ORDERS:
FINAL ORDER AND DECISION
STATEMENT OF THE CASE
This matter is before the Court upon the Petitioner’s (“Taxpayer”) request for a contested case hearing pursuant to S.C. Code Ann. §12-60-460 (Supp. 2006). The request seeks to challenge a Department Determination issued by the Respondent (“Department”) finding that the taxpayer’s income was subject to South Carolina’s income tax.
FINDINGS OF FACT
Having carefully considered the testimony and the arguments of both sides, I make the following Findings of Fact, taking into consideration the burden on the parties to establish their respective cases by a preponderance of the evidence, and taking into account the credibility of the witnesses:
1. Notice of the time, date, place, and subject matter of the hearing was given to all parties in a timely manner.
2. Taxpayer is a resident of South Carolina who failed to file a South Carolina Income Tax Return or pay South Carolina Income Taxes for the 2001 tax year.
3. Department subsequently received information in the form of electronic tape concerning the taxpayer from the Internal Revenue Service (“IRS”). That information indicated that Taxpayer received the following income during the 2001 tax year, totaling $37,982.00: Compensation from Precision Stainless in the amount of $22,652.00; wages from TQ Conbll Constructors, Inc. in the amount of $6,870.00; and wages from Fluor Daniel Services, Corp. in the amount of $8,460.00.
4. Upon receiving the IRS information, the Department calculated the taxpayer’s South Carolina tax liability by applying a standard deduction and one exemption to his income. Once this was computed, the Department estimated the taxpayer’s withholding to determine the tax due and added a penalty and interest. As a result, a proposed assessment was issued to the taxpayer on August 10, 2006 in the amount of $2,091.85 which included the following: Income Tax due of $1,178.00; a penalty of $589.00 and interest totaling $324.85.
5. Taxpayer timely protested the proposed assessment. In doing so, the taxpayer did not deny receiving the income reported by the IRS. He based his protest on the following arguments: That his income was not subject to South Carolina Tax; that the information received by the Department was hearsay; that the Department violated his due process rights; that he is entitled to additional deductions and exemptions; that the penalties assessed should be waived; that the Sixteenth Amendment to the U.S. Constitution is a bar to the imposition of income tax; and that income taxes are limited to federal employees.
6. On November 28, 2006, the Department issued the taxpayer a Department Determination concerning his protest. The Determination affirmed the proposed assessment.
7. The taxpayer filed a request for a contested case hearing on October 16, 2006.
CONCLUSIONS OF LAW
Based on the foregoing Findings of Fact, I conclude, as a matter of law:
1. The Court has jurisdiction to decide issues herein pursuant to S.C. Code Ann. Section 12-60-460 (2000).
2. The standard of proof in administrative proceedings is a preponderance of the evidence. Anonymous v. State Board of Medical Examiners, 329 S.C. 371, 496 S.E.2d 17 (1998). The trier of fact must weigh and pass upon the credibility of the evidence presented. S.C. Cable Television Ass’n v. Southern Bell Tel. and Tel. Co., 308 S.C. 216, 417 S.E.2d 586 (1992). The trial judge who observes a witness is in the best position to judge the witness’ demeanor and veracity and evaluate his testimony. McAlister v. Patterson, 278 S.C. 481, 299 S.E.2d 322 (1982).
3. This case involves the interpretation and application of Federal and State Regulations and Codes. The primary rule of construction “is to ascertain and give effect to the legislature’s intention or purpose as expressed in the statute.” Scholtec v. Estate of Reeves, 327 S.C. 551, 558, 490 S.E.2d 603, 605-06 (Ct. App. 1997). The language used should be given its plain and ordinary meaning without resort to subtle or forced construction to expand or limit the scope of a statute. Berkebile v. Outen, 311 S.C. 50, 426 S.E.2d 760 (1993).
