BEFORE THE UTAH STATE TAX COMMISSION
Petitioner : FINDINGS OF FACT,
: CONCLUSIONS OF LAW,
v. : AND FINAL DECISION
AUDITING DIVISION OF THE : Appeal No. 91-0718
UTAH STATE TAX COMMISSION : Account No. XXXXX
STATEMENT OF CASE
After submitting briefs on the subject matter of this case, both Petitioner and Respondent waived the right to a formal hearing. This decision is based on the entire contents of the file as presently constituted as of XXXXX.
Based upon the evidence and information contained in the file, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. The tax in question is corporation franchise tax.
2. The periods in question are the years XXXXX and XXXXX.
3. Petitioner filed Utah corporate franchise tax returns as a "C" corporation for calendar years XXXXX and XXXXX.
4. Petitioner filed a Utah corporate franchise tax return as an "S" corporation for calendar year XXXXX.
5. Due to the termination of its "S" corporation election, Petitioner was required to file as an "S" corporation for the period XXXXX through XXXXX, and a short-period Utah corporate franchise tax return as a "C" corporation for the period XXXXX through XXXXX.
6. Petitioner filed a Utah corporate franchise tax return as a "C" corporation for calendar year XXXXX.
7. Petitioner incurred net losses on the XXXXX through XXXXX short period "C" corporation return and on the XXXXX "C" corporation return.
8. Petitioner seeks to first carry back the loss from the XXXXX through XXXXX short-period "C" corporation return to offset income reported on the XXXXX return and then to carry back the loss from the XXXXX return to offset income reported on the XXXXX return. Under Petitioner's approach, the losses would be carried back three calendar years.
9. The Auditing Division's approach requires losses to be carried back three taxable years, with the two short periods of XXXXX being treated as two taxable years. The Auditing Division has required Petitioner to first carry back the loss from the XXXXX through XXXXX short period return to offset income reported on the XXXXX return. The Auditing Division has required the loss from the XXXXX year to be carried forward since there was no "C" corporation income during the preceding three taxable years.
CONCLUSIONS OF LAW
Utah Code Annotated Section 59-7-108(14)(c) states:
A net loss is first carried back to the earliest of the next preceding three years; if not entirely used to offset income of that year, it is carried to the second year preceding the loss year; and any remaining amount is next carried to the taxable year immediately preceding the loss year. Any amount then remaining can be carried to each of the five taxable years following the taxable year of the net loss. (emphasis added)
A "taxable year" is defined as the calendar year or the fiscal year ending during such calendar year upon the basis of which the net income is computed, and also includes, in the case of a return made for a fractional part of a year. Utah Code Ann. §59-7-101(11)(A).
Further, the taxable year for Utah corporate franchise tax purposes shall be the same as the taxable year for federal income tax purposes. Utah Code Ann. §59-7-101(11)(d).
The Internal Revenue Code specifically provides that when a corporation terminates its "S" status and elects "C" status in the middle of a year, two short taxable years are created, necessitating two separate return filings. Internal Revenue Code §1362(e)(1)(A)(B).
Whenever this situation occurs, the Internal Revenue Code provides that the first short taxable year described above "shall not be taken into account for purposes of determining the number of taxable years to which any item may be carried back or carried forward by the corporation." Internal Revenue Code §1362(e)(6)(A).
DECISION AND ORDER
In applying Utah Code Ann. §59-7-108(14)(c), Petitioner may carry back losses to the earliest of the third preceding calendar year, then to the second preceding calendar year, and lastly, to the taxable year immediately preceding the loss year.
Confusion and ambiguity exist because the Utah Code does not directly address how to compute carry back and carry forward situations when the corporation has switched from "S" to "C" status in the crucial preceding years.
Since Utah law requires the Tax Commission to defer to the taxable year used for federal income tax purposes in the area of corporate franchise tax, it is only logical that the Tax Commission also be accepting of the Internal Revenue Code's treatment of the two short taxable years created when "S" status is terminated.
To clarify, in applying Utah Code Ann. §59-7-108(14)(c) to situations where a corporation has terminated "S" status in favor of "C" status mid-year, two short taxable years are thereby created as defined in Section 59-7-101(11)(a), i.e., return made for a fractional part of a year. For carry back and carry over situations, however, the short taxable year that is inclusive of the final period of "S" status will not be taken into account when determining the number of taxable years carried back or forward by the corporation.
In the current case, Petitioner's taxable year has remained constant in that it follows the calendar year. It is unfair to penalize Petitioner for filing two separate returns, one with "S" status and the other with "C" status, when the affect is to merely benefit Petitioner's accounting procedures and ultimately the Tax Commission's ability to assure itself that Petitioner is property distributing, allocating and apportioning income/losses to the correct entity.
Based upon the foregoing, the Tax Commission finds that Petitioner may carry back net losses that were incurred in the second half of XXXXX to the year XXXXX. Further, net losses that were incurred in XXXXX may be carried back to the year XXXXX. It is so ordered.
DATED this 25th day of March, 1991.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger O. Tew
Joe B. Pacheco S. Blaine Willes