitioners were assessed a 100% penalty for acting with
fraud with the intent to evade the tax due.
Under
the facts of the present case, the Tax Commission finds that there is ample
evidence to sustain the determination of the Collection Division that the
Petitioners acted with fraud with the intent to evade the tax due by
intentionally failing to file income tax returns for the years in
question. As testified to by XXXXX, he
and his wife had filed income tax returns prior to XXXXX but thereafter stopped
filing simply because they were "too lazy" to do so. Clearly then, the Petitioners were aware of
their obligations to file income tax returns, nevertheless, they deliberately
and intentionally chose not to do so.
Based
upon the foregoing, the Tax Commission orders the Collection Division to adjust
its audit in accordance with this decision.
It is so ordered.
DATED
this 17th day of March, 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