BEFORE THE UTAH STATE TAX COMMISSION
Petitioner, : FINDINGS OF FACT,
: CONCLUSIONS OF LAW,
v. : AND FINAL DECISION
COLLECTION DIVISION OF THE : Appeal No. 92-2280
UTAH STATE TAX COMMISSION, :
Respondent. : Serial No. XXXXX
Type: Penalty & Interest
STATEMENT OF CASE
This matter came before the Utah State Tax Commission for a formal hearing on XXXXX. G. Blaine Davis, Administrative Law Judge, heard the matter for and on behalf of the Commission. Present and representing the Petitioner was XXXXX. Present and representing the Respondent were XXXXX, Assistant Attorney General, and XXXXX and XXXXX from the Auditing Division.
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 individual income tax.
2. The period in question is the calendar year XXXXX.
3. The Auditing Division has imposed additional income taxes on the Petitioner for the calendar year XXXXX in an amount of $$$$$ together with a 50% penalty for intent to evade the tax, and interest on all such amounts at the statutory rate.
4. Petitioner was involved in numerous business enterprises, a partial list of which is more fully included in Exhibit R-1, which was a part of this proceeding.
5. As a part of one of those business enterprises, Petitioner entered into an agreement to acquire XXXXX. Petitioner originally entered into an agreement to buy XXXXX, but because of certain actions of Congress, he backed out of that agreement. Thereafter, Petitioner was sued by the sellers of that company for specific performance, and ultimately determined to go ahead and purchase the company.
6. As a part of that transaction, a new Utah corporation was formed, which was XXXXX.
7. Many of the assets of XXXXX were transferred to XXXXX. In addition to the transfer of those assets, including bank accounts, the following transactions are primarily at issue in this proceeding.
a. A check was written by XXXXX to Petitioner in the amount of $$$$$. Petitioner endorsed that check and transferred it to the sellers of the company in exchange for shares of preferred stock in XXXXX which had been retained by the sellers.
b. A $$$$$ check was written from XXXXX to Petitioner for an office building which was owned by Petitioner. Petitioner claims that his basis in the building was $$$$$, but he has not been able to substantiate such a basis. Petitioner again transferred the $$$$$ which he had received for his building to the sellers of XXXXX, again in exchange for additional shares of preferred stock. Following the above two transactions, the sellers of XXXXX no longer owned any of the preferred stock in XXXXX.
c. Petitioner also received common stock in the company with a fair marker value of $$$$$. The $$$$$ was subsequently used for XXXXX to purchase the mortgage of the XXXXX from Petitioner, and Petitioner received $$$$$ cash for that mortgage. The position of XXXXX is that he had previously loaned XXXXX the sum of $$$$$ for construction costs.
8. Petitioner indicated that he does not know why the checks were written to him first, but stated that perhaps they should have been written to XXXXX from XXXXX. However, this Commission does not attempt to restructure transactions for which the taxpayers have determined the structure. Instead, this Commission tries to determine the tax status of transactions which have been voluntarily entered into by various taxpayers.
9. The $$$$$ received by Petitioner was clearly income to him. He received cash of $$$$$ from XXXXX. That cash was transferred to XXXXX for shares of preferred stock. Therefore, the Petitioner had received income of $$$$$, and elected to invest that income in shares of stock of another corporation.
10. With respect to the $$$$$ received from XXXXX for the purchase of an office building for that amount, it clearly constituted income which should have been reported in the gross income of Petitioner at the time he filed his income tax return. Petitioner did not include that $$$$$ in his gross income, so the Auditing Division has correctly included it in his income. Petitioner maintained that his basis in the building was $$$$$. However, the Auditing Division attempted to substantiate that basis, and they were unable to establish any basis in the building. Petitioner received the building from XXXXX, which was a publicly held company of which Petitioner was one of the key officials, and it could not be established that Petitioner had any basis in the building. Petitioner has the burden of proof to establish any such basis, and Petitioner has failed to sustain that burden of proof. Petitioner did maintain that the reason that he is unable to establish the basis is because the records of the insurance companies have been confiscated by the XXXXX, but the establishment of his basis would go back to XXXXX, but it still could not be established that he had any basis in the building.
