SC Administrative Law Court Decisions

This is a contested case hearing concerning a 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 May 5, 2008. Present at the hearing were Mr. Johnson, who represented himself, pro se, and Andrew L. Richardson, Jr., Attorney for Department.

PROCEDURAL HISTORY

The taxpayer filed 2003, 2004, 2005, and 2006 South Carolina income tax returns which indicated that he had zero taxable income and zero tax liability for those years. On August 2, 2007, the Department issued the taxpayer Proposed Assessments for the aforementioned years. For the tax year 2003, the Department accessed the taxpayer’s income information from the Department’s Data Warehouse. For the tax year 2004, the Department received the taxpayer’s income information from a TDS (Transcript Delivery System) report from the Internal Revenue Service (IRS). For the tax years 2005 and 2006, the Department acquired the taxpayer’s income information from the taxpayer’s W-2 forms, which were attached to the 2005 and 2006 state income tax returns and indicated the taxpayer earned wage income in each of those years. The taxpayer appealed the Proposed Assessments on September 6, 2007. On January 18, 2008, the Department sent the taxpayer a Department Determination upholding its Proposed Assessments. Thereafter, on February 10, 2008 the taxpayer requested a contested case hearing before the Administrative Law Court.

ISSUES

1.                  Is the taxpayer’s income subject to South Carolina income tax?

2.                  Is the South Carolina Income Tax Act restricted to taxing only corporate income?

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. The taxpayer is a South Carolina resident. He filed timely 2003, 2004, 2005, and 2006 South Carolina income tax returns which indicated he had zero federal taxable income, zero state taxable income, and zero South Carolina tax liability in each of those years.

2. The Department subsequently accessed information from the Data Warehouse for the taxpayer’s 2003 income. The Department received a TDS report from the IRS for the taxpayer’s 2004 income.^[1] The Department received W-2 forms attached to the 2005 and 2006 state income tax returns indicating the taxpayer earned wage income in 2005 and 2006. 3. The sources of information mentioned above indicated the taxpayer received the following wage income in 2003, 2004, 2005, and 2006:

4. In each of the above years, the Department calculated the taxpayer’s state tax liability by applying a standard deduction and one exemption to the income stated on the report. After adding penalties and interest, the Department issued taxpayer Proposed Assessments in the following amounts:

5. The taxpayer appealed the Proposed Assessments whereupon the Department issued a Department Determination upholding the Proposed Assessments. The taxpayer requested a contested case hearing after it received the Department’s Determination.

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. § 12-60-410 (Supp. 2007) 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. § 12-60-450 (Supp. 2007).

2. The burden of proof is on the party asserting the affirmative in an adjudicatory administrative proceeding. 2 Am. Jur. 2d Administrative Law § 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 in this appeal 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)

A. The Taxpayer’s Income Is Subject To South Carolina Income Tax.

1. The taxpayer’s income is subject to South Carolina income tax pursuant to S.C. Code Ann. § 12-6-510(A) (2000). The taxpayer argues he has no tax liability because his income is not subject to South Carolina’s income tax. Section 12-6-510(A) of the South Carolina Income Tax Act specifically imposes a tax on the “South Carolina taxable income” of individuals, estates, and certain other entities. S.C. Code Ann. § 12-6-560 (2000) further provides that “. . . [a] resident individual’s South Carolina gross income, adjusted gross income, and ‘taxable income’ is computed as determined under the Internal Revenue Code . . . .” According to IRC § 63, taxable income is simply “gross income” minus certain deductions and exclusions. Therefore, the taxpayer’s income is taxable under § 12-6-510(A) if it comes within the definition of “gross income” found at IRC § 61. That definition specifically 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[.]

IRC § 61 is sufficiently broad to encompass the taxpayer’s wages.

