Jacobsen Inv. Co. v. State Tax Com'n of Utah

• Decision Date: 11 June 1992
• Docket Number: No. 900104,900104
• Citation: 839 P.2d 789
• Parties: JACOBSEN INVESTMENT COMPANY, Petitioner, v. STATE TAX COMMISSION OF UTAH, Respondent.
• Court: Utah Supreme Court

Page 789

839 P.2d 789

JACOBSEN INVESTMENT COMPANY, Petitioner, v. STATE TAX COMMISSION OF UTAH, Respondent.

No. 900104.

Supreme Court of Utah.

June 11, 1992.

R. Paul Van Dam, Leon A. Dever, Salt Lake City, for State Tax Com'n.

Gerald T. Snow, Salt Lake City, for Jacobsen Inv. Co.

STEWART, Justice:

The petitioner seeks reversal of a Utah State Tax Commission order affirming a corporate franchise tax deficiency assessment in the amount of $67,352. We affirm.

The State of Utah imposes a franchise tax on corporations for the privilege of doing business in Utah. Through the year 1972, Utah law required corporations to prepay this tax at the beginning of each taxable year. A corporation would pay the franchise tax based on the income received during the past year in return for the privilege of exercising its corporate franchise during the next year. When a corporation dissolved and therefore no longer needed a corporate franchise, it was not required to file a return or pay tax on income for the year of dissolution. This prepaid franchise tax scheme was amended by the Legislature in 1973 to require that corporations pay franchise taxes in arrears, that is, the tax was due at the end of each business year and was based on the income received during that year.

However, in amending the franchise tax scheme the legislature grandfathered the prepaid tax rule for all businesses incorporated prior to January 1, 1973, which remained in good standing thereafter. Qualifying corporations were not charged a franchise tax on income received during the year of dissolution: "A corporation incorporated or qualified to do business in this state prior to January 1, 1973, is not liable for filing a return or paying tax measured by income for the taxable year in which it legally terminates its existence." Utah Code Ann. § 59-7-123(5); see also Utah Admin.R. R865-6-1F.

Petitioner Jacobsen was incorporated under Utah law prior to January 1, 1973, and remained in good standing until November 25, 1986, at which time its corporate existence was legally terminated. Jacobsen was therefore eligible for treatment under the prepaid franchise tax rule as set forth by § 59-7-123(5). Consequently, Jacobsen paid its 1986 franchise tax based on its 1985 tax year income. As provided by § 59-7-123(5), Jacobsen was not required to file a return for 1986, and no tax has been assessed for that year.

In previous years, Jacobsen had elected to defer certain installment income, as permitted by Utah Code Ann. § 59-7-119. Jacobsen reported income from these transactions as the payments were received.

The Auditing Division of the Commission assessed a tax deficiency against Jacobsen for its 1985 tax year based on the deferred income from installment sales transactions remaining unreported as of November 30, 1985, the close of Jacobsen's 1985 fiscal year. The Commission affirmed the deficiency, primarily relying on Utah Administrative Rule R865-6-15F ("Rule 15"), which provides that when a taxpayer is no longer subject to franchise tax, unreported deferred income must be included in the return for the last year for which the taxpayer was subject to the tax.

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