STATE OF WISCONSIN
TAX APPEALS COMMISSION
LA VERNE I. IVERSON
400 Meadowood Court
Viroqua, WI 54665,
WISCONSIN DEPARTMENT OF REVENUE
P.O. Box 8907
Madison, WI 53708,
DECISION AND ORDER
DON M. MILLIS, COMMISSION CHAIRPERSON:
This matter came before the Commission for trial on June 19, 2003, in Viroqua. Each party has made a post-hearing submission. Petitioner appears pro se. Respondent appears by Attorney Michael J. Buchanan.
Based upon the evidence received at trial, the submissions of the parties, and the entire record in this matter, the Commission hereby makes the following findings of fact, conclusions of law, and order.
FINDINGS OF FACT
1. From November 1, 1967, until his retirement on October 31, 1995, petitioner was an independent insurance agent for several affiliated State Farm insurance companies(1) (collectively "State Farm").
2. From October 16, 1965, until November 1, 1967, petitioner was a salaried employee of one of the State Farm insurance companies, with the title of Trainee Agent.
3. At no time prior to or during his service for State Farm, either as an employee or an independent insurance agent, did petitioner purchase from State Farm an agency or policies then or previously in effect.
4. As of the date petitioner became an independent insurance agent for State Farm, he entered into a State Farm Agent's Agreement ("Initial Agent's Agreement").
5. The Initial Agent's Agreement provided that petitioner would be an independent contractor and responsible for most of his own expenses, although State Farm would provide certain forms, manuals, records, and other supplies. The Initial Agent's Agreement also provided that State Farm would make payments to petitioner as set forth on a schedule of payments.
6. The Initial Agent's Agreement also provided:
This Agreement constitutes the sole and entire Agreement between the parties hereto, and no change, alteration, or modification of the terms of this Agreement may be made except by agreement in writing signed by an authorized representative of [State Farm] and accepted by [petitioner].
7. The Initial Agent's Agreement also provided that the agreement could be terminated by State Farm at will, simply by providing notice to petitioner.
8. Upon termination of the Initial Agent's Agreement, either by petitioner or State Farm, the Initial Agent's Agreement provided for Termination Payments to be paid to petitioner based upon a formula. Under the formula, petitioner was entitled to Termination Payments based on various percentages of premiums collected or commissions that would have been due had the Initial Agent's Agreement not been terminated.
9. Petitioner entered into at least one subsequent Agent's Agreement ("Subsequent Agent's Agreement") that superceded all prior agreements between petitioner and State Farm. The Subsequent Agent's Agreement does not materially differ from the Initial Agent's Agreement in any respect pertinent to this matter.
10. When he retired in 1995, petitioner did not execute any separate agreement with State Farm with respect to or obtain any valuation of the value of his agency, any of its assets, or the Termination Payments.
11. Petitioner received Termination Payments based on the Subsequent Agent's Agreement in the following amounts: $17,370.57 in 1997, $16,594.04 in 1998, $14,836.18 in 1999, and $15,536.76 in 2000.
12. When he filed Wisconsin income tax returns for these years, petitioner characterized these amounts as capital gain income and excluded 60% of these payments from Wisconsin taxable income.
13. In each of these years on his federal Schedule D, petitioner reported a zero basis in the Termination Payments. On each of these same schedules, petitioner did not include a sales price for the Termination Payments, but instead inserted a notation referring to agency premium renewal service compensation.(2)
14. The Initial and Subsequent Agent's Agreements do not differ in any material respect with regard to the issues pertinent in this matter to the agent's agreement at issue in Gudal v. Dep't of Revenue, Wis. Tax Rptr. (CCH) ¶400-541 (WTAC 2001).
Health Insurance Premiums
15. On his 1998, 1999, and 2000 Wisconsin income tax returns, petitioner claimed a deduction for self-employed health insurance premiums in the amounts of $1,164.35, $1,762.63, and $1,934.85, respectively.
16. During these years, petitioner was not self-employed and did not file a federal Schedule SE.
17. On April 5, 1998, petitioner was playing dollar slot machines at a casino in Marquette, Iowa, when he hit the jackpot, winning $1,350.
18. The casino withheld $67.50 in Iowa state income tax and issued a federal form W-2G reflecting the amount of the gross winnings and the tax withheld.
19. Petitioner did not report his winnings on his 1998 Wisconsin income tax return and filed no 1998 Iowa income tax return.
20. Petitioner and his ex-wife were plaintiffs in a class action suit against certain corporations venued in the U.S. District Court for the Southern District of Florida.
21. In December of 1998, petitioner and his ex-wife received a settlement distribution consisting of a check in the amount of $1,511.68 and a promissory note in the amount of $2,318.21.
22. The cover letter transmitting the settlement check and promissory note advised petitioner and his ex-wife that "under most circumstances the distribution represents income that you must report on your tax return." [Emphasis in original.]
