STATE OF WISCONSIN
TAX APPEALS COMMISSION
KENNETH H. PAKER AND
MARIANNE FLOOD PAKER
305 Arcadia Drive
Madison, WI 53717
WISCONSIN DEPARTMENT OF REVENUE
P.O. Box 8933
Madison, WI 53708
|DOCKET NO. 98-I-142
DECISION AND ORDER
THOMAS M. BOYKOFF, COMMISSIONER:
This matter was submitted to the Tax Appeals Commission on stipulated facts. Petitioners, Kenneth H. Paker and Marianne Flood Paker, appear pro se. Respondent, Wisconsin Department of Revenue, is represented by Attorney Sheree Robertson, Madison, Wisconsin.
Based on the stipulated facts, related exhibits, and briefs of both parties, the Commission finds, concludes, and orders as follows:
FINDINGS OF FACT
The Commission adopts the following facts as stipulated by the parties, with slight modifications and with references to exhibits omitted:
1. Kenneth H. Paker and Marianne Flood Paker ("petitioners") filed a Wisconsin joint income tax return(1) for 1996 as part-year residents from January 20, 1996 to December 31, 1996. A wage statement for petitioner Kenneth H. Paker ("Mr. Paker") from Lucent Technologies, Inc. ("Lucent") is attached to this income tax return. That wage statement shows that Mr. Paker received wages, tips, and other compensation in 1996 of $67,022.71. The wage statement further shows that Wisconsin state income tax in the amount of $4,643.85 was withheld. Also attached to petitioners' income tax return is another wage statement for 1996 for Mr. Paker from AT&T Corporation ("AT&T") showing that he received $2,782.95 of wages that were also subject to Wisconsin income tax withholding.
2. On their 1996 income tax return, petitioners claimed a refund of $5,172.30.
3. Under date of June 17, 1997, respondent issued to petitioners a notice stating that the wages reported on the income tax return were adjusted by respondent to agree with the Wisconsin wages shown on the two wage statements. Since the wages reported by petitioners were adjusted, respondent determined that petitioners were only entitled to a refund of $828.43.
4. Petitioners filed with respondent a timely petition for redetermination objecting to the notice of refund.
5. Under date of April 16, 1998, petitioners' petition for redetermination was denied. The denial notice provides the following reason:
Per sec. 71.04(2), Wis. Stats., liability to taxation for income which follows the residence of the recipient, who moves into the state within the year, shall be determined on the basis of the income received during the portion of the year that the individual was a resident of Wisconsin.
6. On June 15, 1998, petitioners filed a timely petition for review with the Commission.
7. Prior to January 13, 1996, both petitioners were employed in Illinois by AT&T, which subsequently became Lucent Technologies, Inc.
8. On January 13, 1996, petitioners voluntarily terminated their employment with AT&T as part of an AT&T Force Management Program. Because Mr. Paker voluntarily terminated his employment with AT&T, he received from Lucent the $67,022.71 of income reported on the 1996 wage statement, on which Wisconsin income tax was withheld. Lucent did not withhold Illinois income tax on this income.
9. Mr. Paker also received income from AT&T in 1996 in the amount of $2,782.95, on which Wisconsin income tax was withheld.
10. Mr. Paker received the income from Lucent and AT&T after he moved to Wisconsin.
11. Petitioners filed a 1996 Illinois income tax return, reporting the $67,022.71 Mr. Paker received from Lucent.
12. On their 1996 Wisconsin income tax return, petitioners did not report the $67,022.71 received from Lucent, because they contend that the income is not subject to Wisconsin income tax.
13. Respondent determined that both the $67,022.71 and the $2,782.95 that Mr. Paker received after he moved to Wisconsin are subject to Wisconsin income tax. Petitioners disagree.
Are the two amounts ($67,022.71 and $2,782.95) to which petitioner Kenneth H. Paker acquired rights in Illinois in 1995 and received from his former employers in 1996 after becoming a Wisconsin resident taxable under Wisconsin's income tax law?
71.02 Imposition of tax.
(1) For the purpose of raising revenue for the state and the counties, cities, villages and towns, there shall be assessed, levied, collected and paid a tax on all net incomes of individuals ... by every natural person residing within the state....
71.04 Situs of income; allocation and apportionment.
(a) All income or loss of resident individuals ... shall follow the residence of the individual....
* * *
(2) PART-YEAR RESIDENT LIABILITY DETERMIN-ATION. Liability to taxation for income which follows the residence of the recipient, in the case of persons ... who move into or out of the state within the year, shall be determined for such year on the basis of the income received (or accrued, if on the accrual basis) during the portion of the year that any such person was a resident of Wisconsin. The net income of such person assignable to the state for such year shall be used in determining the income subject to assessment under this chapter.
CONCLUSION OF LAW
Income which petitioner Kenneth H. Paker received from his former employer, to which he acquired rights in Illinois in 1995 while an Illinois resident, and which he received in 1996 after he established residence in Wisconsin, is taxable as Wisconsin income pursuant to Wis. Stat. §§ 71.02 and 71.04.
Wisconsin's income tax applies to all income of residents of this state. It applies no matter where the income was earned and no matter in what state the rights to it may have been acquired. Wis. Stat. § 71.02(1). "All income ... of resident individuals ... shall follow the residence of the individual...." Wis. Stat. § 71.04(1).
Respondent cites three cases of this commission on point. In Day v. WDOR, Wis. Tax Rep. (CCH) ¶ 200-826 (1972), in 1969, while a Wisconsin resident, petitioner received deferred compensation for personal services performed in Minnesota prior to becoming a Wisconsin resident. The Commission cited the above statutes and concluded that the income was taxable by Wisconsin because it was received when petitioner was a Wisconsin resident.
