STATE OF WISCONSIN
TAX APPEALS COMMISSION
EDWARD C. AND JEAN F. WILKINSON
905 Tanglewood Court
Oconomowoc, WI 53066,
WISCONSIN DEPARTMENT OF REVENUE
P.O. Box 8907
Madison, WI 53708-8907,
RULING AND ORDER
DON M. MILLIS, ACTING CHAIRPERSON:
This matter comes before the Commission on cross-motions for summary judgment. Both parties have submitted briefs and supporting papers with respect to the motions. Petitioners represent themselves. Respondent is represented by Attorney Robert C. Stellick, Jr.
Having considered the submissions of the parties and the entire record in this matter, the Commission finds, concludes, and orders as follows:
SUMMARY OF UNDISPUTED FACTS
1. Petitioner Edward C. Wilkinson taught in the Milwaukee city public schools from 1955 to 1967. As of September 1959, Mr. Wilkinson was a member of the Milwaukee School Teachers' Annuity and Retirement Fund ("MTRF").
2. In June of 1967, Mr. Wilkinson received a complete refund of his contributions to the MTRF after he submitted his application for refund on or about April 5, 1967.
3. The application for refund Mr. Wilkinson signed provided, in part:
As a member of the FUND, I further agree that payments of said accumulation(s) made shall constitute a full and complete discharge and release of all right, interest or claim on my part to state deposit accumulations which accrued while a member of said FUND.
4. In 1967, Mr. Wilkinson took a position with the University of Wisconsin-Milwaukee and the University of Wisconsin Extension. By virtue of taking this position, on or about August 18, 1967, Mr. Wilkinson became a member of the Wisconsin State Teachers Retirement System ("STRS").
5. In 1974, Mr. Wilkinson returned to employment with the Milwaukee public schools until his retirement in 1990.
6. When he retired in 1990, Mr. Wilkinson received a copy of respondent's Publication 108 entitled "HOW YOUR RETIREMENT BENEFITS ARE TAXED", dated June 1989, and relied upon it in preparing petitioners' Wisconsin income tax returns for 1991, 1992, and 1993. Publication 108 provided, in part:
Some payments received from the Wisconsin Retirement System are exempt for Wisconsin tax purposes (they are not exempt for federal tax purposes):
* * *
Payments received from the Wisconsin Retirement System if the payments were paid on the account of a person who was a member of the State Teacher's Retirement System or the Milwaukee Teacher's Retirement System as of December 31, 1963, or was retired from one of those retirement systems as of that date. . . .
7. Following the withdrawal of his MTRF contribution, Mr. Wilkinson had on account with the STRS no deposits from either him or the state attributable to his teaching service with the Milwaukee public schools prior to 1967. His MTRF ledger shows that in 1967 all deposit accumulations had been withdrawn, leaving him with no balance. Mr. Wilkinson's STRS ledger shows that when he began service under the STRS in 1967, he started off with a zero balance.
8. In 1990, Mr. Wilkinson applied to the Wisconsin Retirement System ("WRS") to purchase, under section 40.25(6) of the Statutes, previously forfeited years of service under the MTRF and other public employment service not relevant to the issues raised here.
9. Originally Mr. Wilkinson purchased a total of 10 years of forfeited service, leaving 5.07 years of forfeited service as uncredited. However, as a result of the Dane County Circuit Court's decision in Olson, Rinehart and Wuebben v. Employe Trust Funds Board, Case No. 96-CV-308 (Oct. 30, 1997), the Department of Employe Trust Funds ("DETF") granted Mr. Wilkinson 7.7 years of his forfeited MTRF years of service with no charge, and the number of forfeited years of service he purchased was adjusted to 7.37 years, with the cost to purchase 2.63 years refunded to Mr. Wilkinson.
10. For the years at issue here, Mr. Wilkinson's retirement benefits from the WRS were based on his non-forfeited years of service, two years of military service, and 7.37 years previously forfeited.
11. In 1991, 1992, and 1993, Mr. Wilkinson received payments from the WRS in the respective amounts of $20,330, $21,343, and $22,481.
