99-0738

INCOME TAX

Signed 8/8/00

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

PETITIONER, ) FINDINGS OF FACT,

) CONCLUSIONS OF LAW,

Petitioner, ) AND FINAL DECISION

)

v. ) Appeal Nos. 99-0738 & 99-0784

) 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: PETITIONER REP

PETITIONER

For Respondent: Tim Bodily, Assistant Attorney General

Becky McKenzie, Senior Auditor

Ryan Bradshaw, Auditor

STATEMENT OF THE CASE

This matter came before the Utah State Tax Commission for a Formal Hearing on June 20, 2000. Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:

FINDINGS OF FACT

1. Petitioner is appealing Respondent's assessment of additional income tax, penalties and interest for the tax years 1995, 1996, 1997 and 1998. The penalty assessed is a $500 penalty for each tax year at issue pursuant to Utah Code Ann. '59-1-401(7).

2. During the tax years 1995 through 1998 Petitioner was a "resident individual" for the purposes of Utah Code Ann. '59-10-104, so that his "state taxable income" was subject to Utah individual income tax. The amount of the assessments at issue are indicated on the Statutory Notices of Audit Change for each tax year at issue.

3. During 1995 through 1998 Petitioner received business income and income from a pension distribution. Petitioner claimed this income on the original returns he had filed for each of the years in question.

4. For the year 1995 Petitioner originally filed a Utah Individual Income Tax Return on which he reported $$$$$ in federal adjusted gross income. Later, in 1999, Petitioner filed an amended 1995 Utah Individual Income Tax Return on which he reported $$$$$ in federal adjusted gross income. Petitioner had attached an amended 1995 U.S. Individual Income Tax Return on which he indicated a deduction of $$$$$ as "nontaxable income."

5. Respondent issued the Statutory Notice of Audit Change for the 1995 tax year on May 28, 1999, assessing additional income tax of $$$$$ as well as interest and a penalty of $500.

6. For the year 1996 Petitioner originally filed a Utah Individual Income Tax Return on which he reported $$$$$ in federal adjusted gross income. Later, in 1999, Petitioner filed an amended 1996 Utah Individual Income Tax Return on which he reported $$$$$ in federal adjusted gross income. Petitioner had attached an amended 1996 federal income tax return on which he indicated a deduction of $$$$$ as "nontaxable income."

7. Respondent issued the Statutory Notice of Audit Change for the 1996 tax year on August 6, 1999, assessing additional income tax of $$$$$ as well as interest and a penalty of $500.

8. For the year 1997 Petitioner originally filed a Utah Individual Income Tax Return on which he reported $$$$$ in federal adjusted gross income. Later, in 1999, Petitioner filed an amended 1997 Utah Individual Income Tax Return on which he reported $$$$$ in federal adjusted gross income. Petitioner had attached an amended 1997 federal income tax return on which he indicated a deduction of $$$$$ as "nontaxable income."

9. Respondent issued the Statutory Notice of Audit Change for the 1997 tax year on August 6, 1999, assessing additional income tax of $$$$$ as well as interest and a penalty of $500.

10. For the year 1998 Petitioner filed his original Utah individual income tax return on which he reported $$$$$ in federal adjusted gross income. Petitioner had attached a 1998 U.S. Individual Income Tax Return on which he indicated a deduction of $$$$$ as "nontaxable income." The Nontaxable Income Schedule 1998 1040 which was attached to the federal return indicated that Petitioner had received personal contract interest income of $$$$$, Dividend income of $$$$$, net business earnings of $$$$$ and a pension distribution of $$$$$. On the schedule Petitioner subtracted out a $$$$$ capital loss and indicated that $$$$$of his gross income was "nontaxable income."

11. Respondent issued the Statutory Notice of Audit Change for the 1997 tax year on August 6, 1999, assessing additional income tax of $$$$$ as well as interest and a penalty of $500. The Respondent based its calculation on $$$$$ in federal adjusted gross income and determined from that amount that Petitioner had received $$$$$ in Utah taxable income during 1998.

12. The Commission has accepted as timely Petitioner's appeal of the tax years at issue, 1995 through 1998.

13. The filing of the amended Utah individual income tax returns such as the ones filed by Petitioner for tax years 1995 through 1997 and the original return filed for 1998 requires review by the Processing Division of the Tax Commission so that they do not issue a refund based on the erroneous return was well as additional attention from the Auditing Division. The Auditing Division is required to 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 amended Utah individual income tax returns for 1995 through 1997 and the original return for 1998 was substantially incorrect. The correct amount of federal taxable income was available from the information contained on the original returns for 1995 through 1997 and the information submitted with the federal income tax returns for each of the years at issue.

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 $500 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 was a Utah resident throughout the tax years 1995 through 1998 and is liable for income tax on his state taxable income. Utah Code Ann. '59-10-104.

3. Petitioner is not entitled to take the "nontaxable" income deductions which he claimed on his amended U.S. Individual Income Tax Returns for the tax years 1995 through 1997 and his original federal income tax return for 1998. Petitioner presented a theory and explained his interpretation of the federal law and Internal Revenue Code as to why he felt this deduction was available to him. However, Petitioner's interpretation is clearly erroneous and there is no support in federal law, the Internal Revenue Code, or case law for his theory. The Commission points out to Petitioner that "state taxable income" is defined statutorily as "federal taxable income" with certain modifications and adjustments. Utah Code Ann. '59-10-112. "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. The assessments of additional tax and interest made by Respondent and set out in the Statutory Notices of Audit Change are appropriate, based on the best evidence available to Respondent 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).

5. After filing returns which more closely followed Utah individual income tax law, in furtherance of a frivolous position, Petitioner filed clearly erroneous amended returns for the years 1995 through 1997, claiming refunds for which he was not entitled. For the tax year 1998 he filed only the erroneous return. Petitioner's actions were intentional. He ignored common knowledge and his past experience of filing and paying income tax returns and followed a novel theory that has no support in either case law or the statutes. His actions impeded the administration of the tax laws. For these reasons the $500 penalty assessed pursuant to Utah Code Ann. '59-1-401(7) is appropriate for each of the years at issue.

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 1995 through 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 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).

[2]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.@