23. The law firm distributing the settlement check and promissory note filed a 1099-MISC that listed $3,829.89 as other income paid to petitioner and his ex-wife.
24. On his 1998 Wisconsin income tax return, petitioner reported $1,511.68 of the settlement proceeds as a long-term capital gain, excluding 60% of this amount from his Wisconsin taxable income. Petitioner did not report any portion of the promissory note on his 1998 Wisconsin income tax return.
25. Other than interest on the promissory note, petitioner did not receive any payments under the promissory note during the four years at issue.
26. Petitioner's 1997 income tax return was dated March 8, 1998, and received by respondent on March 17, 1998.
27. Under the date of February 18, 2002, respondent issued its income tax assessment against petitioner in the principal amount of $3,445.38, plus 12% interest in the amount of $1,262.61, for the years 1997 through 2000.
28. Respondent's assessment included the following elements: (1) disallowed capital gains treatment of the Termination Payments for all four years, (2) disallowed the deduction for self-employed health insurance premiums for 1998, 1999, and 2000, (3) added back gambling winnings to petitioner's income for 1998, (4) disallowed capital gains treatment for the settlement proceeds received in 1998, and (5) added back the amount of the promissory note to petitioner's income for 1998.
29. Petitioner filed a timely petition for redetermination with respondent. Under the date of September 11, 2002, respondent denied the petition for redetermination. Petitioner then filed a timely petition for review with the Commission.
30. Pursuant to section 902.01(2)(a) of the Statutes, the Commission takes judicial notice that respondent generally pursues tax revenue on behalf of the state treasury with zeal.
CONCLUSIONS OF LAW
1. Respondent issued the income tax assessment against petitioner in a timely manner, within the statute of limitations. Wis. Stat. § 71.77(2).
2. Respondent's alleged motivation to generate revenues to cover the state's budget deficit is not a defense to the assessment.
3. Respondent has no choice but to impose a 12% interest rate on the outstanding amount of the assessment. Wis. Stat. § 71.82(1).
4. Neither respondent nor the Commission is bound by the alleged determinations of the Internal Revenue Service with respect to the issues raised in the assessment. Wis. Stat. § 71.01(4).
5. The Termination Payments are not entitled to capital gain treatment because petitioner neither owned nor sold an asset in exchange for the Termination Payments.
6. Petitioner is liable for Wisconsin income tax on his gambling winnings, and he has failed to substantiate any potentially offsetting gambling losses.
7. Petitioner is not entitled to a deduction for health insurance premiums because he was not self-employed.
8. Petitioner is not entitled to capital gain treatment for the cash portion of his settlement distribution because he has failed to substantiate the nature of the loss compensated by the settlement.
9. Petitioner is liable for the face value of the promissory note portion of his settlement distribution because he has failed to demonstrate that the maker was not responsible and solvent, and has failed to show that the fair market value of the note is anything other than the face value.
Timeliness of Assessment
Petitioner complains that respondent took too long to issue the assessment at issue here. The earliest year at issue is 1997, and petitioner's return for 1997 was dated March 8, 1998 and received by respondent on March 17, 1998. Section 71.77(2) of the Statutes authorizes respondent to issue an assessment up to four years after the return was filed. The assessment was issued on February 18, 2002, within the statute of limitations. Respondent was completely within its authority to issue the assessment when it did. If petitioner believes that assessments should be issued in a timelier manner, his only recourse is to the legislature.
Petitioner also argues that respondent targeted him because of the state's ongoing budget crunch. Even if respondent's motivation was a valid defense, the Commission disagrees with petitioner's assertion. The Commission daily witnesses the manner in which respondent enforces the tax code on behalf of the state treasury; and while respondent may have its faults, lax enforcement has never been one of them, regardless of the condition of the state's coffers. The assessment of other retired State Farm agents in the 1990s--a time when the state's coffers were flush--shows that respondent did not just recently conclude that Termination Payments under State Farm's standard agent's agreement are not eligible for capital gain treatment. See, e.g., Gudal v. Dep't of Revenue, Wis. Tax Rptr. (CCH) ¶400-541 (WTAC 2001). Nevertheless, respondent's alleged motivation to close the state's revenue gap is no defense to an assessment.
Petitioner also complains that the 12% interest rate applied to the principal amount of the tax is excessive. Respondent is required by law to impose interest on assessments at the specified rates. Section 71.82(1) of the Statutes sets the rate at 12%. Again, complaints about the statutorily mandated interest rate are better directed to the legislature.
With respect to a number of issues in this matter, petitioner argues that the Internal Revenue Service has accepted his position. First of all, the record contains no substantiation of the issues raised by the IRS or the IRS's resolution of any such issues. But even if petitioner offered such substantiation, it would be immaterial. The definition of "federal taxable income" and "federal adjusted gross income" allows that such amounts may be determined by respondent or on appeal from respondent. Wis. Stat. § 71.01(4). Therefore, neither respondent nor the Commission is bound by any determination of the IRS.
