Challenging the Utah State Tax Commission

TAX ISSUES

BEATING THE UTAH STATE TAX COMMISSION IN THE GAME OF DOUBLE TAXATION

BY BARBARA M. SMITH, CPA, CIRA, CDBV, CFF

With the large number of individuals moving in and out of Utah in recent years, the issue of domicile has risen to a level of high priority for CPAs and their clients. Domicile has profound legal implications on taxpayers. As outlined in Oklahoma Tax Comm’n v. Chickasaw Nation, the state where an individual is domiciled has much broader authority to tax the income of that individual than other states. There is a “well-established principle of interest … taxation … that a [state] may tax all the income of its residents, even income earned outside the taxing jurisdiction.”1

The Utah State Legislature passed a domicile statute in 2011 that requires mandatory domicile in Utah if2

• Children claimed by taxpayers as dependents are in

Utah public schools.

• The taxpayer claims a primary residence property tax exemption on a home.

• The taxpayer is registered to vote in Utah.

These issues create what the Utah State Tax Commission (USTC) call a rebuttable presumption of domicile. Where a taxpayer and their CPA determine that the taxpayer is domiciled outside of Utah, the USTC has a pattern of issuing audit assessments to taxpayers, reversing the domicile reported on the return based on property tax or voter registration records. Although Section 59-10136(2)(a) provides guidelines for establishing a rebuttable resumption of domicile, the USTC typically does not allow the taxpayer to properly apply the statute. This causes nightmares for taxpayers who file part-year returns in Utah and another state for the year they move in or out of the great state of Utah.

As stated in an amicus brief prepared by the UACPA in an appeal before the Supreme Court in a domicile case, this has resulted in a trap for the unwary in which many taxpayers have fallen. The statute in Subsection 5910-136(2)(a) provides that any and all facts are to be allowed to rebut a presumption of Utah domicile. The statute specifically provides that “domicile” is rebuttable. Subsection 59-10-136(3)(b) indicates that the standard for evaluating domicile is a preponderance of the evidence. And the Utah Supreme Court has ruled, “a preponderance of the evidence is the level of proof required in the typical civil case where only money damages are at stake.”3

When arguing issues of domicile, taxpayers and CPAs must require the USTC to consider all relevant evidence. Rule 401 of the Utah Rules of Evidence provides evidence is relevant if (a) it has any tendency to make a fact more or less probable than it would be without the evidence; and (b)

the fact is of consequence in determining the action.

And Rule 403 (Excluding Relevant Evidence for Prejudice, Confusion, Waste of Time, or Other Reasons) states

“The Court may exclude relevant evidence if its probative value is substantially outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence.

The Legislature has identified 12 factors to help determine relevant evidence for determining domicile in Subsection 59-10-136(3)(b). When considering domicile issues, the taxpayer and CPA should examine the factors listed below and request that the USTC consider the preponderance of the evidence in light of all the facts and circumstances.

1.Whether the individual or individual’s spouse has a driver license in the state

2.Whether a dependent claimed on the federal tax return is a student in an institute of higher education

3.The nature and quality of the living accommodations of the individual or their spouse in Utah as compared to another state

4.The presence in Utah of a spouse or dependent claimed on a federal tax return

5.The physical location in which the earned income is earned

6.Whether the individual or their spouse is a member of a church, club, or similar organization in Utah

7.Whether the individual or their spouse lists an address in Utah for mailing with a government organization or other relevant entity

8.Whether the individual or their spouse asserts residence in Utah on a document other than a tax return filed with a governmental agency (e.g., business licenses, etc.)

9.The failure of an individual or their spouse to get a license or permit required to have domicile (i.e. driver licenses, etc.) 10. Whether the individual registers their children in

Utah schools

11. Whether the individual maintains a place of abode in the state and spends in the aggregate 183 or more dates in the state

12. Whether the individual or their spouse votes or has registered to vote in another state

The above factors can be applied to prove that a taxpayer is domiciled in Utah, and conversely, that a taxpayer is NOT domiciled in Utah, therefore, not subject to taxation on out-of-state wages by the USTC. For example, a client that moved out of state on December 30, 2011, and then returned to Utah on June 30, 2012, should not be taxed on out-of-state wages on the part-year Utah return filed for July 1, 2012, through December 31, 2012. In the current example, the client

• obtained an out-of-state driver license

• acquired out-of-state professional licenses

• enrolled their children in out-of-state schools for

January through June 2012

• sold their Utah home and purchased a home in a state outside Utah, paying out-of-state property taxes on the newly purchased home

• sold the newly purchased home in July 2012 and purchased a different home in Utah in September 2012

• moved their church records to the new state outside

Utah

• changed their mailing address to the new address

But they did not register to vote in the new state. The spouse was a conscientious non-voter and the husband had not voted in the last two elections. Based on the failure to register to vote in the new state, the USTC determined that the wages earned from January through June 2012 should be reported as taxable on the Utah return for 2012.

