South Carolina              
Administrative Law Court
Edgar A. Brown building 1205 Pendleton St., Suite 224 Columbia, SC 29201 Voice: (803) 734-0550

SC Administrative Law Court Decisions

CAPTION:
Christopher S. Lawton vs. SCDOR

AGENCY:
South Carolina Department of Revenue

PARTIES:
Petitioners:
Christopher S. Lawton

Respondents:
South Carolina Department of Revenue
 
DOCKET NUMBER:
08-ALJ-17-0118-CC

APPEARANCES:
Christopher S. Lawton, Pro Se For Petitioner

Ronald W. Urban, Esq., For Respondent
 

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.[1] 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.[2] 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



[1]See NSK Ltd. v. U.S., 919 F. Supp. 442 (1996), wherein the Court explained the underlying basis for a similar statute that allowed the Department of Commerce to use the best information available for purposes of administering federal antidumping laws. There, the Court stated such statute served as an investigative tool used as an informal club over recalcitrant parties who refused to cooperate. The Court also noted that “best information available is not necessarily accurate information, it is information which becomes usable because a respondent has failed to provide accurate information.”

[2]This Bulletin, which is not promulgated as a regulation, does not have the force and effect of law. See S.C. Code Ann. § 1-23-10(4) (2005) (“Policy or guidance issued by an agency other than in a regulation does not have the force or effect of law.”). However, the ALC is free to consider its guidance and apply it as it deems persuasive.


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