98-1299

Income Tax

Signed 4/27/99

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

PETITIONER, :

: ORDER

Petitioner, :

: Appeal No. 98-1299

v. : Account No. #####

:

AUDITING DIVISION OF : Tax Type: Income Tax

THE UTAH STATE TAX )

COMMISSION, : Judge: Phan

:

Respondent. :

_____________________________________

Presiding:

Jane Phan, Administrative Law Judge

Appearances:

For Petitioner:

For Respondent: Tim Bodily, Assistant Attorney General

Brent Taylor, Manager, Income Tax Auditing

STATEMENT OF THE 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 March 18, 1999.

Petitioner is appealing the assessment of Utah individual income tax, penalty and interest made against him for the 1997 tax year. Respondent has determined that the amount of income tax owed by Petitioner for 1997 was $$$$$. Respondent has allowed a credit of $$$$$ for the withholding that was paid to the state. The result is total addition tax due of $$$$$, with $$$$$ in interest calculated to the date of the assessment. A $500 penalty was assessed pursuant to Utah Code Ann. §59-1-401(7).

During 1997 Petitioner received $$$$$ in income from wages. His employers had remitted withholding on the income to the Utah Tax Commission in the amount of $$$$$. However, Petitioner did not include the income from wages on his Utah individual income tax return for 1997. Instead, Petitioner claimed only $$$$$ in taxable income on his return which was apparently interest income earned during the year and Petitioner requested a refund of the full withholding amount.

Petitioner explained his rationale for failing to claim his wage income on his Utah tax return for 1997, asserting that the income tax was an excise tax, that he was not a "taxpayer," that his occupation was not among those subject to federal excise taxes, that tax liability was somehow based on whether someone signs a W-4 or a tax return.

The Commission finds Petitioner's arguments to be completely and utterly without merit. State and federal individual income taxes have clearly been upheld by the courts and the courts have addressed arguments similar to those made by the Petitioner.[i]¹ Petitioner has apparently done some research into these positions and cites a number of cases. However, none of the cases that he cites deal directly and specifically with the real issue presented in this appeal, whether the state or federal government can assess a tax against the wages of its citizens. Why Petitioner has chosen this approach of relying on cases which are not on point or taking language out of context is unclear when there are many cases that deal directly and specifically with this issue and the courts when looking at this issue have unanimously upheld the income tax.[ii]²

Respondent's representative pointed out that in support of these frivolous positions Petitioner filed a return that failed to contain information from which the correct liability could be determined and clearly indicated an incorrect liability. Because of this Tax Commission employees had to take the time to obtain the correct income information from the Internal Revenue Service and prepare and issue an assessment against Petitioner. For this reason Petitioner's actions impeded the administration of the tax laws and Respondent asked that the penalty be upheld. Respondent's representatives explained that Petitioner knew the correct way to prepare a tax return as he had filed one in 1996. Petitioner did not prepare the incorrect 1997 return by accident, it was done specifically with intent. He researched, although poorly, his position. He erroneously came to the conclusion that his wages were not subject to income tax liability and he with intent excluded his wages from the return and requested a refund of his withholding.

APPLICABLE LAW

The state of Utah imposes income tax in Utah Code Ann. §59-10-104 as follows:

. . . a tax is imposed on the state taxable income, as defined in Section 59-10-112, of every resident individual as follows: . . .

State taxable income is defined in Utah Code Ann. §59-10-112 as:

"State taxable income" in the case of a resident individual means his federal taxable income (as defined by Section 59-10-111) with the modifications, subtractions, and adjustments provided in Section 59-10-114 . . .

Federal taxable income is defined in Utah Code Ann. §59-10-111 as follows:

"Federal taxable income" means taxable income as currently defined in Section 63, Internal Revenue Code of 1986.

Taxable income is defined in the Internal Revenue Code at 23 USC 63 as:

Except as provided in subsection (b), for purposes of this subtitle, the term "taxable income" means gross income minus the deductions allowed by this chapter (other than the standard deduction).

Gross income is defined in the Internal Revenue Code at 23 USC 61(a) as:

Except as otherwise proved in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

(1) Compensation for services, including fees, commissions, fringe benefits and similar items; . . .

The Utah Legislature has determined that a $500 penalty is necessary under the following circumstances as set out in Utah Code Ann. §59-1-401(7):

If any taxpayer, in furtherance of a frivolous position has a prima facie intent to delay or impede administration of the tax law and files a purported return that fails to contain information from which the correctness of reported tax liability can be determined or that clearly indicates that the tax liability shown must be substantially incorrect, the penalty is $500.

DECISION AND ORDER

Petitioner's arguments supporting his assertion that he had no Utah tax liability on his wages are without merit. Petitioner's position is frivolous as the courts have clearly upheld the assessment of individual income tax on wage income. Petitioner filed a return that was clearly substantially incorrect. Petitioner did so with intent and his actions impeded the administration of the tax laws.

Based on the foregoing, the Commission sustains the assessment of tax, $500 penalty and interest against Petitioner for the 1997 tax year.

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 appeal rights in this matter.

DATED this 27TH day of April, 1999.

____________________________________

Jane Phan

Administrative Law Judge

BY ORDER OF THE UTAH STATE TAX COMMISSION.

The Commission has reviewed this case and the undersigned concur in this decision.

DATED this 27th day of April, 1999.

Richard B. McKeown

Chairman

Pam Hendrickson R. Bruce Johnson

Commissioner Commissioner

^^

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[i] ¹See United States v. Koliboski, 732 F.2d 1328, 1329(7th Cir. 1984), "the defendant’s entire case at trial rested on his claim that he in good faith believed that wages are not income for taxation purposes. Whatever his mental state, he, of course, was wrong, as all of us already are aware. Nonetheless, the defendant still insists that no case holds that wages are income. Let us now put that to rest: WAGES ARE INCOME."

See also Granzow v. C.I.R., 739 F.2d 265, 267(7th Cir. 1984),”It is well settled that wages received by taxpayers constitute gross income within the meaning of section 61(a) of the Internal Revenue Code . . . and that such gross income is subject to taxation." The court in Granzow cited a number of decisions from several other circuits.

See United States v. Mann, 884 F.2d 532 (10th Cir. 1989). In Mann the appellant offered many theories as to why he was not required to file income tax returns. The court stated, "His many theories include the asserted beliefs that 1) the United States Supreme Court has declared that the sixteenth amendment applies only to corporations, 2) the Internal Revenue Service (IRS) has no jurisdiction over him, 3) he is not a "person" within the meaning of 26 I.R.C. §7203, 4)wages are not income, 5)federal reserve notes are not legal tender, and 6) the income tax is voluntary." The court in Mann responded to these assertions as follows, "The government's expert on tax law, Mr. Chancellor, testified that the representation . . . that the Supreme Court has declared that the sixteenth amendment applies only to corporations -- is untrue . . . We agree and add that each of the views offered by Mann, whether found in his published materials or articulated additionally at trail, falls somewhere on a continuum between untrue and absurd."

[ii] ²In addition to the cases listed above, see Nelson v. Auditing Div., 903 p.2d 939 Utah 1995). In Nelson the Utah Supreme Court stated, “Like most Utah residents, Nelson has a duty to file tax returns and pay state income taxes as they come due.” In that case the Utah Supreme Court upheld the assessment of Utah income tax as well as penalties and interest.