2. Several courts have addressed the meaning of “gross income” as defined in IRC § 61. They have each held such definition means all income, including wages. U.S. v. Romero, 640 F.2d 1014 (9^th Cir. 1981) (“Compensation for labor or services, paid in the form of wages or salary, has been universally held by courts of this republic to be income, subject to the income tax laws currently applicable.”); U.S. v. Gerads, 999 F.2d 1255 (8^th Cir. 1993) (“Wages are within the definition of ‘income’ under the Internal Revenue Code and the Sixteenth Amendment, and are subject to taxation”); U.S. v. Connor, 898 F.2d 942, 944 (3^rd Cir. 1990) (“We take this opportunity to reiterate that wages are income within the meaning of the Sixteenth Amendment. Unless subsequent Supreme Court decisions throw any doubt on this conclusion, we will view arguments to the contrary as frivolous, which may subject the party asserting them to appropriate sanctions.”); U.S. v. Richards, 723 F.2d 646, 648 (8^th Cir. 1983) (“Although the sixteenth amendment, giving Congress the power to tax income, does not define “income,” the courts have interpreted the term in its every day usage to mean gain derived from capital, from labor, or from both combined . . . . Clearly wages and salaries fall within this definition and are therefore constitutionally taxable.”). In fact, courts have found arguments to the contrary “completely lacking in legal merit and patently frivolous.” Lonsdale v. U.S., 919 F.2d 1440 (10^th Cir. 1990).

3. In sum, the IRC defines “gross income” and ultimately “taxable income” to include all the taxpayer’s wages. Thus, all such wages are subject to South Carolina income tax.

B. South Carolina Income Tax Act Is Not Restricted To Taxing Only Corporate Income.

1. Pursuant to statutory and case law, South Carolina income tax is not restricted to taxing only corporate income. The taxpayer asserts the word “income” is not defined in the IRC, but has been defined to mean corporate income by the U.S. Supreme Court in Merchants’ Loan & Trust v. Smietanka, 255 U.S. 509 (1921). As such, the taxpayer alleges his wages are not taxable since only corporations are subject to income tax. This allegation lacks legal merit for four reasons.

2. First, both federal and state income taxes are specifically imposed on “individuals” pursuant to IRC § 61 and § 12-6-510(A).

3. Second, the operative words for income tax purposes are “gross income,” not “income.” U.S. v. Drefke, 707 F.2d 978 (8^th Cir. 1983). Thus, arguments which state that compensation for services is non-taxable because the word “income” is not defined are “patently frivolous.” Biermann v. C.I.R., 769 F.2d 707 (11^th Cir. 1985).

4. Third, the taxpayer has misrepresented the holding in Merchants’ Loan & Trust. Prior to the Sixteenth Amendment, a federal excise tax was levied on corporations. As a result, case law defined what could constitute “corporate income.” After the addition of the Sixteenth Amendment and the enactment of federal income tax legislation, the prior case law was sometimes referred to for the purpose of defining “income.” In doing so, however, no court, including Merchants’ Loan & Trust, has held that income taxes were only applicable to corporations. Instead, the Court in Lonsdale found this argument “completely lacking in legal merit and patiently frivolous.”

5. Fourth, the statutory language specifically imposes federal and state income taxes on individuals. IRC § 61 and § 12-6-510(A) specifically impose taxes on individuals. Moreover, S.C. Code Ann. § 12-6-30 (2000) defines the word “taxpayer” for South Carolina income tax purposes, to include, “an individual, trust, estate, partnership, association, company, corporation, or any other entity subject to the tax imposed by this chapter or required to file a return.” (Emphasis added)

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 tax years 2003, 2004, 2005, and 2006 is affirmed.

FURTHERMORE, the taxpayer made substantially the same arguments presented here in a contested case hearing in 2007 for the tax year 2002. Anonymous Taxpayer v. South Carolina Department of Revenue, Docket No. 06-ALJ-17-0802-CC. Like the instant result, the Court found in favor of the Department in the 2007 case. Whereas the taxpayer may contest various taxpayer issues, the Court cautions the taxpayer that in the event he raises the same substantial arguments which were raised for the 2002, 2003, 2004, 2005, and 2006 tax years in a subsequent contested case hearing before this Court, the Court may find the taxpayer’s arguments to be frivolous and fine him accordingly.

AND IT IS SO ORDERED.

__________________________________

JOHN D. MCLEOD

Administrative Law Judge

May 20, 2008

Columbia, South Carolina