12. On their Wisconsin income tax returns for 1991 through 1993, petitioners did not report Mr. Wilkinson's retirement payments received during these years.
13. On May 15, 1995, respondent issued an income tax assessment against petitioners for 1991 through 1993 in the amount of $4,834, plus $1,306.41 in interest. Among the bases for the assessment was respondent's assertion that the amounts Mr. Wilkinson received from the WRS in 1991 through 1993 were subject to Wisconsin's income tax.
14. Petitioners filed a petition for redetermination objecting only to that portion of the assessment pertaining to Mr. Wilkinson's payments from the WRS. Respondent denied the petition for redetermination. Petitioners filed a timely petition for review with the Commission.
15. The DETF interprets and applies section 40.25(6) of the Statutes to mean that an eligible public employee, including a state teacher, who purchases previously forfeited creditable service obtains the right to use such purchased years of service only to determine the final amount of that person's retirement annuity and insurance eligibility at retirement, but not to reinstate or restore any other rights the person may have had in the retirement system or its predecessor before withdrawing from such system.
16. In Wisconsin Tax Bulletin 76, issued in April 1992, and Wisconsin Tax Bulletin 98, issued in July 1996, respondent advised that members of the STRS who withdrew their deposit accumulations prior to 1964 could still qualify for the exemption under section 71.05(1)(a) of the Statutes. Respondent revoked this advice for persons drawing STRS pensions effective with taxable years beginning on or after January 1, 2000. Those people drawing STRS pensions could rely on this advice for years beginning prior to January 1, 2000.
71.05 Income computation.
(1) EXEMPT AND EXCLUDABLE INCOME. There shall be exempt from taxation under this subchapter the following:
(a) Retirement systems. All payments received from . . . the public employe trust fund as successor to the Milwaukee public school teachers' annuity and retirement fund and to the Wisconsin state teachers retirement system, which are paid on the account of any person who was a member of the paying or predecessor system or fund as of December 31, 1963, . . . but such exemption shall not exclude from gross income tax sheltered annuity benefits. [Emphasis supplied.]
CONCLUSION OF LAW
The retirement benefits paid to Mr. Wilkinson are not exempt from the Wisconsin income tax because they were not paid on the account of a person who was a member of an eligible retirement system as of December 31, 1963.
This case is governed by three prior Commission decisions: Connor v. Dep't of Revenue, 1995 Wisc. Tax LEXIS 41, Wis. Tax Rep. (CCH) ¶400-176 (WTAC 1995); Groschel v. Dep't of Revenue, 1996 Wisc. Tax LEXIS 34, Wis. Tax Rep. (CCH) ¶400-235 (WTAC 1996); and Hansis v. Dep't of Revenue, Wis. Tax Rep. (CCH) ¶400-548 (WTAC 2001). In Groschel, the taxpayer was a member of an eligible retirement system on December 31, 1963, but subsequent to that date the taxpayer withdrew his contributions to his retirement system. Groschel, at 2. Before the taxpayer in Groschel retired, he purchased his forfeited years of creditable service. Id. at 3.
The Commission concluded that, while the taxpayer had been a member of an eligible retirement system on December 31, 1963, the benefits for which he sought the tax exemption were not paid on the taxpayer's account that existed on December 31, 1963. Id. at 7. Upon withdrawal of the taxpayer's funds, the account no longer contained any assets upon which retirement benefits could be based, a fact confirmed by the taxpayer's repurchase of forfeited service. Because nothing remained in the taxpayer's account, the benefits he received were not "paid on the account of any person who was a member of [an eligible fund] as of December 31, 1963."
Likewise in this case, Mr. Wilkinson withdrew all of the assets that remained in his MTRF account subsequent to December 31, 1963. There was nothing remaining in the account to which Mr. Wilkinson had a right.
