99-0697

99-0697 and 99-0792

Income Tax

Signed 8/8/00

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

PETITIONER’S, ) FINDINGS OF FACT,

) CONCLUSIONS OF LAW,

Petitioners ) AND FINAL DECISION

)

v. ) Appeal Nos. 99-0697 & 99-0792

) Account No. #####

AUDITING DIVISION OF )

THE UTAH STATE TAX ) Tax Type: Income Tax

COMMISSION, )

) Judge: Phan

Respondent. )

_____________________________________

Presiding:

Jane Phan, Administrative Law Judge

Appearances:

For Petitioner: Garry DeMott

Larry Felt

For Respondent: Tim Bodily, Assistant Attorney General

Becky McKenzie, Senior Auditor

STATEMENT OF THE CASE

This matter came before the Utah State Tax Commission for a Formal Hearing on June 21, 2000. Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:

FINDINGS OF FACT

1. Petitioners are appealing the assessment of additional income tax, penalty and interest assessed for the tax years 1991, 1994, 1995, 1996, 1997 and 1998. The penalty assessed per year at issue is a $$$$$ penalty pursuant to Utah Code Ann. '59-1-401(7). The amounts of each of the assessments under appeal is listed in the Statutory Notices of Audit Change for each tax year at issue.

2. During the years at issue Petitioners were "resident individuals" for the purposes of Utah Code Ann. '59-10-104, so that their "state taxable income" was subject to Utah individual income tax.

3. During the years at issue Petitioners received business income and some wage income.

4. For the year 1991 Petitioners filed, sometime in 1999, an Amended Utah Individual Income Tax Return on which they reported $$$$ in federal adjusted gross income. Petitioners had attached an amended 1991 U.S. Individual Income Tax Return on which they had deducted $$$$$ as "nontaxable income." Attached to the return was a Nontaxable Income Schedule 1991 1040X which indicated that Petitioners had received $$$$$ in net business income and incurred $$$$$ in rental and capital losses. The form went on to state, "Line 21, Total Nontaxable Income $$$$$." The number $$$$$ is essentially the net business earnings minus the rental and capital losses.

5. Respondent issued the Statutory Notice of Audit Change for the 1991 tax year on August 3, 1999, assessing

additional income tax as well the penalty and interest. The audit assessment was determined using federal adjusted gross income of $$$$$ and determining from that Utah taxable income of $$$$$. Respondent's assessment for this year was based on information provided by the Internal Revenue Service.

6. For the year 1994 Petitioners filed, sometime in 1999, a Utah Individual Income Tax Return on which they reported $$$$$ in federal adjusted gross income. Petitioners had attached an amended 1994 U.S. Individual Income Tax Return on which they had deducted $$$$$ as "nontaxable income." Attached to the return was a Nontaxable Income Schedule 1994 1040 which indicated that Petitioners had received $$$$$ in net business earnings as well as wage and interest income. The number $$$$$ claimed as nontaxable income was essentially the sum of the net business income and all other income listed on the Schedule.

7. Respondent issued the Statutory Notice of Audit Change for the 1994 tax year on May 28, 1999, assessing additional income tax, penalty and interest. The audit assessment was determined using federal adjusted gross income of $$$$$ and determining from that Utah taxable income of $$$$$.

8. For the year 1995 Petitioners filed, sometime in 1999, an amended Utah Individual Income Tax Return on which they reported $$$$$ in federal adjusted gross income. Petitioners had attached a 1995 U.S. Individual Income Tax Return on which they had deducted $$$$$ as "nontaxable income." Attached to the return was a Nontaxable Income Schedule 1995 1040 which indicated that Petitioners had received $$$$$ in net business earnings as well as wage and interest income. Again the amount claimed as "nontaxable income" was essentially the same amount as the total of all income earned that year.

9. Respondent issued the Statutory Notice of Audit Change for the 1995 tax year on August 16, 1999, assessing additional income tax, penalty and interest. The audit assessment was determined using federal adjusted gross income of $$$$$ and determining from that Utah taxable income of $$$$$.

10. For the year 1996 Petitioners filed, sometime in 1999, a Utah Individual Income Tax Return on which they reported $$$$$ in federal adjusted gross income. Petitioners had attached a 1996 U.S. Individual Income Tax Return on which they had deducted $$$$$ as "nontaxable income." Attached to the return was a Nontaxable Income Schedule 19961040 which indicated that Petitioners had received $$$$$ in net business earnings as well as other income. Again the amount claimed as nontaxable income was essentially the same amount as the total of all income earned that year.

11. Respondent issued the Statutory Notice of Audit Change for the 1996 tax year on August 3, 1999, assessing additional income tax, penalty and interest. The audit assessment was determined using federal adjusted gross income of $$$$$ and determining from that Utah taxable income of $$$$$.

12. For the year 1997 Petitioners filed, sometime in 1999, a Utah Individual Income Tax Return on which they reported $$$$$ in federal adjusted gross income. Petitioners had attached an unsigned copy of their 1997 U.S. Individual Income Tax Return on which they had deducted $$$$$ as "nontaxable income." Attached to the return was a Nontaxable Income Schedule 1997 1040 which indicated that Petitioners had received $$$$$ in net business earnings. Again they claimed that the full $$$$$ of income earned that year was "Nontaxable Income."

