SC Administrative Law Court Decisions

This is a contested case hearing concerning proposed assessments for income taxes issued by the Respondent (Department) to the Petitioner (taxpayer). After notice of the date, time, place, and nature of the hearing was given to all parties, the matter came before the Court on March 29, 2007. Present at the hearing were the taxpayer and Ronald W. Urban, Attorney for Department.

PROCEDURAL HISTORY

The taxpayer failed to file or pay South Carolina income taxes for the 1999, 2000, and 2001 tax years. As a result, the Department issued the taxpayer proposed assessments for such years based on information it received from the Internal Revenue Service (IRS). The taxpayer timely appealed the proposed assessments. On September 19, 2006, the Department sent the taxpayer a Department Determination upholding its proposed assessments. Thereafter, on October 12, 2006, the taxpayer requested a contested case hearing before the Administrative Law Court.

ISSUES

1. Does the South Carolina General Assembly have the authority to enact legislation imposing a tax on income?

2. Does the Department have the authority to issue Department Determinations?

3. Does biblical scripture limit South Carolina’s taxing authority?

4. Is the taxpayer exempt from income taxes?

FINDINGS OF FACT

Based on the testimony and evidence offered at the hearing, and taking into consideration the burden of persuasion and the creditability of the witnesses, I make the following findings of fact by a preponderance of evidence:

1. Each year, any entity or person making a payment of W-2 or 1099 income to an individual must report such to the IRS. The IRS provides the Department this information relative to South Carolina residents by means of a magnetic tape. The Department uses this information to identify and assess residents who earned income but failed to file or pay South Carolina income taxes.

2. The taxpayer is a resident of South Carolina. Although employed by Denmark-Olar School District Two, he failed to file South Carolina income tax returns for tax years 1999, 2000, and 2001.

3. The Department received information from the IRS that indicated the taxpayer received the following income during the tax years in question:

4. Upon receiving the IRS’s information, the Department calculated the taxpayer’s state tax liability by applying a standard deduction and one exemption to his income. Once this was completed, the Department added penalty and interest and then issued the taxpayer proposed assessments in the following amounts:

5. The taxpayer appealed the proposed assessments whereupon the Department issued a Department Determination upholding its assessments. This resulted in the taxpayer filing his present request for a contested case hearing.

6. On November 7, 2006, the Department served Requests for Admissions on the taxpayer. The requests asked the taxpayer to admit or deny receiving the items of income reported by the IRS to the Department. Although the taxpayer initially denied all the Department’s admissions requests, he later admitted each by letter dated December 13, 2006.

CONCLUSIONS OF LAW

Based upon the Findings of Fact, I conclude the following as a matter of law:

1. This matter is properly before the Court pursuant to S.C. Code Ann. Section 12-60-410 (Supp. 2006) et seq., “General Appeal Procedures.” A taxpayer may appeal a proposed assessment issued by the Department by requesting a contested case hearing before the Administrative Law Court, S.C. Code Ann. Section 12-60-450 (Supp. 2006).

2. The burden of proof is on the party asserting the affirmative in an adjudicatory administrative proceeding. 2 Am. Jur. 2d Administrative Law Section 354 (2004). In the instant appeal, it is the taxpayer who has requested a contested case hearing to challenge the Department’s proposed assessments. Thus, the taxpayer asserts the affirmative and must carry the burden of proving the Department’s proposed assessments are incorrect. Id.; cf. Cloyd v. Mabry, 295 S.C. 86, 367 S.E.2d 171 (1988) (“A taxpayer contesting an assessment has the burden of showing the valuation of the taxing authority is incorrect . . . . Ordinarily, this will be done by proving the actual value of the property . . . . The taxpayer may, however, show by other evidence that the assessing authority’s valuation is incorrect. If he does so, the presumption of correctness is then removed and the taxpayer is entitled to appropriate relief.”). (Citations omitted) Other jurisdictions have reached the same conclusion. See, e.g., In re Broce Const. Co., Inc., 27 Kan. App. 2d 967, 980, 9 P.3d 1281, 1290 (2000) (“[O]ur Supreme Court has long held that ‘the tax found by the tax commission to be due is presumed to be valid [and] the taxpayer has the burden of showing its invalidity.’”). (Citations omitted)

3. The taxpayer has admitted the Department’s Requests for Admissions. It is thus conclusively established that the taxpayer received the income stated by the IRS. See Rule 36(b), SCRCP, (any matter admitted is conclusively established).