4. S.C. Code Ann. §12-6-510(A)(2000) of the South Carolina Income Tax Act specifically imposes a tax on the South Carolina taxable income of individuals, estates and certain other entities. For residents like the taxpayer, S.C. Code Ann. 12-6-560 (2000) indicates how this taxable income is to be determined stating, “a resident individuals’ South Carolina gross income, adjusted gross income and taxable income is computed as determined under the Internal Revenue Code (“IRC”)…” Under the IRC, taxable income is simply gross income minus certain deductions and exclusions specified in IRC 62 and 63. Thus, in the instant situation, the taxpayer’s income is taxable if it comes within the definition of gross income at IRC 61 which states in part that gross income is:
(a)…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…
Several courts have likewise addressed the meaning of gross income as defined in 61. In doing so, they have all held that such definition means all income to include wages. United States v. Romero, 640 F.2d 1014(9th Cir. 1981); Biermann v. CIR, 769 F.2d 707 (11th Cir. 1985); Casper v. C.I.R., 805 F.2d 902 (10th Cir. 1986); United States v. Coner, 898 F.2d 941 (3rd Cir. 1990); Unites States v. Gerads, 999 F.2d 1255 (8th Cir. 1993); United States v. May, 555 F.Supp. 1008 (1983). In fact, courts have found arguments like Petitioner’s to the contrary “completely lacking in legal merit and patently frivolous.” Lonsdale v. U.S., 919 F.2d 1440(10th Cir. 1990). The IRS defines “gross income” and ultimately” taxable income” to include all the taxpayer’s income. Thus, all such income is subject to South Carolina Income Tax. As such, S.C. Code Ann §12-6-4910 (Supp. 2006) requires the taxpayer to file a South Carolina Income Tax Return and S.C. Code Ann. §12-6-4970 (2000) provides that the return must be filed on or before the fifteenth day of the fourth month following the taxable year.
5. The Petitioner bears the burden of proof in this case. See Leventis v. S.C. Dep’t. of Health & Envtl. Control, 340 S.C. 118, 530 S.E.2d 643 (Ct. App. 2000). He has not met this burden because he has provided no evidence of an income other than that as found by the Department. Through the discovery process, the taxpayer also failed to provide evidence in the form of W-2’s or 1099’s that would refute the figures as provided to the Department by the IRS. Rather, the taxpayer definitively stated to the Court during a motion to compel hearing for the production of such documents that he did not have any such documentation.
6. The documentation from the IRS is not hearsay. When a taxpayer fails to file a return, S.C. Code Ann. §12-60-430 (Supp. 2006) allows the Department to issue a proposed assessment based on the best information available. Specifically that statute states that:
if a taxpayer fails or refuses to make a report or to file a return required by the provisions of this title or required to be filed with the Department, the Department may make an estimate of the tax liability from the best information available and issue a proposed assessment for the taxes including penalties and interest.
The taxpayer did not file a return for the 2001 tax year. In such a situation, the above statute authorizes the Department to issue a proposed assessment based on the best information available. The best information available to the Department was the IRS information. The prohibition against hearsay statements at trial has no relevance to administrative functions such as the issuance of proposed assessments. Further, the Department’s use of the proposed assessment at trial does not constitute a violation against the hearsay rule. Rule 801(c), SCRE, defines “hearsay” as a statement, other than one made by the declarant while testifying at trial or hearing offered in evidence to prove the truth of the matter asserted.” The Department has not offered the proposed assessment to prove the truth of the matter asserted, I.e., that the taxpayer earned $37,982.00 in income. Rather, the underlying information available was used to issue a proposed assessment once the taxpayer failed to file a 2001 income tax return.
8. The taxpayer was not denied Due Process. Due Process requires a meaningful remedy to challenge the underlying tax. McKesson Corp v. Division of Alcoholic Beverages and Tobacco, Dept. of Business Regulation of Florida, 496 U.S. 18 (1990). In South Carolina, such a remedy is provided by S.C. Code Ann. §§12-60-450 and 12-60-460 (Supp. 2006). These sections allow the taxpayer to protest his proposed assessment prior to the assessment being final. Taxpayer is currently proceeding under these sections. Thus, he is being provided a remedy without being denied Due Process.