In Groschel, Connor, and Hansis, the taxpayers purchased years of forfeited service. Groschel, at 2; Connor, at 4; Hansis, at 1-2. In these cases, the Commission held that the mere purchase of forfeited service did not make the taxpayer a member of an eligible system as of December 31, 1963 (Connor, at 11) and did not reinstate a member's credit in his retirement depository (Groschel, at 7; Hansis, at 5). In the instant case, the purchase of his forfeited credit does not mean that his retirement benefits were paid on the account of a member as of December 31, 1963.
Effect of Schmidt and Benson Decisions
Petitioners argue that the Commission's holding in Groschel is inconsistent with the Wisconsin Supreme Court's decision in Schmidt v. Employe Trust Funds Board, 153 Wis. 2d 35 (1990), and the Court of Appeals' decision in Benson v. Gates, 188 Wis. 2d 389 (Ct. App. 1994). With regard to the Schmidt decision, we cannot better address this argument than by quoting from our Connor decision:
In 1965, the Legislature created the formula group, members of which could receive benefits under a defined benefit plan. Ch. 250, Laws of 1965, § 5; § 42.244-245, Stats. (1965-66). This plan based annuities, in part, on a formula that utilized: (1) years of creditable service, (2) final average compensation, (3) a formula factor, and (4) a measure of social security benefits. § 42.245(2)(b)2.a., Stats. (1965-66). This change, for the first time, introduced to the STRS the concept of "years of creditable service." § 42.245(1), Stats. (1965-66).
All persons who became members of the STRS after November 30, 1965 were required to be members of the formula group. § 42.244(1)(d), Stats. (1965-66). Members of the combined group(1) of the STRS prior to that date had the option of electing to join the formula group. § 42.244(1)(a) and (c), Stats. (1965-66). In order to accommodate the conversion of combined group members into the formula group, the statute had to allow for the conversion of years of service prior to the effective date of the formula group into years of creditable service. Thus, § 42.245(1)(a), Stats. (1965-66), provided that the "creditable service of each member any time prior to July 1, 1966, shall be the number of years of service as a teacher in Wisconsin teaching (including prior service) . . . ." However, § 42.245(1)(c), Stats. (1965-66), provided that "[c]reditable service for Wisconsin teaching prior to the effective date of this paragraph shall be reduced by the one-half of any period included therein with respect to which the required deposits of a member have been withdrawn . . . "
The plaintiff in the Schmidt case was a teacher and member of the STRS from 1957 until 1963, when he left public employment and withdrew his member's deposit. Schmidt, 153 Wis. 2d at 37-38. In the course of his withdrawal, the plaintiff signed a waiver of his rights to the state deposit accumulation much the same as Mr. Connor had. Id. at 38. The plaintiff returned to public employment in 1964, and, after the enactment of Chapter 250 of the Laws of 1965, he opted to join the formula group. Id. at 38-39.
The Wisconsin Supreme Court held that, while the plaintiff had waived his right to money which accumulated in his retirement fund through state deposits, the plain language of § 42.245(1)(a) and (c), Stats., grants creditable service to the plaintiff, notwithstanding the withdrawal of his members accumulation. Id. at 46, 49.
In Connor, we pointed out that the enactment of section 42.245 of the 1965-66 Statutes merely granted to the taxpayer credit under the formula group for his prior service in the STRS. Connor, at 14. It did not reinstate his credit in the STRS depository. In fact, the Supreme Court in Schmidt held that the statute did not reinstate any right to state money the taxpayer forfeited when he withdrew his accumulation. Schmidt, 153 Wis. 2d at 49.
Here, Mr. Wilkinson received a benefit not materially different than the benefit at issue in Schmidt. The enactment of the statute granting this benefit did not reinstate their forfeited retirement accumulations. Thus, the Commission's decision in Groschel is not inconsistent with the holding in Schmidt.
The Benson decision is likewise of no assistance to petitioners. Benson merely dealt with the statute of limitations for persons challenging the denial of their creditable service granted under section 42.245. Prior to Benson, DETF determined that the statute of limitations for claiming the benefits granted by section 42.245 was when the beneficiary first had notice that DETF had failed to grant such credit. The Court of Appeals held that the statute of limitations commences on the date DETF calculates and pays retirement benefits to the beneficiary. Benson, 188 Wis. 2d at 405. As in Connor, the Benson holding does not affect the taxability of his retirement benefits.
