STATE OF WISCONSIN
TAX APPEALS COMMISSION
DENNIS AND PAMELA JACOBSON
317 21st Avenue
Cumberland, WI 54829,
WISCONSIN DEPARTMENT OF REVENUE
P.O. Box 8907
Madison, WI 53708-8907,
|DOCKET NO. 01-I-94
DECISION AND ORDER
DON M. MILLIS, COMMISSION CHAIRPERSON:
This matter came before the Commission for trial on February 12, 2002, in Eau Claire. Both parties have filed post-hearing submissions. Petitioners appeared in person and were represented by Gregory J. Galaski. Respondent appeared by Attorney Neal E. Schmidt.
FINDINGS OF FACT
Based on the evidence received at trial and the record in this matter, the Commission makes the following Findings of Fact.
1. During the first part of 1997, petitioner Dennis Jacobson was employed by Echo Brook Freight, Inc., of Colfax, Wisconsin ("Echo Brook"), during which period Echo Brook paid Mr. Jacobson $9,400.31.
2. A few months after he left Echo Brook's employ in 1997, Mr. Jacobson returned to Echo Brook as a contractor, supplying trucking services to it from that point forward and for all of 1998 and 1999. During 1998 and 1999, Mr. Jacobson was joined by his son, Chad Jacobson, in providing trucking services to Echo Brook.
3. Echo Brook reported paying non-employee compensation to Mr. Jacobson of $7,567.19 and $6,925.45 in 1997 and 1998, respectively. Echo Brook reported paying non-employee compensation to Chad Jacobson of $72,936.17 in 1998.(1) The amounts paid by Echo Brook for the trucking services performed by Mr. Jacobson and his son were allocated between Mr. Jacobson and his son as directed by Mr. Jacobson and his son.
4. Mr. Jacobson and his son used a single truck to provide trucking services to Echo Brook. This truck was owned by an attorney in Michigan. Mr. Jacobson and his son were parties to a lease-purchase agreement with the truck's owner. Echo Brook made monthly payments of $1,186 to the truck's owner out of the amounts Echo Brook owed to Chad Jacobson.(2) Once all of the payments are made under lease-purchase agreement, title to the truck will pass to Chad Jacobson.
5. During most, if not all, of the years at issue, Chad Jacobson lived with petitioners and paid them $500 per month.
6. Petitioners did not file Wisconsin income tax returns for 1997, 1998, and 1999, the years at issue.
7. On December 14, 2000, respondent sent a letter to petitioners requesting that they file Wisconsin income tax returns for the years at issue within 30 days. Petitioners did not file returns in response to respondent's letter and had not filed returns as of the date of trial.
8. Under the date of February 19, 2001, and pursuant to section 71.74(3) of the Statutes, respondent issued a default income tax assessment against petitioners for the years at issue in the principal amount of $8,081.00, plus interest, penalties, and fees as of that date of $5,069.20. Respondent estimated that petitioners had Wisconsin adjusted taxable income of $45,000 during each of the years at issue.
9. Petitioners filed with respondent a document construed by respondent as a petition for redetermination objecting to the assessment. Respondent denied the petition for redetermination. Petitioners then filed a timely petition for review with the Commission.
71.88 Time for filing an appeal.
(1) APPEAL TO THE DEPARTMENT OF REVENUE.
(a) Contested assessments and claims for refund.... any person feeling aggrieved by a notice of additional assessment, refund, or notice of denial of refund may, within 60 days after receipt of the notice, petition the department of revenue for redetermination. A petition or an appeal by one spouse is a petition or an appeal by both spouses. The department shall make a redetermination on the petition within 6 months after it is filed.
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(2) APPEAL TO THE WISCONSIN TAX APPEALS COMMISSION.
(a) Appeal of the department's redetermination of assessments and claims for refund. A person feeling aggrieved by the department's redetermination may appeal to the tax appeals commission by filing a petition with the clerk of the commission as provided by law and the rules of practice promulgated by the commission. If a petition is not filed with the commission within the time provided in s. 73.01 or, except as provided in s. 71.75(5), if no petition for redetermination is made within the time provided the assessment, refund, or denial of refund shall be final and conclusive.
73.01 Tax appeals commission.
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(4) POWERS AND DUTIES DEFINED.
(a) Subject to the provisions for judicial review contained in s. 73.015, the commission shall be the final authority for the hearing and determination of all questions of law and fact arising under sub. (5) and s. 72.86(4), 1985 stats., and ss. 70.11(21), 70.38(4)(a), 70.397, 70.64 and 70.995(8), s. 76.38(12)(a), 1993 stats., ss. 76.39(4)(c), 76.48(6), 76.91, 77.26(3), 77.59(6)(b), 78.01, 78.22, 78.40, 78.555, 139.02, 139.03, 139.06, 139.31, 139.315, 139.33, 139.76, 139.78, 341.405 and 341.45, subch. XIV of ch. 71 and subch. VII of ch. 77.
