SC Administrative Law Court Decisions

STATEMENT OF THE CASE

This matter is before the Court upon the Petitioner’s (taxpayer’s) request for a contested case hearing under S.C. Code Ann. § 12-60-460 (Supp. 2007). Taxpayer challenges a Determination issued by the Respondent (Department), which held that the taxpayer’s income was subject to South Carolina’s income tax.

After timely notice to the parties, arguments in this matter were heard at the Administrative Law Court in Columbia, South Carolina on February 20, 2008.

FINDINGS OF FACT

Having carefully considered the testimony and the arguments of both sides taking into account the credibility of the evidence and witnesses, I find by a preponderance of the evidence:

1. It is undisputed that the taxpayer failed to file or pay South Carolina income taxes for the 2000 tax year. The due date for the 2000 return was April 15, 2001. The Department received no requests for an extension of time to file the return.
2. The Department subsequently received information from the Internal Revenue Service (IRS). That information indicated the taxpayer received the following income during 2000.

3. Upon receiving the IRS information, the Department calculated the taxpayer’s tax liability by applying a standard deduction and one exemption to the income reported. After adding penalty and interest, the Department issued the taxpayer a proposed assessment in the following amount:

4. Although the proposed assessment was issued on June 9, 2005, the Department did not receive a protest from the taxpayer until February 8, 2006. The protest, however, stated the taxpayer had sent a prior protest to the Department of July 11, 2005. The Department therefore considered his protest timely.
5. The Department issued the taxpayer a Determination that affirmed the proposed assessment on March 27, 2007.
6. Taxpayer requested a contested case hearing to challenge the determination on April 18, 2007 and a hearing was held on February 20, 2008 at the Administrative Law Court in Columbia, South Carolina.
7. At that hearing, Taxpayer argued that: (1) he has no tax liability because his income is not subject to South Carolina’s income tax; (2) the use of IRS information to determine the taxpayer’s tax liability constitutes hearsay; (3) he is entitled to additional deductions and exemptions; and (4) the income reported to the IRS was actually the income of an illegal alien.
8. Taxpayer worked at Beaver Piano during the 2000 tax year, but contends that his income is not taxable because he worked as an independent contractor. He believes the assessed income amount of $13,970.00 is too high because he only worked at Beaver Piano five or six hours a day, five days a week, for a period of forty eight weeks during 2000. Taxpayer provided no W-2’s or other documentation to support his assertion that the assessed amount was too high.
9. Taxpayer alleges that some of the amounts reported to the IRS as his income were really the amounts earned by illegal aliens or that he was the victim of identity theft. The taxpayer has presented no evidence to show that such a theft actually occurred or that he reported any such theft to law enforcement authorities. Instead, in response to the Department’s discovery requests, the taxpayer referred to the alleged theft as a mere “possibility.”
10. It is undisputed that Taxpayer received an IRA distribution in 2000, but he kept no documentation concerning his IRA.
11. Taxpayer argues that he is entitled to certain deductions, but he provided no bills, receipts, or other documentation showing that he is entitled to deductions. He did provide the court with an affidavit of expenses, but the affidavit only includes a list of approximate expenses and it is not substantiated by any receipts or other evidence.
12. Although Taxpayer requests that the Department waive his penalties and interests, he provided no documentation to justify such a waiver under S.C. Revenue Procedural Bulletin #02-5.
13. Because Taxpayer did not meet his burden of proving that the assessment was incorrect, the Department’s determination is upheld.

CONCLUSIONS OF LAW

1. The Administrative Law Court has subject matter jurisdiction over this action pursuant to S.C. Code Ann. § 12-60-470(F)(2007) and S.C. Code Ann. § 1-23-600 (2007).
2. The right to recover taxes from the State of South Carolina was created by statute. C.W. Matthews Contracting Co., Inc. v. S.C. Tax Comm'n, 267 S.C. 548, 230 S.E.2d 223 (1976). Accordingly, anyone seeking such a refund of taxes must do so pursuant to the appropriate refund statute Guaranty Bank and Trust v. South Carolina Tax Commission, 254 S.C. 82, 173 S.E.2d 367 (1970).
3. S.C. Code Ann. § 12-6-510(A) (2007) 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 (2007) indicates how this taxable income is to be determined. More specifically, such section states, “. . . [a] resident individual’s South Carolina gross income, adjusted gross income, and taxable income is computed as determined under the Internal Revenue Code . . . .” Pursuant to such Code, taxable income is simply gross income minus certain deductions and exclusions. (See IRC § 63) Thus, in the instant situation, the taxpayer’s income is taxable under § 12-6-510(A) if it comes within the definition of “gross income” at IRC § 61. That definition defines “gross income” to include:

(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[.]