Effect of Hafner Decision
Petitioners also argue that the Court of Appeals decision in Hafner v. Dep't of Revenue, 239 Wis. 2d 218 (Ct. App. 2000), is inconsistent with the Commission's holding in Groschel. Hafner actually involved dockets involving two different federal employees: Lorraine Hafner and Gabriel De Rango. Mrs. Hafner had been in employment covered by the federal Civil Service Retirement System ("CSRS") before December 31, 1963. Hafner v. Dep't of Revenue, 1998 WL 839840 at 5 (WTAC 1998). She withdrew her retirement contributions at the end of her CSRS service prior to December 31, 1963. Mr. De Rango was a member of the CSRS on December 31, 1963, but subsequently withdrew his CSRS contributions. Id. at 42. Thus, Mr. De Rango's situation is analogous to Mr. Wilkinson's situation: membership on December 31, 1963, but withdrawal of all contributions subsequent to December 31, 1963.
The Commission relied on Groschel in holding that withdrawal of Mr. De Rango's CSRS contributions meant that his CSRS pension was not paid on the account of a member as of December 31, 1963. Id. at 12-13. When the Court of Appeals considered this matter, it recited facts applicable only to Mrs. Hafner. As a result, it emphasized the Commission's holding with respect to Mrs. Hafner: that she was not a member of the CSRS as a matter of historical fact on December 31, 1963. Hafner, 239 Wis. 2d at 224-25. Petitioners argue that we should read the Court of Appeals' decision in Hafner to overrule Groschel because it emphasized the facts and reasoning of the Commission's decision with respect to Mrs. Hafner and largely ignored the same with respect to Mr. De Rango. It would be error to read the Court of Appeals' decision in such a manner.
It is not apparent why the Court of Appeals glossed over the facts and reasoning associated with Mr. De Rango. However, what is important is that the Court of Appeals affirmed the Commission's decision with respect to Mr. De Rango. Had the Court of Appeals disagreed with the Commission's reasoning with respect to Mr. De Rango, and by extension the holding in Groschel, it was incumbent on the Court of Appeals to reverse or vacate the holding with respect to Mr. De Rango. Because the Court of Appeals affirmed the result with respect to Mr. De Rango, we can only conclude that the reasoning applicable to Mr. De Rango and the reasoning of Groschel remains good law.
Petitioners argue that respondent is equitably estopped from imposing the income tax on Mr. Wilkinson's retirement payments because they relied upon the June 1989 edition of Publication 108. Petitioners assert that this publication led them to believe that Mr. Wilkinson's pension was not taxable.
The elements of equitable estoppel are: (1) action/non-action by respondent (2) that induces reasonable reliance by the taxpayer (3) to the taxpayer's detriment. Department of Revenue v. Moebius Printing Co., 89 Wis. 2d 610, 634 (1979). In addition, when a party seeks to estop respondent, the conduct of respondent must be unconscionable. Id. at 641. Petitioners' estoppel argument fails in two respects.
The language in Publication 108 closely followed the language of the statutory exemption, including the requirement that in order to be exempt, the payments must be "paid on the account of a person who was a member" of an eligible system "as of December 31, 1963." In Groschel, we determined for the first time that the "paid-on-the-account-of" requirement excluded retirees in Mr. Wilkinson's situation. Of course, this decision was issued more than six years after Mr. Wilkinson retired. In fairness to petitioners, people not familiar with the rules of statutory construction might reasonably conclude, as petitioners suggest, that withdrawal of retirement contributions after December 31, 1963 would not make one ineligible under the exemption.
