SC Administrative Law Court Decisions

This matter comes before the Administrative Law Judge Division pursuant to S.C. Code Ann.

§ 12-60-460 (Supp. 1995) for a contested case hearing requested by the Petitioners (taxpayers) upon the determination by the Department of Revenue that the taxpayers owed additional state income tax for the 1991 tax year, and the denial by the Department of Revenue of their claim for a refund. The taxpayers exhausted their prehearing remedy pursuant to S.C. Code Ann. § 12-60-450 (Supp. 1997). Both parties filed motions for summary judgment. After notice to the parties, a hearing on the motions was conducted by telephone on August 28, 1998. Based upon the evidence presented, the assessment of additional income tax upon the taxpayers was timely and no refund is required.

Any issues raised in the proceedings or hearing of this matter that are not specifically addressed in this order are deemed denied. ALJD Rule 29.

I make the following findings of fact, taking into consideration the burden on the parties to establish their cases by a preponderance of the evidence and taking into account the credibility of the witnesses:

1. Taxpayers are husband and wife and residents of South Carolina.

2. The Internal Revenue Service (IRS) audited the taxpayers for federal income tax purposes. The audit included the 1991 tax year.

3. The IRS disallowed a loss taken on the taxpayers' 1991 tax return, resulting in an increase to their federal taxable income for that year. The taxpayers' did not contest the adjustment.

4. As a result of the adjustment, taxpayers owed additional federal income tax for the 1991 tax year.

5. On February 28, 1995, the IRS gave notice of the taxpayers' audit and its ultimate results to the South Carolina Department of Revenue (Department).

6. Inasmuch as the taxpayers' state taxable income is derived from their federal taxable

income, the Department determined additional state taxes were due based on the adjustments made by the IRS.

7. On March 20, 1995, the Department issued a proposed assessment to the taxpayers for the additional taxes due.

8. The taxpayers did not officially contest the proposed assessment.

9. On October 6, 1995, the Department issued its final assessment.

10. When the taxpayers did not pay the assessment, the Department filed a tax warrant against them on January 3, 1996. The taxpayers paid the tax on April 10, 1996.

11. On September 4, 1996, the taxpayers submitted a claim for a full refund of the taxes assessed in October 1995.

12. The taxpayers' refund claim was denied by the Department, whereupon the taxpayers timely protested pursuant to S.C. Code Ann. § 12-60-470 (Supp. 1996).

13. On January 27, 1998, the taxpayers' claim for refund was denied in the Final Agency Determination of the Department of Revenue.

14. A contested case hearing with the Administrative Law Judge Division was requested by the taxpayers on March 3, 1998.

Both parties filed Motions for Summary Judgment stating there is no genuine issue of fact to be determined and the sole issue to be decided was whether the Department's final assessment was timely and within the applicable statute of limitations.

At the time the Department issued the proposed assessment to taxpayers in March 1995, S.C. Code Ann. § 12-54-80 (Supp. 1994) was the applicable statute setting forth the time period within which the Department could issue assessments. It provided in part:

[e]xcept as otherwise provided in this section, the amount of taxes due on a return which has been filed as required by provisions of law administered by the commission must be determined and assessed within thirty-six months from the date the return was filed or due to be filed, whichever occurs later. In the case of income taxes, the commission may determine and assess income taxes after the thirty-six months limitation if it makes the determination and assessment within one hundred and eighty days of receiving notice from the Internal Revenue Service of a final determination of an income adjustment made by the Internal Revenue Service.

(Emphasis added). In this matter, the Department received notice of the IRS adjustment on February 28, 1995; therefore, the 180-day period in which to issue a final assessment expired on August 27, 1995. Prior to the expiration of the assessment period, Section 12-54-80 was repealed and a new statute was enacted, effective August 1, 1995. The new code section stated, in part:

(C) Taxes may be determined after the thirty-six month limitation if:

(1) in the case of income, estate and generation skipping transfer taxes, the taxes are assessed within one hundred eighty days of receiving notice from the Internal Revenue Service of a final determination of a tax adjustment made by the Internal Revenue Service;

. . .

(G) The running of the period limitations provided in subsections (A), (B), (C), (D), and (E) of this section is suspended:

. . .

(2) for ninety days after the date of a proposed assessment, property tax assessment notice, or tax notice[.]

(Emphasis added). S.C. Code Ann. § 12-54-85 (Supp. 1996).

Pursuant to the amended statute, the 180-day period in which to issue a final assessment is suspended for 90 days after the date of the proposed assessment. The Department issued its proposed assessment on March 20, 1995. As applied to the present situation, the extension assigns the date for the final assessment as November 25, 1995. The Department's final assessment was issued October 6, 1995. The question then presented is whether the statutory amendments extending the statute of limitations may be applied retroactively.

