BEFORE THE UTAH STATE TAX COMMISSION
XXXXX : FINDINGS OF FACT,
Petitioner, : CONCLUSIONS OF LAW,
: AND FINAL DECISION
AUDITING DIVISION OF THE : Appeal No. 91-1572
UTAH STATE TAX COMMISSION, :
: Account No. XXXXX
STATEMENT OF CASE
The parties, through counsel, have submitted this matter to the Utah State Tax Commission for decision based upon the parties' Stipulation of Facts and respective memoranda.
Based upon the parties' stipulation, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. The tax involved is corporate franchise tax.
2. The periods in question are XXXXX and XXXXX.
3. Petitioner incurred a net loss for calendar year XXXXX.
4. Petitioner carried the loss forward to Petitioner's XXXXX and XXXXX tax years both on its federal and state income tax returns.
5. In XXXXX, Petitioner incurred a net loss. The net loss was carried forward to Petitioner's XXXXX and XXXXX tax years on both its federal and state returns.
6. Utah Code Ann. §59-7-108(14)(c) sets forth the provisions for handling loss carry backs for state tax purposes.
7. Federal and State law treat NOL operating losses differently. Internal Revenue Code §172(b)(3) allows a net operating loss to be carried forward or to be carried back, at the election of the taxpayer.
8. The statute of limitations for claiming a loss carry back refund for the XXXXX loss ran XXXXX.
9. The statute of limitations for Petitioner's XXXXX tax return ran on XXXXX.
10. Utah Code Ann. §59-7-127 states that returns will be examined as soon as practicable after they are filed.
11. The Auditing Division admits that in some cases returns are not selected for audit or are not examined until after the statute of limitations for loss carryback claims has expired.
12. XXXXX, Senior Auditor, pulled Petitioner's XXXXX return from the files together with a block of returns to be examined on XXXXX.
13. The returns were given to XXXXX to review. XXXXX made an initial examination of the records and ordered copies of Petitioner's returns back to XXXXX sometime between XXXXX and XXXXX.
14. On XXXXX, XXXXX wrote up his audit results.
15. The audit made adjustments to apply the XXXXX loss first to Petitioner's XXXXX, XXXXX and XXXXX returns, even though the statute of limitations had closed those years to any claim for refund by the Petitioner. The proposed adjustments would result in additional tax due in the year XXXXX of $$$$$ and in the year XXXXX of $$$$$.
16. On XXXXX, a Preliminary Notice was mailed to Petitioner.
17. On XXXXX, Petitioner responded to the Preliminary Notice.
18. On XXXXX, the Auditing Division responded to Petitioner's XXXXX letter.
19. On XXXXX, Petitioner responded to the Auditing Division's XXXXX letter.
20. On XXXXX, a Statutory Notice was issued.
21. On or about XXXXX, Petitioner filed a TC-20 with respect to its XXXXX return.
22. On or about XXXXX, Petitioner filed a TC-20 with respect to its XXXXX return.
23. On or about XXXXX, Petitioner filed a TC-20L application for refund with respect to its XXXXX return carrying back losses to XXXXX, XXXXX and XXXXX.
24. On XXXXX, Petitioner filed its Petition for Redetermination.
25. On XXXXX, the Auditing Division filed its response.
26. The pre-hearing conference was held XXXXX.
27. In XXXXX, the Utah State Tax Commission issued Tax Bulletin No. 6-92, whereby under certain conditions an extension was granted to the otherwise applicable statute of limitations for filing a Claim for Refund.
28. Internal Revenue Code §§1311 through 1314 allow the mitigation of the effect of statutes of limitations and the provisions.
CONCLUSIONS OF LAW
In determining income for purposes of Utah's corporate franchise tax, a deduction from income is allowed for the aggregate of net loss carryovers and net loss carrybacks. (Utah Code Ann. §59-7-108(14).)
A net loss must first be carried back to the earliest of the prior three years before it may be applied to any succeeding years. (Utah Code Ann. §59-7-108(14)(c).)