In Day, the Commission cited Stucky v. WDOR, 5 WTAC 190 (1964). Prior to his November 1958 transfer to Wisconsin by his employer, Mr. Stucky was a resident of California. In 1959, after becoming a Wisconsin resident, he received extra compensation from his California employer. The amount of this extra compensation was determined in 1959, based on the employer's 1958 profits. The Board of Tax Appeals (the predecessor agency to this commission) concluded that the income was taxable by Wisconsin, the state in which Mr. Stucky resided when he received it.
More recently, in Lawn v. WDOR, Wis. Tax Rep. (CCH) ¶ 202-515 (1985), Mr. Lawn received a wage settlement in 1981 resulting from a lawsuit he commenced in Florida involving 1977 and 1978 wages. This commission again concluded that the wage settlement received in 1981, although earned in 1977 and 1978, was taxable to Mr. Lawn in 1981 because it was received in that year while he was a Wisconsin resident.
The same reasoning applies here. Mr. Paker acquired the right to receive $67,022.71 and $2,782.95 in 1995 in Illinois while a resident of that state. He subsequently moved to Wisconsin, where he received the funds in 1996. By the above line of authority, Mr. Paker's above amounts are subject to Wisconsin's income tax.
Petitioners assert that Day is distinguishable because the actual amount Mr. Day received, based on his employer's 1958 profits, was not determined until 1959, two months after he moved to Wisconsin. They also try distinguishing Lawn on the basis that the lawsuit's settlement amount was not determined until 1981, when Mr. Day had become a Wisconsin resident. In addition, in Stucky, they point out that Mr. Stucky's profit sharing payment was not determined until after he lived in Wisconsin. These cases differ from Mr. Paker's, petitioners state, because his payments were received in 1996 while living in Wisconsin but the amounts were determined and fixed in 1995 while he was an Illinois resident.
This argument is not persuasive. The correct standard for applying Wisconsin's income tax is when the income was received, not when the amount was determined. The amounts were received when Mr. Day, Mr. Stucky, Mr. Lawn, and Mr. Paker lived in Wisconsin. The amounts were and are, therefore, subject to Wisconsin's income tax. That is what is meant by "All income ... of resident individuals ... shall follow the residence of the individual...." § 71.04(1). And "[l]iability to taxation for income which follows the residence of the recipient ... in the case of persons who move into ... the state within the year, shall be determined ... on the basis of the income received (or accrued if on the accrual basis) during the portion of the year that any such person was a resident of Wisconsin." § 71.04(2).
Petitioners also argue that Mrs. Paker, too, received income under the same termination plan in 1996, but this income was not questioned by respondent; therefore, this inconsistency in treatment should be made consistent by Mr. Paker's income under review not being questioned. (This argument could obviously boomerang if the inconsistency is resolved by taxing Mrs. Paker's income similarly to Mr. Paker's income.)
Respondent replies that its adjustments to Mr. Paker's income were made because of differences in his reported Wisconsin income for 1996 and the two 1996 wage statements he received. No wage statement from either issuer of Mrs. Paker's two wage statements was attached to petitioners' 1996 part-year Wisconsin income tax return.(2)
Petitioners state that they reported the disputed income on the accrual, not cash, method of accounting. This method would require that the income under review be attributed to 1995 (the year it accrued), not 1996 (the year it was received). In 1995, petitioners were not residents of Wisconsin.
In support of this assertion, petitioners quote portions of federal income tax publications (Publications 17 and 538) and conclude that they may elect to report to Wisconsin on the accrual method. This appears to be the first time petitioners raise this issue.
A quoted sentence from Publication 17 reads: "You choose a method [of accounting] when you file your first [federal] income tax return." Nothing in the record shows that the petitioners were already on the accrual method of accounting. Absent any showing that petitioners used the accrual method for their prior returns, we must assume they used the cash method of accounting.
Respondent correctly counters that IRS approval is required for a change of accounting method. Wisconsin's statutes for tax year 1996 adopt the provisions of the Internal Revenue Code as amended to December 31, 1995 (Wis. Stat. § 71.01(6)(k)), with exceptions not applicable here. The federal requirement of application to and approval by the IRS to change an accounting method of reporting (Internal Revenue Code § 446(e)) applies to Wisconsin income tax law.
Petitioners have not shown what accounting method they used prior to 1996, and, assuming they used the cash method, they have not shown whether they received IRS approval to change to the accrual method for 1996. Petitioners may not change their income tax method of accounting at will.
IT IS ORDERED
That respondent's action on petitioners' petition for redetermination is affirmed.
Dated at Madison, Wisconsin, this 23rd day of June, 1999.
WISCONSIN TAX APPEALS COMMISSION
Mark E. Musolf, Chairperson
Don M. Millis, Commissioner
"NOTICE OF APPEAL ___________________________________________
INFORMATION" Thomas M. Boykoff, Commissioner
August 10, 1999 Petition for rehearing denied under § 227.49(3)
1 References to an income tax return in these Findings of Fact mean the 1996 Wisconsin joint income tax return filed by petitioners, unless otherwise specified. Although adjustments were made on Mr. Paker's income only, both Mr. and Mrs. Paker are petitioners here because the adjustments apply to the joint returns which they both filed.
2 Although Mrs. Paker's income is not involved in this case, a March 13, 1998 letter from respondent to both petitioners states that respondent awaits resolution of this case before it inquires further into what income Mrs. Paker received in 1996 that may be taxable by Wisconsin. This letter is attached to an exhibit, although facts contained in it or any reference to it is not included in the stipulated facts.