There is a presumption that statutory enactments are to be considered prospective rather than retroactive in their operation unless there is a specific provision or a clear legislative intent to the contrary. Hercules, Inc. v. South Carolina Tax Commission, 274 S.C. 137, 262 S.E.2d 45 (1980). However, the South Carolina Supreme Court has consistently approved retroactive application of statutes which provide procedural or remedial benefits as opposed to statutes affecting vested or substantial rights. Goff v. Mills, 279 S.C. 382, 308 S.E.2d 778 (1983); See also Jenkins v. Meares, 302 S.C. 142, 394 S.E.2d 317 (1990). This exception is still subject to an analysis of the intent of the legislature as to the prospective or retrospective application of the statute. Jenkins, 302 S.C at 146.

Petitioners argue that South Carolina Nat'l Bank v. South Carolina Tax Comm'n, 297 S.C. 279, 376 S.E.2d 512 (1989), applies. In that case, the Tax Commission [Department] attempted to apply a six year statute of limitations enacted in 1985 to assess additional taxes that were due from 1979 to 1982. The Tax Commission issued its assessment on January 31, 1986. Prior to the six year statute of limitations being effective on September 1, 1985, the time period for assessing taxes under the pre-existing statute of limitations expired in July 1985. At the time the tax returns were filed, the Tax Commission had three years within which to send notice of underpayment. The time period for sending an assessment had expired before the amendment of the six year statute of limitation.

The question presented to the Supreme Court was whether the six year statute of limitation should be applied retroactively to allow an assessment which was untimely under the pre-existing statute. The Supreme Court stated that legislative intent determines retroactive application of a statute. The Court went on to say that "statutes are not to be applied retroactively unless the result is so clearly compelled as to leave no room for doubt." 297 S.C. at 281, 376 S.E.2d at 513. The six year statute of limitations would have revived an action that was already procedurally barred. The Court therefore held that the new statute of limitations could not be applied retroactively to revive the period for assessing taxes.

In this case, clearly the legislature intended for Section 12-54-85 to be applied retrospectively. When Section 12-54-85 was enacted providing for the 90-day tolling period, Section 12-54-80 was specifically repealed. The intention was that the new statute extending the time period was to replace the old provisions. "Where an amendment to a statute of limitations enlarges the time within which an action arose must be brought, the new statute applies even though the cause of action arose prior to the change." 54 C.J.S. Limitation of Actions § 7 (1987). By repealing the existing statute of limitations and replacing it with a new statute that enlarged the time for issuing assessment by tolling of the period, the legislature clearly intended for the statute of limitations to apply to all pending files and not only to assessments to be made in the future.

At the time of the enactment of Section 12-54-85, the assessment period had not yet expired. The Department was not prohibited from issuing a final assessment because the time period under Section 12-54-80 did not expire until August 27, 1995. The intervening enactment of the tolling period in Section 12-54-85 enlarged the period of time during which the Department could issue an assessment. Enlargement of a limitations period by legislative enactment governs a claim not yet time barred under an earlier statute. Goff v. Mills, 279 S.C. 382, 308 S.E.2d 778 (S.C. 1983). The assessment by the Department on October 6, 1995 was timely.

Based upon the Findings of Fact, I conclude as a matter of law:

1. The Administrative Law Judge Division is authorized to hear contested cases pursuant to Chapter 23 of Title 1 of the 1976 Code, as amended. S.C. Code Ann. § 12-60-2540 (Supp. 1997).

2. In examining Petitioners' claim that Respondent's assessment was not timely, the applicable statute must be determined.

3. At the time the Department received notice of the IRS adjustment, S.C. Code Ann. § 12-54-80 (Supp. 1994) provided the period during which an assessment could be issued. The statute allowed for 180 days. The expiration date for an assessment by the Department was August 27, 1995.

4. S.C. Code Ann. § 12-54-85 (Supp. 1997) came into effect on August 1, 1995, extending the period during which an assessment could be issued by providing a 90 day tolling period from the date of the proposed assessment. At the same time, S.C. Code Ann. § 12-54-80 was repealed. Act No. 60, 1985, S.C. Acts § 41.

5. The statute of limitations that is in force at the time the suit is brought provides the applicable limitations period, as opposed to the one in effect at the time of the accrual of the cause of action. 54 C.J.S. Limitations of Actions § 7.

6. By repealing the existing statute of limitations and replacing it with a new statute that enlarged the time for issuing assessment by tolling of the period, the legislature clearly intended for the statute of limitations to apply to all pending files and not only to assessments to be made in the future.

7. At the time of the enactment of Section 12-54-85, the assessment period had not yet expired. Enlargement of a limitations period by legislative enactment governs a claim not yet time barred under an earlier statute. Goff v. Mills, 279 S.C. 382, 308 S.E.2d 778 (S.C. 1983).

8. Therefore, S.C. Code Ann. § 12-54-85 (Supp. 1997) is controlling in this situation.

9. The Department's final assessment issued on October 6, 1996 was timely.

Based on the foregoing Findings of Fact and Conclusions of Law, it is hereby

ORDERED, that the Department of Revenue properly assessed additional income tax upon the taxpayers and the assessment was timely pursuant to S.C. Code Ann. § 12-54-85. Respondent's Motion for Summary Judgment is granted.

AND IT IS SO ORDERED.

_________________________________

ALISON RENEE LEE

Administrative Law Judge

October 19, 1998

Columbia, South Carolina.