96-0856

CORPORATE FRANCHISE

SIGNED 10/28/97

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

COMPANY A, )

:

Petitioner, ) ORDER

:

v. ) Appeal No. 96-0856

:

AUDITING DIVISION OF THE ) Account No. #####

UTAH STATE TAX COMMISSION, :

STATE OF UTAH, )

Respondent. : Tax Type: Corporate Franchise

_____________________________________

STATEMENT OF CASE

This matter came before the Utah State Tax Commission for an Initial Hearing pursuant to the provisions of Utah Code Ann. '59-1-502.5, on February 24, 1997. Gail S. Reich, Administrative Law Judge, heard the matter for and on behalf of the Commission. Present and representing Petitioner was PETITIONERS REP., CPA. Present and representing Respondent was Mark Wainwright of the Attorney General=s Office.

ANALYSIS

COMPANY A is a corporation which was organized on May 9, 1989, under the laws of the State of Utah, and is an AS Corporation@ as defined in Section 1361 of the Internal Revenue Code. Throughout the audit period in issue, January 1, 1992 through December 31, 1994, COMPANY A had six shareholders, four of whom resided in the State of Utah and two of whom were non-residents. COMPANY A never qualified or registered to do business in any state other than Utah and never conducted business in any other state. Prior to March of 1993, COMPANY A=s main activities were connected with the construction and operation of a solid waste landfill facility located in the city of CITY, COUNTY, Utah. During March of 1993, COMPANY A sold substantially all of its assets to COMPANY B. for the following consideration: cash of $$$$$; two Promissory Notes in the aggregate principal amount of $$$$$ payable in four annual installments of $$$$$ principal plus interest with the final payment to be made in March 1997; assumption of substantially all of the liabilities of COMPANY A; and contingent payments based upon the future revenues of the purchaser.

COMPANY A accounted for the gain on the sale of the assets under the installment method of accounting for federal tax purposes. Following the sale of its assets, COMPANY A=s only activity has been the receipt of payments under the installment contract and activities associated with such receipt of payment. The parties stipulate that the installment gained reported from the sale of the assets is Abusiness income@ which should be apportioned under the provisions of Utah Code Ann. '59-7-303 and that all Abusiness income@ of COMPANY A should be apportioned 100% to the State of Utah. The sole issue of disagreement between COMPANY A and the Auditing Division concerns the proper treatment of interest income received by COMPANY A in 1994 in connection with the Promissory Notes received on the sale of the assets. On its 1994 Utah Tax Return, COMPANY A did not allocate or apportion to Utah any of the non-resident shareholder=s portion of its interest income received in connection with the Promissory Notes. According to COMPANY A, the interest income from the Promissory Notes held by COMPANY A should be treated as non-business income and allocated to the state of residency of the resident and non-resident shareholders.

The Auditing Division has treated COMPANY A=s 1994 interest income as being apportionable or allocable to Utah in its entirety. Such income has been reduced in the audit by the percentage of ownership attributable to resident shareholders as provided in Utah Code Ann. '59-7-703(1)(a)(iii), as it refers to AS Corporations@. (COMPANY A and the Auditing Division have agreed to the amended audit adjustments for calendar years 1992 and 1993.)

Not only have the parties stipulated to the fact that COMPANY A never qualified or registered to do business in any state other than Utah and never conducted business in any other state, the parties have further stipulated that the underlying sale constitutes business income. The Promissory Notes executed in furtherance of the sale are between the purchaser and COMPANY A (formerly named COMPANY B).

The Commission finds no merit in Petitioner=s argument that the interest generated from the sale constitutes non-business income. Petitioner has conceded that the sale constitutes business income. As a matter of simple logic, all of the proceeds of that sale, including principal and interest, bear the same characterization.

DECISION AND ORDER

Based upon the forgoing, the Tax Commission finds in favor of Respondent and upholds the treatment of COMPANY A=s 1994 interest income as set forth in the audit.

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 28 day of OCTOBER, 1997.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

W. Val Oveson Richard B. McKeown

Chairman Commissioner

Joe B. Pacheco Alice Shearer

Commissioner Commissioner

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