Income Tax

Signed 5/3/95






Petitioner, : ORDER


v. : Appeal No. 93-1059





Respondent. : Tax Type: Income Tax



This matter came before the Utah State Tax Commission for a Settlement Conference pursuant to the provisions of Utah Code Ann. 59-1-502.5, on XXXXX. Jane Phan, Administrative Law Judge, heard the matter for and on behalf of the Commission. Present and representing Petitioner were XXXXX and XXXXX of XXXXX. Present and representing Respondent was XXXXX of the Collection Division. The Settlement Conference was continued until XXXXX. At the continuance XXXXX joined the representatives for Petitioner and XXXXX joined the representative for Respondent.

Penalties of $$$$$ with interest of approximately $$$$$ for the year XXXXX, penalties of $$$$$ with interest of approximately $$$$$ for the year XXXXX, penalties of $$$$$ with interest of approximately $$$$$ for the year XXXXX and penalties of $$$$$ with interest of approximately $$$$$ for the year XXXXX were assessed against Petitioner relating to income tax. Petitioner had requested waiver of the penalties and interest from the Collection Division Waiver Unit which was denied.

At the initial Settlement Conference it was determined that the penalties for the years XXXXX, XXXXX and XXXXX had been assessed by the Auditing Division as 100% fraud penalties. The parties agreed to the XXXXX continuance so that a representative from the Auditing Division could be present to explain the assessment of these fraud penalties.

At the Settlement Conference Petitioner and his representatives explained that Petitioner had earned income during the years in question as an employee and as a consultant through his own professional corporation. The Internal Revenue Service (IRS) preformed an audit of Petitioner and disallowed as deductions payments made by Petitioner to his sons compensating the sons for their services rendered in connection with Petitioner's business. Petitioner stated that his sons were qualified to perform the services. Petitioner stated that he had relied on the advice of his accountant and tax preparer in claiming these payments as deductions. Petitioner alleged that the IRS disallowed the deductions solely because the payments were made to Petitioner's sons. He felt that had they been made to an unrelated party with the same qualifications the payments would have been allowed as deductions.

At the continuance the representative from the Auditing Division asserted that after the IRS audit he had performed an audit of Petitioner for the State Tax Commission. He alleged that the fraud penalties were assessed because of the more than 50% increase in taxes owed after the audit. Petitioner asserted that some of that increase was actually from income earned and taxed through Petitioner's professional corporation. Respondent did not remember and did not have the audit with him. After some discussion the representative from the Auditing Division stated that maybe the fraud penalties should be waived, although the Petitioners should pay a 10% late payment penalty.

The parties requested further time to review the results of the audit. Upon review the Respondent recommended that the 100% fraud penalties be reduced to a 10% negligence penalty for XXXXX through XXXXX. Respondent asserted that the 10% penalty for XXXXX should remain intact.


Based upon the information presented at the conference, and the records of the Tax Commission, the Commission finds sufficient cause has been shown to reduce the penalties assessed from $$$$$ to $$$$$ for XXXXX, from $$$$$ to $$$$$ for XXXXX and from $$$$$ to $$$$$ for XXXXX. Sufficient cause has not been shown to waive or reduce the penalty of $$$$$ assessed relating to income tax for XXXXX. Sufficient cause has not been shown to waive the interest for any of the years in question, but the interest is to be adjusted for the decrease in the penalties assessed.

This decision does not limit a party's right to a Formal Hearing. However, this Decision and Order will become the Final Decision and Order of the Commission unless any party to this case files a written request within thirty (30) days of the date of this decision to proceed to a Formal Hearing. Such a request shall be mailed to the address listed below and must include the

Petitioner's name, address, and appeal number:

Utah State Tax Commission

Appeals Division

210 North 1950 West

Salt Lake City, Utah 84134

Failure to request a Formal Hearing will preclude any further administrative action or appeal rights in this matter.

DATED this 3 day of May, 1995.



W. Val Oveson Roger O. Tew

Chairman Commissioner

Joe B. Pacheco Alice Shearer

Commissioner Commissioner