The Commission has previously held that Termination Payments under a State Farm Agent's Agreement are not entitled to capital gain treatment. Gudal, supra.. More recently, the Seventh Circuit Court of Appeals came to the same conclusion. Baker v. Commissioner, 2003-2 USTC ¶50,604 (7th Cir. 2003).
To qualify for capital gain treatment, petitioner must show that he owned a capital asset for more than one year, that he sold or exchanged it, and that he received Termination Payments in consideration for the sale or exchange. Baker, at 3; Schelble v. Commissioner, 97-2 USTC ¶50,944 at 90,881 (10th Cir. 1997); Furrer v. Commissioner, 78-1 USTC ¶9,212 at 83,357 (9th Cir. 1977); Elliott v. U.S., 70-2 USTC ¶9, 581 at 84,429 (10th Cir. 1970).
Petitioner argues that when he retired, he sold to State Farm his right to continue to receive "service fee compensation," i.e., compensation on policies petitioner sold or maintained. There are two problems with this argument. First, the record indicates that petitioner never owned this right to service fee compensation. Both the Initial and Subsequent Agent's Agreements allowed State Farm to terminate these agreements at will simply by giving notice. At that point, petitioner's right to service fee compensation would cease. Moreover, nothing in either agreement allows petitioner to assign or sell his right to service fee compensation. Petitioner can hardly be said to own an asset that can be taken on a moment's notice and that cannot be assigned or sold.
Second, there is no evidence that petitioner sold his right to service fee compensation. There was no agreement outside of the two Agent's Agreements. Nothing in the two Agent's Agreements says that State Farm is buying petitioner's right to service fee compensation with Termination Payments. It is, indeed, telling that petitioner was unable to report on his tax returns the price for the alleged sale of his service compensation fees.
Petitioner argues that respondent should contact the State of Iowa to retrieve the amount withheld from his gambling winnings, and that he actually lost more money gambling than he won. It is petitioner's, not respondent's, obligation to claim a refund from the State of Iowa, if he is indeed entitled to a refund. If petitioner is not entitled to a refund, then he could have claimed a credit against taxes paid to Iowa. He did not. Moreover, petitioner has not substantiated any gambling losses. See, Rev. Proc. 77-29.
Self-Employed Health Insurance Premiums
It is undisputed that petitioner was not self-employed during the years at issue. Nevertheless, petitioner argues that it is unfair for respondent to disallow his deductions for health insurance premiums, when employers may pay health insurance premiums for their employees without tax consequence to those employees. Fair or not, it is the law. During the years at issue, section 162(l) of the Internal Revenue Code allowed a partial deduction for health insurance premiums paid by self-employed persons. This deduction was not available to petitioner because he was not self-employed.
Certainly, tax laws are subject to equal protection scrutiny under the state and federal constitutions. However, the burden to challenge the constitutionality of a tax law classification is particularly great, and the Wisconsin Supreme Court has established five factors to consider in a challenge to a legislative classification. GTE Sprint Communications Corp. v. Wisconsin Bell, Inc., 155 Wis. 2d 184, 192, 194 (1990). Petitioner has made no attempt to pose an equal protection challenge or address the five factors.
Petitioner argues that the cash he and his ex-wife received in 1998 as part of a settlement distribution should be treated as capital gain. The tax characteristics of settlement proceeds are determined by the nature of the claims involved. Elliott v. Commissioner, 53 TCM 1302, 1304 (1987). Petitioner might be entitled to capital gain treatment of the settlement proceeds if he demonstrated that the claim involved replacement of capital destroyed or lost. Id. However, petitioner offered no substantiation whatsoever to show that the claim was one that would permit capital gain treatment.
Petitioner argues that he should not be forced to realize any income upon receipt of the note until he is actually paid on the note. It has been settled law for decades that the fair market value of a note by a responsible and solvent maker is included in gross income. Laramy v. Commissioner, 25 TCM 809, 817 (1966); Estate of Webb v. Commissioner, 30 TCM 1202, 1213 (1958); Weinmann v. Commissioner, 5 BTA 885, 885 (1926); Wolfson v. Commissioner, 1 BTA 538, 541-42 (1925). Because petitioner has offered no evidence that the maker is other than responsible or solvent or that the fair market value of the note is anything other than its face value, the Commission disagrees with petitioner.
Respondent's action on the petition for redetermination is affirmed.
Dated at Madison, Wisconsin, this 12th day of November, 2003.
WISCONSIN TAX APPEALS COMMISSION
Don M. Millis, Commission Chairperson
Thomas M. Boykoff, Commissioner
ATTACHMENT: "NOTICE OF APPEAL INFORMATION"
1 State Farm Mutual Automobile Insurance Company, State Farm Life and Accident Assurance Company, State Farm Fire and Casualty Company, and State Farm General Insurance Company were the insurance companies on petitioner's Initial Agent's Agreement.