13. Respondent issued the Statutory Notice of Audit Change for the 1997 tax year on August 3, 1999, assessing additional income tax, penalty and interest. The audit assessment was determined using federal adjusted gross income of $$$$$ and determining from that Utah taxable income of $$$$$.

14. For the year 1998 Petitioners filed, on or around April 14, 1999, a Utah Individual Income Tax Return on which they reported $$$$$ in federal adjusted gross income. Petitioners had attached an unsigned copy of their 1998 U.S. Individual Income Tax Return on which they had deducted $$$$$ as "nontaxable income." Attached to the return was a Nontaxable Income Schedule 1998 1040 which indicated that Petitioners had received $$$$$ in net business earnings as well as some other income. Again the claimed "nontaxable income" was the full amount of the income that Petitioners indicated they had earned that year on the Schedule.

15. Respondent issued the Statutory Notice of Audit Change for the 1998 tax year on September 2, 1999, assessing additional income tax, penalty and interest. The audit assessment was determined using federal adjusted gross income of $$$$$.

16. The Commission has accepted as timely filed Petitioners' appeals for the years at issue.

17. The filing of the original and amended Utah individual income tax returns such as the ones filed by Petitioners for the years 1991 and 1994 through 1998 require review by the Processing Division of the Tax Commission so that they do not issue a refund based on the erroneous return, and additional attention from the Auditing Division which must perform an audit to correct the returns to reflect the true amount of state taxable income and state tax liability. Additional time is spent by Tax Commission employees to provide the administrative appeal process. The amount of state taxable income claimed on the Utah individual income tax returns for the years at issue was substantially incorrect. The correct amount of taxable income was available from the information contained on the federal income tax return and its attachments.

APPLICABLE LAW

The state of Utah imposes income tax on individuals who are residents of the state, 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...

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

"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 26 U.S.C. 63 as:

Except as provided in subsection (b), for purposes of this subtitle, the term Ataxable 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 26 U.S.C. 61(a) as:

Except as otherwise provided 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 $$$$$ penalty is necessary in 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.

The Utah Legislature has specifically provided that the taxpayer bear the burden of proof in proceedings before the Tax Commission. Utah Code Ann. '59-10-543 provides the following:

In any proceeding before the commission under this chapter, the burden of proof shall be upon the petitioner except for the following issues, as to which the burden of proof shall be upon the commission:

(1) whether the petitioner has been guilty of fraud with intent to evade tax;

(2) whether the petitioner is liable as the transferee of property of a taxpayer, but not to show that the taxpayer was liable for the tax; and

(3)whether the petitioner is liable for any increase in a deficiency where such increase is asserted initially after a notice of deficiency was mailed . . .

CONCLUSIONS OF LAW

1. Petitioners were Utah residents throughout the tax years at issue and are liable for income tax on their state taxable income. Utah Code Ann. '59-10-104.

3. There is no basis in federal law, the Internal Revenue Code, or case law for the "nontaxable income" deduction taken by Petitioners for each of the years at issue. Therefore Respondent's denial of the deduction is appropriate. Petitioners' interpretation of the Internal Revenue Code is clearly erroneous and without merit. The Commission points out to Petitioners that "state taxable income" is defined statutorily as "federal taxable income" with certain modifications and adjustments and "federal taxable income," for state income tax purposes, is taxable income as defined in Section 63 of the Internal Revenue Code. Utah Code Ann. '59-10-111.

4. Respondent's audit assessments of additional tax and interest based on Petitioner's corrected taxable income is appropriate, based on the best evidence available and the statutory definition of state taxable income. Utah Code Ann.'59-10-112; Utah Code Ann. '59-10-111; 26 U.S.C. 63; 26 U.S.C. 61(a). Petitioners have not met their burden of proof in this matter. Utah Code Ann. '59-10-543.

5. The returns filed by Petitioners for the periods at issue were clearly erroneous and were filed in furtherance of a frivolous position. Petitioners' returns claimed refunds for which Petitioners were not entitled. Petitioners' actions were intentional. They ignored what is common knowledge and followed a novel theory that has no support in either case law or the statutes. Their actions impeded the administration of the tax laws. For these reasons the $$$$$ penalty assessed pursuant to Utah Code Ann. '59-1-401(7) is appropriate.

DECISION AND ORDER

Based upon the foregoing, the Tax Commission affirms the audit assessment of additioanl income tax, $500 penalty and interest for the tax years 1991, 1994, 1995, 1996, 1997 and 1998. It is so ordered.

DATED this 8^th day of August, 2000.

_____________________

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 8^th day of August, 2000.

Pam Hendrickson R. Bruce Johnson

Commission Chair Commissioner

Palmer DePaulis Marc B. Johnson

Commissioner Commissioner

[1]See United States v. Koliboski, 732 F.2d 1328 (7th Cir. 1984). The court stated Athe 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), AIt 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.@

[2]See the Utah Supreme Court decisions in Nelson v. Auditing Div., 903 P.2d 939 (Utah 1995) and Jensen v. State Tax Commission, 835 P.2d 965(Utah 1992).

[3]See also United States v. Mann, 884 F.2d 532 (10th Cir. 1989). In that case, Mann offered many theories as to why he was not required to file income tax returns. The court stated, AHis 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 Aperson@ 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, AThe government=s expert on tax law, Mr. Chancellor, testified that the representation . . . 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 trial, falls somewhere on a continuum between untrue and absurd.@