A. Issue One

1. S.C. Code Ann. Section 12-6-510(A) (2000) imposes a tax on the South Carolina taxable income of individuals, estates, and certain other entities. Although the taxpayer’s wages and gambling winnings are taxable under this section,[1] the taxpayer nonetheless claims such taxation is improper because the federal constitution does not grant states the power to impose a tax on income.

2. The taxpayer’s argument is incorrect. Prior to the adoption of the federal constitution, all sovereign powers rested with the states. When the constitution came into being, the states surrendered many of these powers to the newly created federal government. All powers not ceded to the federal government, however, remained with the states. 16A Am. Jur. 2d Constitutional Law Section 229, pp. 122-123. As a result, South Carolina’s General Assembly retained plenary power to enact any legislation it deems necessary. The only limitation is that such legislation not violate a specific provision of either the state or federal constitution. Parker v. Bates, 216 S.C. 52, 56 S.E.2d 723 (1949).

3. In view of the foregoing, the question before this Court is not whether there exists constitutional authority for the state to impose a tax on income. Instead, the question is whether there is any constitutional provision prohibiting such tax. This specific question has previously been answered by the Court in State v. Charron, 351 S.C. 319, 569 S.E.2d 388 (Ct. App. 2002). There, the Court again noted the plenary power of the General Assembly, and further held “there is no state or federal constitutional provision prohibiting the South Carolina General Assembly from levying an income tax.”

B. Issue Two

1. The taxpayer argues the Department lacks the authority to issue a Department Determination concerning his tax liability. Like the previous argument, this argument stems from the taxpayer’s belief that there is no provision in the federal constitution allowing for such action by the Department.

2. The taxpayer’s argument must fall for the same reason that his previous argument fell. The Department issued the taxpayer a Department Determination pursuant to its authority under S.C. Code Ann. Section 12-60-450(E) (Supp. 2006). Inasmuch as this statute violates no constitutional provision, the issuance of such determination was proper.

C. Issue Three

1. The taxpayer argues South Carolina cannot impose a tax on income because there appears no likeness of any state official on coins or dollar bills. The taxpayer bases this argument on biblical scripture wherein Christ is asked if it is lawful to pay taxes to Caesar. Christ, noting the image of Caesar appears on gold coins, responds by stating “[r]ender to Caesar the things that are Caesar’s.”

2. The taxpayer’s reliance on biblical scripture is misplaced. With the addition of the First Amendment to the federal constitution, comes the separation of church and state. As a result, the state’s taxing powers are derived from secular law, not scripture.

D. Issue Four

1. The taxpayer argues he is a “proclaimed heir to the kingdom of God” and, therefore, “exempt from the law of taxation.” Regardless of the sincerity of this argument, such must be rejected.

2. The only income tax exemptions related to religion are IRC Section 501 subsections (c)(3) and (d).[2] These provisions exempt the income of certain, qualifying religious entities. The taxpayer here has made no showing he qualifies as such an entity.

ORDER

Based upon the above Findings of Fact and Conclusions of Law:

IT IS HEREBY ORDERED that the Department Determination issued to the taxpayer for the 1999, 2000, and 2001 tax years is affirmed.

AND IT IS SO ORDERED.

JOHN D. MCLEOD

Administrative Law Judge

April 10, 2007

Columbia, South Carolina