BEFORE THE UTAH STATE TAX
COMMISSION
_________________________________
XXXXX
XXXXX : FINDINGS OF FACT,
XXXXX ) CONCLUSIONS OF LAW,
Petitioners, : AND FINAL DECISION
:
:
v. : Appeal Nos. 92-2327
AUDITING
DIVISION OF THE : to 92-2329
UTAH STATE TAX COMMISSION, :
Respondent. :
______________________________________
STATEMENT OF CASE
A
formal hearing was held in this matter on XXXXX before the Utah State Tax
Commission. Lisa L. Olpin,
Administrative Law Judge, heard the matter for and on behalf of the Commission. Petitioners were represented by XXXXX, an
attorney. XXXXX, Assistant Utah
Attorney General, represented Respondent.
Based
upon the testimony and evidence presented at the hearing, the Tax Commission
makes its:
FINDINGS OF FACT
1. The tax in question is individual income
tax.
2. The year in question is XXXXX.
3. The Auditing Division conducted a
withholding tax audit on XXXXX for the
tax year XXXXX and discovered that XXXXX reported loans to shareholders had
significantly decreased in dollar amount from approximately $$$$$ to $$$$$.
4. A closer look at XXXXX bookkeeping indicated
that three loans which had been previously reported on XXXXX books to the sole
three directors and officers of the corporation, were now unaccounted for.
5. These three loan amounts (interest included)
and the individuals who received them are:
a. $$$$$ to XXXXX, company President
b. $$$$$ to XXXXX, company Vice-President
c. $$$$$ to XXXXX, Vice-Pres. of Technology
6. The Auditing Division determined that these
loan amounts were essentially taxable income to Petitioners and, therefore,
amended each Petitioner's income tax return to reflect the change. Interest and a ten percent negligence
penalty were also added.
7. Facts pertinent to determining whether or
not these loans now deleted from corporate books are actually taxable income to
the recipients are as follows:
8. Each of these unsecured loans was disbursed
over at least a year's time in XXXXX to the recipients in varying cash amounts
and at different intervals with the approval of the board of directors. (The board of directors consisting of
Petitioners).
9. None of the loans were reduced to writing;
therefore, no terms were agreed upon in regards to a payment plan, payment in
full due date, interest rate, etc.
10. XXXXX, however, understood that the interest
rate was whatever the market rate was.
11. XXXXX entered these loan amounts on its
financial books. Petitioners felt that these entries were sufficient as far as
recognition of the existence of these loans is concerned.
12. At no time since the disbursement of these
loan amounts has XXXXX pursued Petitioners for re-payment. None of Petitioners have paid any amount
owing on the loans.
13. XXXXX, brother of co-Petitioner XXXXX, is
the company president and the president of the board of directors. He maintains that he has always acknowledged
his loan amount as his personal debt to XXXXX.
14. He stated he was unaware that the loans were
not reported on the XXXXX corporate records until the results of the Auditing
Division's audit were made known.
15. He and the other two Petitioners stated that
they had no idea how it was that these loans were missing from financial
records as the board of directors did not act to remove the debt nor did they
request a release of the debt obligations.
16. XXXXX explained that XXXXX, chief financial
officer, was in charge of the company's books during the years XXXXX.
17. XXXXX, vice-president over computer systems,
recognizes the loan amount he received as a debt to XXXXX.
18. He believed that there was sufficient
documentation of the loan obligation given the fact that the loan had been
reflected in financial statements at times and that the other two officers knew
about it.
19. Like XXXXX, XXXXX stated that he saw the
financial statements on a quarterly basis, but that he never closely
scrutinized them. He said that he was
unaware that these loans were not reported on company books in XXXXX.
20. XXXXX, vice-president of technology, added
that these XXXXX loans were paid out sporadically as the company did not have
the money to make lump sum payments at the time.
21. Like the other two Petitioners, XXXXX stated
that he saw the financial statements, but was unaware that the loans were
unaccounted for on the XXXXX company books.
22. While XXXXX recognizes the loan amount to
him as a debt to XXXXX, he did not list this debt obligation on a car loan
application in XXXXX.
23. Certified public accountant, XXXXX, the
vice-president of finance at XXXXX since XXXXX, stated that these three loans
are considered debts due the corporation.
As a C.P.A., he would have expected loans such as these to have been
drawn up in XXXXX as promissory notes.
24. XXXXX, Respondent's lead field auditor on
this audit, testified that based on XXXXX documentation (or lack thereof in
this case) he concluded that XXXXX had written off these loans in XXXXX and
that is why they no longer appear on XXXXX financial books. Thus, Petitioners incurred a benefit with
resulting tax liabilities.
25. Further, XXXXX testified that he spoke with
XXXXX at the audit's closing conference about the loans in question and the
fact that they were missing from corporate books. XXXXX told XXXXX, "It was part of XXXXX deal and was netted
against another loan." XXXXX then
told another employee to research the loans to shareholders to find out how
these loans were netted out, that is, to give an accounting for how these three
loan amounts were reconciled on the corporate books.
26. Petitioners never provided any information
to XXXXX about the how the loans were accounted for so he concluded that the
loans had, in fact, been written off and a forgiveness of debt had occurred.
27. Petitioners assert that their loan
obligations were inadvertently omitted by clerical error from the corporate
books in XXXXX as they had not taken any action as a board or independently to
cause a change in their debt obligation status. As such, Petitioners request that the Tax Commission delete the
loan amounts from the audit and allow Petitioners to formalize these debts by
way of promissory notes.
28. The Auditing Division, on the other hand,
contends that Petitioners received income based on the facts of this case.
CONCLUSIONS OF LAW
Under
the Individual Income Tax Act, it is an objective of the State "to impose
on each resident individual, estate, or trust for each taxable year a tax
measured by the amount of his "taxable income" for such year, as
determined for federal income tax purposes..." Utah Code Ann.
§59-10-102(1).
"Federal
taxable income" means taxable income as currently defined by the Internal
Revenue Code. Utah Code Ann. §59-10-111.
"State
taxable income" ...means federal taxable income with the modifications,
subtractions, and adjustment provided in the Utah Code. Utah Code Ann.
§59-10-112.
Dividends
are fully includible in gross income.
For income tax purposes, the term "dividend" means any
distribution made by a corporation to its shareholders, whether in money or
other property, out of its earnings and profits accumulated... or out of
earnings and profits of the tax year.
Internal Revenue Code Section 316.
The
petitioning party shall have the burden of proof to establish that his petition
should be granted. Utah Admin. Rule R861-1A-7(G).
DECISION AND ORDER
The
evidence Petitioners have provided at this hearing is insufficient to warrant a
ruling in their favor. Petitioners'
testimonies are less persuasive as they together make up their company's board
of directors. In the face of no
documentation whatsoever or testimony of a non-party witness with personal
knowledge of the corporation's bookkeeping, the Commission is unconvinced that
the company committed a clerical error in dropping the three debt obligations
from corporate books as Petitioners speculate.
These
loans had never been formalized by way of promissory notes; there are no terms
outlined or even agreed upon between the parties for interest charges or time
schedules for repayment; no petitioner had paid back any amount over the four
year period since these dollar amounts were paid out.
There
is simply a lack of persuasive evidence in this case on the part of
Petitioners.
Based
upon the foregoing, the Tax Commission upholds the audit determinations in
these cases, finding that Petitioners enjoyed additional income for the year
XXXXX, thereby resulting in additional tax liabilities. The ten percent negligence penalties and
interest amounts are not waived. It is
so ordered.
DATED
this 13th day of August, 1993.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
W. Val
Oveson Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco Alice
Shearer*
Commissioner Commissioner