* * *

(4) Interest[.]

4. The taxpayer’s income comes within the above definition because compensation for services and interest income are directly stated to constitute gross income. The phrase “all income from whatever source derived” is sufficiently broad enough to encompass the taxpayer’s IRA distribution. Moreover, IRC § 408(d)(1) specifically states “[E]xcept or otherwise provided in this subsection, any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee . . . .”[1]

5. When a taxpayer fails to file a tax return, S.C. Code Ann. § 12-60-430 (Supp. 2007) authorizes the Department to issue that taxpayer a proposed assessment based on the best information available:

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.[2]

In the instant situation, the taxpayer failed to file a 2000 tax return. As a result, § 12-60-430 authorized the Department to issue the taxpayer a proposed assessment based on the best information available. Testimony by the Department’s witness indicated that information was the information received from the IRS.

6. 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.” As the definition indicates, the prohibition against hearsay is limited in its application to statements made at trial or hearing. It has no relevance to administrative functions such as the issuance of proposed assessments. Accordingly, the Department’s use of IRS information to prepare and issue a proposed assessment to the taxpayer does not constitute hearsay. Moreover, the Department’s introduction of its proposed assessment into evidence at trial does not constitute hearsay. The Department does not submit such to prove the truth of the matter asserted, i.e., that the taxpayer’s income was the amounts noted in the IRS report. Rather, it is presented, along with testimony to establish that the proposed assessment was in compliance with § 12-60-430.[3] Once this is accomplished, the burden rests with the taxpayer to prove the proposed assessment is incorrect. This is a burden the taxpayer has failed to meet.

7. When the Department calculated the taxpayer’s tax liability, it allowed him a standard deduction and one exemption. The taxpayer has argued this was improper because he had “dependents, deductions, credits, allowances and business expenses.” To receive additional deductions for dependents, the taxpayer must file a return as required by S.C. Code Ann § 12-6-4910 (Supp. 2006) listing such dependents along with their social security numbers. Similarly, any other deductions claimed by the taxpayer must be supported by records or other documents. See S.C. Code Ann. § 12-54-210(A) (Supp. 2007) (Persons liable for taxes are required to keep records). Simply stated, to receive additional deductions, the taxpayer must bring himself squarely within the terms of the statutes authorizing such deductions. M. Lowenstein & Sons, Inc v. South Carolina Tax Commission, 227 S.C. 561, 290 S.E.2d 816 (1982). Needless to say, the taxpayer has failed to comply with any of these requirements. [4]

8. The taxpayer has argued his identity was stolen by an illegal alien and that the income reported by the IRS was not his, but was the illegal alien’s income earned at Beaver Piano. The taxpayer has presented no evidence to show that such a theft actually occurred or that he reported any such theft to law enforcement authorities. Instead, in response to the Department’s discovery requests, the taxpayer referred to the alleged theft as a mere “possibility.” The decision of the court may not be based upon surmise, conjecture, or speculation, but must be founded on evidence of sufficient substance to afford a reasonable basis for it. See Thompson ex re. Harvey v. Cisson Const., --- S.E.2d ---, 2008 WL 294525 S.C. App., 2008 (February 1, 2008).

ORDER

Because Taxpayer failed to introduce any evidence to refute the Department’s assessment,

IT IS HEREBY ORDERED that the Department’s determination that Taxpayer owes $635.54 for the 2000 tax year is upheld.

AND IT IS SO ORDERED.

___________________________________

Carolyn C. Matthews

Administrative Law Judge

April 1, 2008