ORDERS:
FINAL ORDER AND DECISION
STATEMENT OF
THE CASE
This matter is before the Court for a
final order and decision following a contested case hearing pursuant to S.C.
Code Ann. §§ 12-60-460 (Supp. 2007) and 1-23-600 (Supp. 2007). Petitioner
Christopher S. Lawton (taxpayer) challenges Respondent South Carolina
Department of Revenue’s (Department) proposed income tax assessment for the
2003 tax year.
After timely notice to the parties, a
hearing on this matter was held on August 19, 2008, at the South Carolina
Administrative Law Court in Columbia, South Carolina. Based upon the testimony
and exhibits presented at the hearing, the Court finds the Department’s
proposed assessment should be upheld.
FINDINGS OF FACT
Having carefully considered all testimony,
exhibits, and arguments presented at the hearing of this matter, and taking
into account the credibility and accuracy of the evidence, I make the following
Findings of Fact by a preponderance of evidence:
1. Although
a South Carolina resident, the taxpayer failed to file or pay South Carolina
income taxes for tax years 2002 through 2007.
2. The Department subsequently received information from the
Internal Revenue Service (IRS) concerning the taxpayer. That information
indicated the taxpayer received the following income during 2003:
Wage income from Dick Smith Automotive |
$25,684.00 |
Wage income from Ken Wilson Ford |
16,500.00 |
Compensation for services from Care Entree |
13,641.00 |
Dividend and interest income from Merrill Lynch Pierce |
1,351.00 |
Total |
$57,176.00 |
3. Upon receiving the IRS information, the Department calculated
the taxpayer’s 2003 tax liability by applying a standard deduction and one exemption
to his income. After adding penalty and interest, the Department issued the
taxpayer a proposed assessment in the following amount:
Tax |
$2,290.00 |
Penalty |
1,053.84 |
Interest |
491.35 |
Amount Due |
$3,835.19 |
4. When the Department determined the taxpayer’s 2003 tax
liability, it allowed him credit for withholding tax submitted by Dick Smith
Automotive. No credit, however, was afforded for amounts withheld by Ken
Wilson Ford. This is because the latter is located in North Carolina and any amounts
withheld by it would have been submitted to the North Carolina Department of
Revenue. Had the taxpayer filed a South Carolina tax return, he could have
claimed a tax credit under S.C. Code Ann. § 12-6-3400 (2000) for any income
taxes reported and paid to North Carolina.
5. The taxpayer filed a protest with the Department when he
received his proposed assessment. In doing so, he simply denied any tax
liability.
6. The Department issued the taxpayer a determination on February
8, 2008. That determination upheld the proposed assessment.
7. The taxpayer requested a contested case hearing before the
Administrative Law court on March 7, 2008.
CONCLUSIONS OF LAW
Based
upon the foregoing Findings of Fact, I conclude as a matter of law:
1. 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 matter, it is the taxpayer who has requested a
contested case hearing to challenge the Department’s proposed assessment.
Thus, the taxpayer asserts the affirmative and must carry the burden of proving
the Department’s proposed assessment is 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)
2. 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.
In the instant situation, the taxpayer failed to file a 2003 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.
The taxpayer, nonetheless, argues it was improper for
the Department to base its proposed assessment on information it received from
the IRS because such constituted hearsay. The taxpayer is mistaken. He has
misconstrued the nature of hearsay and the circumstances in which such is
prohibited.
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.
Similarly, when the Department introduced the IRS
information into evidence at trial, such did not constitute hearsay. The
Department did not submit the information to prove the truth of the matter
asserted, i.e., that the taxpayer’s income was the amounts stated in the information.
Rather, it was presented, along with testimony, to establish that the
Department’s assessment was issued in compliance with § 12-60-430. Once this
was accomplished, the burden rested with the taxpayer to prove the proposed
assessment was incorrect.
3. The taxpayer also argues he had no tax
liability because the exchange of his labor for compensation constituted a
nontaxable exchange. Well established case law and statutory authority,
however, indicate this argument is without merit.
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. 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;
*
* *
(7)
Dividends[.]
Clearly, the income the taxpayer received
in compensation for his services, along with his dividends and interest, comes
within the above definition. The same is equally true of his wages. See United States v. Gerads, 999 F.2d 1255, 1256 (8th Cir. 1993) (“wages” are within the definition of income under the Internal
Revenue Code and the Sixteenth Amendment, and are subject to taxation).
Conversely, there is no authority for the taxpayer’s position that compensation
for services constitutes a nontaxable exchange. Indeed, the Court in United States v. Lawson, 670 F.2d 923 (10th Cir. 1982), has stated
such argument is specious.
4. When the Department calculated the
taxpayer’s tax liability, it allowed him a standard deduction and one
exemption. The taxpayer argues such was improper because he had additional
dependents, deductions, credits, allowances, and business expenses. The
taxpayer further claims Cohan v. C.I.R., 39 F.2d 540 (2d Cir. 1930),
indicates these deductions and expenses need not be established by evidence,
but rather, by his affidavit estimating the amounts of such items.
The taxpayer’s argument is without merit.
The facts of the Cohan case are clearly distinguishable from the instant
matter. Unlike the taxpayer here, Cohan filed a return and presented testimony
and bank records at trial to support his claimed deductions. Moreover, to
receive additional deductions for dependents in South Carolina, the taxpayer
must file a return as required by S.C. Code Ann. § 12-6-4910 (Supp. 2007)
listing such dependents along with their social security numbers. Similarly,
any other deductions or exemptions 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.). The taxpayer’s
failure to comply with these requirements precludes him from any additional
deductions or exemptions. See M. Lowenstein and Sons, Inc. v. South
Carolina Tax Commission, 227 S.C. 561, 290 S.E.2d 816 (1982) (Taxpayers
seeking tax deductions must bring themselves squarely within the statutes authorizing
such deductions and any doubt must be resolved against the taxpayer.).
5. The proposed assessment issued
to the taxpayer included penalties under S.C. Code Ann. § 12-54-25 (Supp. 2007)
for failure to file and S.C. Code Ann. § 12-54-43 (Supp. 2007) for failure to
pay. The taxpayer argues these penalties should be waived by the Court. When
exercising its authority to waive penalties under S.C. Code Ann. § 12-54-160
(2000), the Department relies upon South Carolina Revenue Procedual Bulletin
#02-5.
The purpose of this Bulletin is to encourage voluntary tax compliance and
consistent application of § 12-54-160 by identifying the circumstances under
which waivers or partial waivers of penalty should be considered.
The Court finds that the taxpayer’s
situation does not come within any of the circumstances identified in the
Bulletin. Furthermore, a waiver is not appropriate in light of the fact the
taxpayer has filed no tax returns since before 2002.
ORDER
Based upon the Findings of Fact and Conclusions
of Law stated above, it is hereby ORDERED that the Department’s proposed
income tax assessment for the 2003 tax year is upheld.
IT IS SO ORDERED.
John
D. McLeod
Administrative
Law Judge
September 5, 2008
Columbia, South Carolina
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