Claims for credit or refund arising from a net loss carryback adjustment must be made before the expiration of the 15th day of the 40th month following the end of the taxable year of the net loss which resulted in the carryback. (Utah Code Ann. §59-7-141(2)(b).)
Corporate franchise tax must be imposed within three years after the return is filed. (Utah Code Ann. §59-7-138(1).)
DECISION AND ORDER
Based on the foregoing stipulated facts, Petitioner raises the following issues:
1. Whether Respondent had a duty to audit and correct errors in Petitioner's XXXXX and XXXXX returns prior to the expiration of the statute of limitations applicable to those years;
2. Whether Respondent must follow federal tax law and policy, including Internal Revenue Codes §§1311 through 1314, which allows the federal statute of limitations to be reopened in cases such as this;
3. Whether Respondent can disallow the application of XXXXX loss against XXXXX income, after the statute of limitations has expired for both years;
4. Whether the Commission should grant Petitioner additional time to claim a refund based on its deduction of XXXXX losses from XXXXX through XXXXX income;
5. Whether constitutional principles of due process and equal protection prohibit Respondent's assessment of additional tax in this case;
6. Whether an implied principle of equitable adjustments allows Petitioner to claim offsets of current deductions against prior taxes; and,
7. Whether a principle of "equitable recoupment" may be applied by Petitioner to allow offsets of taxes.
Each of the foregoing will be considered in turn.
A. RESPONDENT'S DUTY TO CORRECT ERRORS PRIOR TO THE EXPIRATION OF THE STATUE OF LIMITATIONS.
Petitioner cites a 1956 federal district court decision (Ryan v. Harrison, DC Ill., 1956), involving a federal loss carryover provision, for the proposition that Respondent was obligated to audit and correct Petitioner's returns for XXXXX and XXXXX before the statute of limitations for those years had expired. In Ryan, the federal district court concluded that the taxpayer's request for refund, filed timely but seeking refund for the wrong year, could be amended to the correct year even after the time for filing refund requests had expired. The Ryan court allowed the amendment on the grounds it related back to the taxpayer's initial refund claim.
Obviously, a significant difference exists between the circumstances in Ryan and this case. Here, no refund request of any sort was filed until the period for claiming refunds had expired. Consequently, there can be no argument of "relation back". Also, Petitioner's XXXXX return, which improperly applied the XXXXX losses, is different from the refund request in Ryan because it required no affirmative action from Respondent, i.e. issuance of a refund check.
Utah's tax system is generally based upon voluntary self-assessment. Respondent has no general duty to audit every return and not all returns are audited. In this case, Petitioner's returns for XXXXX and XXXXX were initially accepted as correct and only reviewed after Petitioner's XXXXX return required further investigation.
B. INCORPORATION OF FEDERAL TAX LAW AND POLICY PURSUANT TO RULE R865-614(F).
The Commission's RuleR865-6F-14 requires that Utah's corporation franchise tax follow as closely as possible federal patterns. The Rule provides:
It is the policy of the Tax Commission, in matters involving the determination of net income for Utah corporation franchise tax purposes, to follow as closely as possible federal requirements with respect to the same matters. In some instances, of course, the federal and state statutes differ; and due to such conflict, the federal rulings, regulations, and decisions cannot be followed. Furthermore, in some instances, the Tax Commission may disagree with the federal determinations and does not consider them controlling for Utah corporation franchise tax purposes.
. . . . The following are the major items which require different treatment under the state and federal statutes:
f. loss carry-overs and carrybacks. . . . . (emphasis added)
Petitioner argues that the foregoing policy requires the Commission to apply the Ryan case to this appeal. As noted under Point A, above, the Commission does not accept Petitioner's interpretation of the Ryan case.
Petitioner also argues that mitigation provisions of Internal Revenue Code §§1311-1314 should be followed by the Commission. Such federal mitigation rules are statutory. No comparable provisions exist in Utah's statutes. As noted in the Commission's RuleR865-6F-14, differences in federal and state law require different results. This is one such case.