When contesting the audit, the original decision was made in favor of the USTC. While acknowledging that

the taxpayers lived and worked in the new state, obtained driver licenses and professional licenses, and enrolled their children in the new state’s schools, the USTC ruled that the taxpayers were domiciled in Utah for the full year. The initial ruling by the USTC was based on the failure of the taxpayer to register to vote upon arrival in the new state. The USTC refused to consider the children’s attendance at out-of-state schools as relevant.

Upon appeal, it was argued that the USTC must consider all of the factors that existed to prove that the taxpayers had created domicile in another state. The USTC had requested the taxpayers to respond to a domicile survey, and in response to the survey, documentation had been provided to the USTC evidencing that indeed, a majority of the factors supported domicile out of state.4

To allow the USTC to ignore use of all the facts and evidence is prejudicial. Such action denies taxpayers a fair consideration of the preponderance of the evidence. Subsection 59-10-136(3) indicates that the 12 factors are to be used “if the requirements of Subsection (1) or (2) are not met for an individual to be considered to have domicile in this state.” Subsection (1) deals with whether a taxpayer has a child enrolled in a public kindergarten, public elementary school, or public secondary school, or if the individual or their spouse is a resident student. Subsection (2) indicates that a person is domiciled in Utah if the individual votes in Utah and has not registered to vote in another state, or the individual asserts residency in Utah for purposes of filing an individual income tax return and asserts that they are a part-year resident.5 As stated by Commissioner Lawrence C. Walters,

The Legislature used the ‘if’ not ‘only if’. The Commission must consider that the Legislature framed this language with care. Thus, while the 12 factors are to be used if the requirements of Subsections (1) and (2) are not met, the plain language of the statute does not preclude their inclusion in a rebuttal of any presumption created under Subsection (2). The Commission must consider all of the relevant facts with particular weight on factors listed in Subsections (1) and (2), in considering any attempt to rebut a Subsection (2) presumption.6

As a society, we live in an era where mobility between states is common. Individuals work for companies that transfer them to a new location with the stroke of few keys on the computer. A person may work in two or three states within a year. If other states applied domicile laws in the same manner as Utah, taxpayers would be caught in an endless web of multiple states declaring domicile over them for individual income tax purposes. By forcing the USTC to properly apply the statute according to its language, those who live in Utah, send their children to Utah school and benefit from Utah taxes will be properly taxed in Utah. At the same time, those who clearly do not live in Utah will not have their income improperly clawed into Utah based on all the facts and circumstances, or simply because they chose not to register to vote after having once lived in Utah and voted there!

So as CPAs preparing returns for individuals who are mobile or moving in or out of Utah, make sure that you obtain the necessary documentation to substantiate the residency of your client. Obtain the documents that will later be requested in a domicile survey by the USTC. Do not be afraid to file that part-year return, but be prepared to defend your decision before the USTC. n

1 Oklahoma Tax Comm’n v. Chickasaw Nation, 515 U.S. 450,463, 115 S. Ct. 2214 (1995) 2 UC§59-10-136 3 Egbert v. Nissan North America, Inc., 2007 UT 64, ¶12 4 It should be noted that a decision on the secondary appeal has not yet been rendered. 5 Beware of relying solely on this section as the USTC often does not allow the taxpayer to use the filing of a part-year return in Utah and another state to avoid clawing income from the other state back into Utah for taxation. 6 Appeal 19-1074, Murray, Petitioners v. Auditing Division of the Utah State Tax Commission, Dissent by Commissioner Lawrence C. Walters

Barbara M. Smith, CPA, has her own firm where she specializes in tax, bankruptcy and fraud accounting. She has worked at Neilsen Elggren and Durkin and PricewaterhouseCoopers. She graduated from the University of Utah with a Master of Accounting and is also has a Certified Insolvency Restructuring Accountant (CIRA), Certified Financial Forensics (CFF), and Certified Distressed Business Valuation (CDBV).

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