9. Although the taxpayer argues that he is entitled to additional deductions and/or exemptions beyond those allowed by the Department in its proposed assessment, the taxpayer’s argument is defeated by his own actions. To receive additional deductions and exemptions, the taxpayer should have filed a tax return as required by S.C. Code Ann. 12-6-4910. Moreover, any deductions or exemptions claimed by the taxpayer should have been supported by records or other documentation. See. S.C. Code Ann. §12-54-210(A)(Supp. 2006) (persons liable for taxes are required to keep records), also see M. Lowenstein & Sons, Inc. v. South Carolina Tax Commission, 277 S.C. 561, 290 S.E.2d 812(1982) (taxpayers seeking tax deductions must establish they come squarely within the terms of the statutes authorizing such deductions). In the instant situation, the taxpayer has failed to meet either of these requirements. In fact, he has stated to the court during a motion to compel hearing that he does not have any documentation in the form of checks, credit cards, or the like to substantiate any of his alleged deductions.
10. The proposed assessment issued to the taxpayer included penalties under S.C. Code Ann 12-54-25 (Supp. 2006) for failure to pay and S.C. Code Ann §12-54-43 (Supp. 2006) for failure to file. The total amount of these penalties is $4,589.00. S.C. Code Ann. §12-54-160(2000) states “unless otherwise specifically prohibited, the Department may waive, dismiss, or reduce penalties provided for in this chapter. To encourage voluntary tax compliance and consistent application of this statute, the Department has put into place S.C. Revenue Procedural Bulletin #02-5. Among other things, this Bulletin identifies mitigating circumstances under which waivers or partial waivers of penalties should be considered. The general standard for determining whether significant mitigating circumstances exist include: The review of a taxpayer’s filing and payment history; the nature and frequency of his errors; and a taxpayer’s voluntariness in working with the Department when a proposed assessment is issued. The taxpayer’s situation does not come within any of the circumstances stated in the bulletin. Rather, he has repeatedly failed to file returns or has filed frivolous “zero” returns and not paid taxes.
11. The Sixteenth Amendment is no bar to Congress’ imposition of an income tax, but in fact authorizes it. In US. v. Collins, 920 F.2d 619, 629 (10th Cir. 1990), citing Brushaber v. Union Pac. R. Co., 240 U.S. 1, 12-19 (1916), the Supreme Court recognized that the “Sixteenth Amendment authorizes a direct non-apportioned tax upon United States Citizens throughout the nation.” Both the US Congress and the South Carolina General Assembly have the power to impose a tax on income. Congress derives its authority from the Sixteenth Amendment, while the General Assembly’s authority is not dependent upon any particular constitutional provision. This is because under the Tenth Amendment, those powers not specifically conferred upon Congress by the Federal Constitution, remain with the state’s legislative bodies. 16 AM. Jur. 2d Constitutional Law 40 pp. 396-398. As a result, South Carolina’s General Assembly has plenary powers to enact any taxing legislation it deems necessary. The only limitation is that such legislation cannot violate a specific provision of either the State or Federal Constitution. See, e.g. State v. Charron, 351 S.C. 319, 323, 569 S.E.2d 388, 390 (Ct. App. 2002) (holding that the General Assembly may enact any law not expressly or by clear implication, prohibited by the State or Federal Constitutional, and that there is no State or Federal Constitutional provision prohibiting the South Carolina General Assembly from levying an income tax).
12. Income taxes are not limited to federal employees. Section 1 of the IRC imposes a federal income tax on individuals such as the taxpayer. Moreover, there is nothing in that section or any other section of the IRC limiting such tax to federal employees. This is likewise true for South Carolina Income Taxes. Nowhere in Chapter 6 of Title 12 of the South Carolina Code is it stated that South Carolina’s Income Tax is limited in the manner alleged by the taxpayer. Instead, all that is necessary to tax the income of the taxpayer is that he either lives in the state or earns income in the state. See. S.C. Code Ann. §12-6-510(A) and 12-6-2220(6) (2000).
THEREFORE, based upon the Findings of Fact and Conclusions of Law, it is hereby ordered that the proposed assessment issued by the Department to the taxpayer in this matter be upheld. The amount owed by the taxpayer is $2,091.85, including tax, penalties and interest as of the date of the proposed assessment. The taxpayer is additionally responsible for that amount of interest accrued until the assessment is paid in full.
AND IT IS SO ORDERED.
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Carolyn C. Matthews
Administrative Law Judge |