11. With respect for the $$$$$ it is also clear that the receipt of the common stock and the ultimate receipt of cash constituted income to Petitioner. Again, Petitioner has not substantiated that he had any basis in the items which were transferred in exchange for the $$$$$. Accordingly, the amount is taxable to him.
12. The Respondent has also proposed that a penalty be imposed upon Petitioner in an amount of 50% of the net amount of tax due. The 50% penalty is provided for by §59-1-401(5)(a)(iii), "for intent to evade the tax, the penalty is the greater of $$$$$ per period or 50% of the tax due." Therefore, for the tax to be imposed, there must have been an "intent to evade the tax."
13. The Respondent did not present specific evidence of intent of the Petitioner to evade the tax. Instead, the Respondent relies upon the fact that this is a very large transaction, and that the failure of Petitioner to include it on his tax return shows that there was sufficient intent to avoid the tax to justify the imposition of the fraud penalty.
14. The Petitioner denies that there was any fraud involved. In fact, the Petitioner maintains that the transactions should not have been taxable to him. The position of Petitioner is that the checks should have never been made out in his name personally, because he was merely a conduit through which the transaction took place, by way of the money going from one company to the other, in exchange for the shares of stock and loans which were ultimately transferred back to the other company. Therefore, the position of the Petitioner is that there should not have been any tax implications to these transactions, and if there was, that it was merely an incident of an improperly structured transaction for which he did not understand there would be any tax impacts.
15. In the case Silver vs. the Auditing Division of the State Tax Commission of Utah, 820 P. 2nd 912, the Utah Supreme Court dealt with a prior imposition of penalty for "intent to evade" a tax. In that case, the court said as follows:
meaning of the term "intent" is that one must have a conscientious
objective or desire to accomplish the
prohibitive end .... the object of the required intent ... is "to
evade" the requirements of the tax laws.
"Evade" is defined as avoidance of something by effort, skill,
dexterity, contrivance, subterfuge, ingenuity, or artifice.... We read the term
"intent to evade," then, to require a conscious desire to avoid a
legal requirement with which the actor knows he or she is obligated to comply;
it is not sufficient that the actor merely intends not to do that which the
law, in fact, may require. In short, an
intent not to file a tax return, even
though required by law to file, is an "intent to evade" only if the
actor is aware that he or she is legally required to file."
16. In this proceeding, there has been a showing that the Petitioner did not include the above stated income in his income tax return, but there has not been a showing that the Petitioner was aware that he was legally required to include such income. In fact, the continuous position of Petitioner is that the income was not taxable to him, and that he was not legally required to include it on his income tax return.
there is no evidence to show that Petitioner intended to evade the tax, there
is sufficient evidence to show that the Petitioner failed to pay the taxes, and
that a reasonable investigation into the applicable rules and statues would
have revealed that the taxes are due.
Therefore, a penalty of 10% for negligence should be imposed upon
When an audit assessment is made by the Auditing Division, the Petitioner has the burden of proof to establish that the audit assessment is not correct, and that the items of income for which taxes have been assessed against Petitioner should not be taxable to Petitioner.
The Respondent has the burden of proof to establish that a 50% penalty for intent to evade the tax should be imposed upon Petitioner.
10% negligence penalty is appropriate when the taxpayer has failed to pay taxes
and a reasonable investigation into the applicable rules and statues would have
revealed that the taxes were due.
CONCLUSIONS OF LAW
Petitioner has failed to sustain his burden of proof.
has failed to sustain the burden to establish that Petitioner intended to evade
the tax, and Respondent has therefore failed to establish it's burden of proof
to establish a 50% penalty should be imposed upon the Petitioner. However, Respondent has established that
there was negligence, and that a penalty of 10% of the amount of under payment
of the tax should be imposed against Petitioner.
DECISION AND ORDER
Based upon the foregoing, the Tax Commission hereby finds that the audit assessment of income taxes assessed against Petitioner by Respondent should be affirmed. However, as to the penalty of 50%, the Commission determines that the penalty of 50% cannot be sustained, but that instead, a penalty of 10% for negligence should be imposed against Petitioner, together with interest at the statutory rate on the amounts recalculated to be due. It is so ordered.
DATED this 18th day of August, 1995.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
W. Val Oveson Roger O. Tew
Joe B. Pacheco Alice Shearer