Internal Revenue Code
Sec. 61 (a) GENERAL DEFINITION.Except as otherwise provided in this subtitle, gross income means 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;
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§ 1.61-2. Compensation for services, including fees, commissions, and similar items.
(a) In general.
(1) Wages, salaries, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses (including Christmas bonuses), termination or severance pay, rewards, jury fees, marriage fees and other contributions received by a clergyman for services, pay of persons in the military or naval forces of the United States, retired pay of employees, pensions, and retire-ment allowances are income to the recipient unless excluded by law. . . .
CONCLUSIONS OF LAW
1. The Commission has subject matter jurisdiction over the petition for review.
2. Petitioners have failed to meet their burden of proving that they did not have taxable income for any of the years at issue.
3. The positions asserted by petitioners in this matter are frivolous and groundless, subjecting petitioners to a penalty of $750 pursuant to section 73.01(4)(am) of the Statutes.
Subject Matter Jurisdiction
Petitioners first argue that the Commission lacks subject matter jurisdiction over respondent's assessment.(3) Petitioners' challenge to the subject matter jurisdiction of the Commission focuses squarely on section 73.01(4)(a) of the Statutes, the section that specifies much of the Commission's appellate authority. Petitioners point out that section 73.01(4)(a) provides that "the commission shall be the final authority for the hearing and determination of all questions of law and fact arising under . . .," and then goes on to enumerate nearly thirty statutory references. Petitioners point out that many of the statutes referenced contain both substantive and procedural elements. For example, section 73.01(4)(a) refers to section 70.397 of the Statutes. Section 73.097 contains the substantive imposition of the oil and gas severance tax (section 73.097(2)), as well as the procedures for appealing the respondent's determination to the commission (section 73.097(3)(c)). Petitioners contrast references like the oil and gas severance tax to the reference that provides the Commission's jurisdiction over the income tax. With respect to the income tax, section 73.01(4)(a) merely refers to subchapter XIV of chapter 71. This subchapter deals only with procedural matters, including the provision for appeals to the Commission of income tax assessments (section 71.88(2)(a)). This subchapter does not, however, contain any of the substantive provisions of chapter 71 imposing the income tax and determining the measure of tax. For petitioners, this omission is significant. They argue that because section 73.01(4)(a) does not list any of chapter 71's imposition provisions, the Commission lacks authority over the income tax assessments in general and the assessment against petitioners in particular. Petitioners argue that, based on this difference, the Commission should ignore the literal reading of the statutes to avoid an absurd result.(4) To quote a prominent Wisconsin jurist, we "are compelled to conclude that the problem is not one of literalness, but of literacy." Madison v. Fitchburg, 112 Wis. 2d 224, 241 (1983) (Heffernan, J., dissenting).
The statutes could not be clearer. Any person aggrieved by a notice of additional assessment may appeal by filing a petition for redetermination with respondent. Wis. Stat. § 71.88(1)(a). A person aggrieved by respondent's action on the petition for redetermination may file a petition with the Commission. Wis. Stat. § 71.88(2)(a).
It matters not whether the statutory reference in section 73.01(4)(a) is to a statute containing the substantive provision of a tax. In fact, the tax statutes are hardly an example of consistency when it comes to defining the jurisdiction of the Commission. It is possible to express the same idea in more than one way. Either way, the Commission clearly has subject matter jurisdiction over the petition for review.
Requirement to File an Income Tax Return
Respondent issued a default assessment against petitioners under section 71.74(3) of the Statutes. This section allows respondent to assess persons required to file a return who refuse to do so. Petitioners' response is that they are not required to file because they had no taxable income during the years at issue. Not only have petitioners utterly failed to show that they had no income, the record clearly shows that they had some taxable income during the years at issue.
Taxation of Labor
Petitioners argue that the payments made by Echo Brook to Mr. Jacobson during the years at issue were payments for his labor, and that Wisconsin does not tax labor. Petitioners claim they can find no authority in Wisconsin law for the taxation of labor.
Petitioners should start with section 71.02(1) of the Statutes, which imposes a tax on "all net incomes of individuals" among others. This term is not limited by source, and, therefore, generally must apply to net incomes regardless of source. More specifically, "Wisconsin adjusted gross income" and "Wisconsin taxable income" are defined with reference to the Internal Revenue Code, with certain alterations not relevant here. Wis. Stat. §§ 71.01(4), (13), and (16). Section 61 of the Internal Revenue Code defines gross income very broadly, including compensation for services. I.R.C. § 61(a)(1). Clearly, the payments Mr. Jacobson received from Echo Brook, both in terms of employee and non-employee compensation, were compensation for his services. See, Treas. Reg. § 1.61-2(a)(1).
We find no exception or exclusion in the law for compensation for labor. Neither have petitioners cited any authority - mandatory or persuasive - that would suggest that payment in exchange for labor should be treated differently than any other payment falling under I.R.C. section 61. In fact, one of the cases cited by petitioners stands for the opposite proposition:
The starting point in the determination of the scope of "gross income" is the cardinal principle that Congress in creating the income tax intended "to use the full measure of its taxing power." Helvering v. Clifford, 309 U.S. 331, 334 (1940); . . . [T]his Court stated that "Congress applied no limitations as to the source of taxable receipts, nor restrictive labels as to their nature[, but intended] to tax all gains except those specifically exempted." Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-30 (1955). . . .