When it comes to estoppel against respondent, the story does not end with the typical "reasonable-person" inquiry. Rather, we must determine whether it would be unconscionable not to estop respondent. Respondent's only sin was to accurately paraphrase a statute, parts of which had not yet been construed by the courts and the Commission. It would be different if respondent misled the public about the meaning of the statute. But here, the explanation was faithful to the statute in all material respects. It would be unconscionable to allow petitioners to prevail on this point. Many statutes are ambiguous and could be read more than one way by reasonable persons. If petitioners prevail on this point, whenever a governmental agency reprints or faithfully paraphrases an ambiguous statute, it could be bound by every alternative reasonable interpretation, many of which would be contradictory. In such an environment, why would any agency undertake to educate the public about the statutes it administers?
Petitioners' equitable estoppel argument also fails because they have not shown that they have suffered a detriment. Petitioners' reliance on Publication 108 led to their failure to report Mr. Wilkinson's retirement payments. This led to an assessment against them for the tax that was not paid on the payments, plus interest. With regard to the tax assessed, petitioners' reliance was not to their detriment. As a result of petitioners' reliance, they must now pay the tax that they owed in the first place. This does not constitute a detriment. Laabs v. Tax Comm., 218 Wis. 414, 422 (1935) ("To compel him to pay a tax which . . . the state was entitled to collect, does not seem to us to produce injustice or undue hardship"). Detriment in equitable estoppel cases typically occurs where the taxpayer fails to withhold or collect a tax based on action/inaction by respondent and then respondent assesses the taxpayer for the tax that was not withheld or collected. Thus, reliance on respondent's action/inaction that led to a failure to collect sales tax resulted in a detriment when respondent sought to collect sales tax from a retailer who had not collected sales tax from its customers. See, Department of Revenue v. Family Hospital, Inc., 105 Wis. 2d 250, 255 (1982); Moebius, 89 Wis. 2d at 637. In another case, detriment was the result because of reliance on action/inaction that led a corporation to not withhold tax on dividends that was subsequently sought by respondent. Libby, McNeill & Libby v. Dep't of Taxation, 260 Wis. 551, 556 (1952).
The only possible hardship is that petitioners will now have to pay interest to respondent on their use of the funds, and this interest may be more than what they might have reasonably expected during the years they had use of the funds. We cannot conclude that petitioners will experience a detriment by paying the interest assessed, because petitioners have not offered evidence that the interest they will pay is "wholly unrelated to the fair value of the use of the money." See, Laabs, 218 Wis. at 422-23.
Petitioners are not challenging the constitutionality of the statute as construed by respondent or the Commission. Rather, petitioners argue that respondent is treating former members of the MTRF differently from similarly situated former members of the STRS. Until the advice was revoked effective with taxable years beginning on or after January 1, 2000, respondent advised that STRS members who withdrew their deposit accumulations prior to December 31, 1963 could, nevertheless, be considered members of the STRS as of December 31, 1963. Respondent does not make the same allowance for similarly situated members of the MTRF. Petitioners argue that this distinction violates the provisions of the equal protection and uniformity clauses of the Wisconsin constitution.
First, Mr. Wilkinson is not similarly situated to those who benefited from the now-revoked advice. Mr. Wilkinson withdrew his contributions after December 31, 1963. More important, petitioners fail to consider that respondent has merely recognized its error and has elected to have compassion upon those who may have followed its advice. Without analysis or citation, petitioners argue that to do so violates the above-cited constitutional protections. We fail to see how, in correcting its error, respondent was violating constitutional protections. Respondent compromises tax obligations every day, accepting less than is owed for a variety reasons. Does this mean that every other similarly situated taxpayer must get the benefit of the same settlement terms? If the answer is yes, we can be sure that respondent will not settle or compromise any disputed matter. Because petitioners have failed to cite any authority to support their constitutional claim, we reject it.
Respondent's action on the petition for redetermination is affirmed.
Dated at Madison, Wisconsin, this 2nd day of January , 2002.
WISCONSIN TAX APPEALS COMMISSION
Don M. Millis, Acting Chairperson
Thomas M. Boykoff, Commissioner
ATTACHMENT: "NOTICE OF APPEAL INFORMATION"
January 29, 2002 Appealed to Waukesha County Circuit Court (02CV258)