95-0073

Income Tax

Signed

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

MCCULLIS RESOURCES, CO. INC., ) FINDINGS OF FACT,

Petitioner, : CONCLUSIONS OF LAW,

) AND FINAL DECISION

v. :

) Appeal No. 95-0073

AUDITING DIVISION OF THE :

UTAH STATE TAX COMMISSION, ) Account No. R00369

Respondent. : Period: 1/93 to 9/94

)

: Tax Type: Penalty

_____________________________________

STATEMENT OF CASE

This matter came before the Utah Tax Commission for a formal hearing on April 22, 1996. Commission Chairman W. Val Oveson, heard the matter for and on behalf of the Commission. Present and representing Petitioner was K.C. Jensen, Attorney for Petitioner. Present and representing Respondent were Brian Tarbet, Assistant Attorney General, Frank Hales, Assistant Director of Auditing Division, Dan Engh, Audit Manager, and Walt Campbell, Audit Supervisor.

Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:

FINDINGS OF FACT

The tax in question is Mineral Withholding Tax. The period in question is Jan. 1. 1993 to Sept. 30, 1994.

In early 1992, Petitioner took over various wells which were previously operated by another operator in the State of Utah. Petitioner retained two of the employees from the previous operator for a very short period of time and therefore opened an employer account to report wage withholding. Petitioner let those two employees go and notified the state of Utah that they would no longer need to file the quarterly reports as it was no longer an "employer" in the state of Utah.

Subsequent to the notification to the state of Utah, Petitioner received a TC-69A summary of account No. issued, reflecting account #R00369 and saying that it needed to make quarterly withholding reports. Petitioner contacted Respondent requesting an explanation, believing they were being asked to report quarterly wage withholding. Representative of Petitioner responsible for tax payments, explained to Respondent's representative that Petitioner had received this notice to file quarterly withholding and that they were no longer employers in Utah. Petitioner's representative told Respondent's representative that the account would be closed and they would not have to make the quarterly reports.

Unbeknownst to Petitioner, Respondent closed Petitioner's mineral withholding account rather than the employer wage withholding account. Petitioner never received coupon booklets after 1992. Petitioner hired a new employee to handle accounting and tax remittances in the various states at this same time. Since the new employee never received mineral withholding coupon booklets for 1993 and 1994 and was unaware of the fact that Petitioner had previously been making these payments, the remittances were overlooked for the period of time from January 1993 through September 30, 1994.

On January 3, 1995 Respondent issued a Notice of Assessment to Petitioner in the amount of $61,000 plus a 10% penalty and interest. The assessment was for additional tax due to amounts withheld and not remitted on mineral production payments to owners of production from wells located within the state of Utah as required by Utah Code Ann. ' 59-6-102(1). The 10% penalty was assessed by Respondent for negligence due to failure to remit the proper tax on payments to owners.

In August of 1995 Respondent's representative submitted to Petitioner's representative recalculation of the tax amount due based on the documentation provided by Petitioner. The assessment was reduced to $28,208.75 with interest and a 10% penalty of $2,828.88.

In October of 1995 Petitioner's representative notified Respondent that Petitioner had accepted the amended assessment of Respondent and requested that the 10% penalty be abated.

In January 1996 Respondent's representative notified Petitioner by letter stating that Respondent rejected Petitioner's offer to abate the penalty.

On February 2, 1996 Petitioner filed a request for Agency Action on Respondent's denial of the waiver of the 10% penalty.

APPLICABLE LAW

The applicable law which governs the application of penalty in this case is found in Utah Code Ann. ' 59-6-104 which states:

(1) The provisions of Title 59, Chapter 10, applicable to withholding taxes by employers under Title 59, Chapter 10, Part 4, relating to records, penalties, interest, deficiencies, overpayments, refunds, assessments, venue, and civil and criminal penalties are applicable to the withholding and payment of withheld taxes under this chapter to the extent that those provisions are consistent with this chapter.

This provision states that the general provisions related to the withholding of taxes by employers, including the imposition of penalties, apply to the withholding of mineral production taxes.

The standard for the application of penalties under Chapter 10 is set forth in Utah Code Ann. ' 59-10-539 as follows:

(1) In case of failure to file an income tax return and pay the tax required under this chapter on or before the date prescribed therefor (determine with regard to any extension of time for tiling), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, There shall be added to the amount required to be show as tax on return a penalty as provided in Section 59-1-401.

ANALYSIS

Petitioner has been a taxpayer in Utah for many years and has a history of timely and complete payment of taxes. The unusual set of facts which resulted in Petitioner inadvertently failing to remit amounts that were previously withheld resulted from innocent and coincidental errors made by both Respondent and Petitioner. Petitioner has cooperated with Respondent in computing the correct tax and has agreed to pay the tax including interest.

A taxpayer is held to the highest standard when dealing with the so called "trust" taxes. Trust taxes involve taxes that are withheld from others and then remitted to the Commission. Examples of "trust" taxes are sales tax and mineral withholding tax. In the instant case Petitioner withheld the tax from their royalty owners and failed to remit the tax to the Commission until they were notified by Respondent and given an assessment.

However, because there were errors made by both parties in this case. It is the opinion of the Commission that responsibility should be shared equally and the penalty should be reduced to %5.

DECISION AND ORDER

Based upon the foregoing, the Tax Commission finds that sufficient cause has been shown which would justify a waiver of 5% of the penalty. The amended assessment of $28,208.75 with the related interest is sustained. It is so ordered.

DATED this _____ day of ____________, 1995.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

W. Val Oveson Roger O. Tew

Chairman Commissioner

Joe B. Pacheco Alice Shearer

Commissioner Commissioner

NOTICE: You have twenty (20) days after the date of a final order to file a Request for Reconsideration with the Commission. If you do not file a Request for Reconsideration with the Commission, you have thirty (30) days after the date of a final order to file a.) a Petition for Judicial Review in the Supreme Court, or b.) a Petition for Judicial Review by trial de novo in district court. (Utah Administrative Rule R861-1A-5(P) and Utah Code Ann. ''59-1-601(1), 63-46b-13 et. seq.)

WVO\wfd\95-0073.ord