C. AUDITING DIVISION CANNOT DISALLOW XXXXX LOSS CARRYFORWARD TO XXXXX.
Petitioner argues that:
after the statute of limitations had run for the XXXXX and XXXXX returns, the Auditing Division disallowed the XXXXX loss carryforward to Petitioner's XXXXX income tax return. Because of this disallowance, then there was additional income for the XXXXX year. . . .
The statute of limitations to which Petitioner refers is §59-7-138, which limits the period for assessment of deficiency to three years from the date on which a return has been filed. Petitioner confuses the impact of §59-7-138, which limits the time in which a deficiency may be assessed by the Respondent, with Respondent's authority under §59-7-127 and §59-7-108(14) to determine whether Petitioner has properly claimed loss carry over and loss carryback credit for years that remain open for assessment. In terms of the facts of this appeal, the three-year statute of limitations of §59-7-138 prevents Respondent from assessing additional tax for XXXXX or earlier. It does not prevent Respondent from following the mandate of §59-7-108(14) and applying Petitioner's losses against its income in order to determine Petitioner's proper tax liability for XXXXX and XXXXX.
D. DISCRETION OF UTAH STATE TAX COMMISSION PERIOD/BULLETIN 6-92
Petitioner argues that the discretion which the Commission exercised in promulgating Tax Bulletin 6-92 should be exercised in this case to prevent what Petitioner characterizes as a "harsh, unfair and inappropriate" result.
Tax Bulletin 6-92 was promulgated to address taxpayer concerns that the Auditing Division could "sit" on a loss carryback adjustment until the time for claiming a credit for the loss had expired. Tax Bulletin 6-92 provides an extension of up to one month for taxpayers to file claims for refunds based upon the carryback of losses. In this case, the statute of limitations for claiming a loss carryback deduction for losses incurred during XXXXX expired on XXXXX, approximately one year prior to Respondent's audit. The facts of this case do not fall within either the letter or the spirit of Tax Bulletin 6-92.
With respect to this point, Petitioner argues that Respondent is taxing Petitioner's income twice. Although it may be a distinction without a great deal of difference, particularly to Petitioner, Respondent is actually denying Petitioner the benefit of a deduction which Petitioner failed to properly claim.
E. CONSTITUTIONAL ISSUES
Petitioner argues that the absence in Utah's Corporate Franchise Tax Act of an "equitable adjustment" provision such as is found in Utah's Individual Income Tax Act constitutes a violation of the United States Constitution's equal protection clause. Petitioner cites no authority for its constitutional argument, and the Commission is unaware of any such authority. Furthermore, the Commission must presume that legislative enactments are constitutional. The Commission therefore finds no merit to Petitioner's constitutional arguments.
F. IMPLIED EQUITABLE ADJUSTMENTS
Petitioner suggests that the Commission can infer authority to allow equitable adjustments in the corporate franchise tax on the basis of statutory equitable adjustment provisions applicable to individual income tax. Petitioner repeats its arguments under Point B, above. As the Commission has already responded to those arguments, it will not repeat that discussion again. The Commission finds no merit to Petitioner's argument, for the reasons previously stated.
G. EQUITABLE RECOUPMENT
Without citing any authority for the proposition, Petitioner argues that the Commission may permit Petitioner to offset its franchise tax liabilities for XXXXX and XXXXX with refund claims for XXXXX through XXXXX, which Petitioner is otherwise barred from claiming by virtue of the statute of limitations. Petitioner cites no authority for its claim. The Commission is unaware of any such precedent, and therefore rejects the same.
Based on the foregoing, the Commission concludes that Respondent properly computed the amounts of Petitioner's corporate income tax liability for the XXXXX and XXXXX tax years. The Respondent's audit determination in this matter is therefore affirmed. It is so ordered.
DATED this 3 day of March, 19993.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger O. Tew
Joe B. Pacheco S. Blaine Willes