91-0427 & 91-0428 - Income






Petitioners, : CONCLUSIONS OF LAW,


v. :

: Appeal Nos. 91-0427 &



Respondent :



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:


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.


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)).


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.


R. H. Hansen Roger O. Tew

Chairman Commissioner

Joe B. Pacheco S. Blaine Willes

Commissioner Commissioner