Commissioner v. Kowalski, 434 U.S. 77, 82-83 (1977).
The closest petitioners come to authority to support their point is Davis v. Edison Electric Illuminating Co. of Boston, 89 F.2d 393 (1st Cir. 1937). Petitioners claim that this case stands for the proposition that payments to Mr. Jacobson for labor "partake of the nature of both personal liberty and of private property involving the right to labor that is not a commodity or privilege subject to tax." Petitioners' Reply Brief at 3. Petitioners were likely looking at the following passage in Davis:
"The rights to labor and to do ordinary business are natural, essential, and inalienable, partaking of the nature of both personal liberty and of private property."
If Congress can tax the common right to employ labor and appropriate the money so collected to any object it sees fit, however it may concern the domestic affairs of the States, and the courts are powerless under the decision in Massachusetts v. Mellon (Frothingham v. Mellon), 262 U.S. 447, 43 S.Ct. 597, 67 L.Ed. 1078, the States will soon, under the policy of recent Congresses, be reduced to mere "geographical subdivisions of the national domain."
Davis, 89 F.2d at 396 (quoting Opinion of the Justices, 247 Mass. 597, 143 N.E. 808, 811).
Elsewhere, the Davis court stated:
It has never been held, however, either by the Supreme Court of the United States, or the Supreme Court of any state, so far as we are advised, that Congress had the power to tax the common right to employ labor. It is like taxing a person's right to work.
Id. at 395.
The quote from Davis is not quite on point, since the issue in that case was whether Congress exceeded its constitutional grant of authority when it imposed the social security tax on employers and employees. The issue in the instant matter is whether, by its own terms, Wisconsin's law imposes a tax on compensation for labor.
The news is even worse for petitioners. Just 40 days after the First Circuit Court of Appeals issued its opinion in Davis, the holding was reversed by the United States Supreme Court in Helvering v. Davis, 301 U.S. 619, 646 (1937), and the rest, as they say, is history. While there may be those who feel that taxes on labor are unwise or outside of governmental power, they have clearly not carried the day.
There can be no reasonable doubt that Wisconsin has the power to tax Mr. Jacobson on compensation he received for his labor and that it has enacted laws to do so. See, Tracy v. Dep't of Revenue, 133 Wis. 2d 151, 159-60 (Ct. App. 1986) (holding that Wisconsin's income tax applies to income derived from labor). Moreover, the record shows that the Jacobsons have, at a minimum, taxable income from Echo Brook, as well as from their son.
Petitioners also argue that if they filed income tax returns "just like everyone else" (Petitioners' Brief at 8), they would be guilty of perjury because they would be telling a lie: reporting as taxable income payments that were not subject to tax. Of course, this argument is premised on petitioners' assertion that the payments for labor are not taxable. Because petitioners are wrong about the taxation of labor, there is no threat of consequences if they correctly file income tax returns accurately reporting their income.(5)
Frivolous and Groundless Position
Petitioners' position in this matter is clearly frivolous and not grounded in any mandatory or persuasive authority. Any reasonable reading of Wisconsin law would lead one to conclude that (1) the Commission has jurisdiction over respondent's income tax assessments, and (2) compensation for labor is subject to the income tax. Petitioners could point to no authority to refute either proposition. The best petitioners could do was to point to a federal circuit court of appeals case that was reversed more than 65 years ago. We conclude that petitioners' position on both propositions is frivolous and without basis. Therefore, we assess petitioners an additional $750 under section 73.01(4)(am) of the Statutes.
1. Respondent's action on the petition for redetermination is affirmed;
2. Petitioners are assessed an additional $750 pursuant to section 73.01(4)(am) of the Statutes.
Dated at Madison, Wisconsin, this 15th day of November, 2002.
WISCONSIN TAX APPEALS COMMISSION
Don M. Millis, Commission Chairperson
Thomas M. Boykoff, Commissioner
Richard F. Raemisch, Commissioner
ATTACHMENT: "NOTICE OF APPEAL INFORMATION"
January 9, 2003 Petition for rehearing denied under § 227.49(3)
February 3, 2003 Second petition for rehearing denied pursuant to 227.49(3)
3 Ordinarily the Commission would address a challenge to the Commission's subject matter jurisdiction well in advance of trial. It would be a waste of litigant and Commission resources if the Commission were to hold a trial in a matter over which the Commission had no jurisdiction. However, petitioners filed their motion to dismiss for want of jurisdiction the day before trial. Rather than cancel the trial, the Commission went ahead with the trial, with the understanding that the Commission would first address the issue of jurisdiction in its Decision and Order.
5 Petitioners complain that Echo Brook reported as non-employee compensation to Chad Jacobson the amount it paid to the owner of the truck. The record does not necessarily support this assertion. Regardless, it is not material, since the assessment at issue does not involve the younger Jacobson.