STATE OF WISCONSIN
TAX APPEALS COMMISSION
WISCONSIN DEPARTMENT OF REVENUE,
|DOCKET NO. 05-I-161
RULING AND ORDER
JENNIFER E. NASHOLD, CHAIRPERSON:
On January 11, 2006, the respondent Wisconsin Department of Revenue (Department), represented by Attorney Mark S. Zimmer, filed motions to deem matters admitted and for summary judgment in this matter, along with an affidavit, exhibits, and brief in support of the motions. No response to the motions was filed on behalf of petitioner Michael Schraufnagel.
By Ruling and Order dated April 12, 2006, the Commission denied the Department's motions and scheduled a telephone status conference for April 27, 2006. At the conference, petitioner appeared in person and by Mary J. Wilcox, CPA. The Department, appearing by Attorney Zimmer, renewed its motion to deem matters admitted and for summary judgment. Neither Ms. Wilcox nor petitioner presented any argument against summary judgment. Petitioner stated that he no longer wished to be represented by Ms. Wilcox.
By Order dated May 4, 2006, the Commission granted petitioner's request for withdrawal of his representative of record and granted the Department's motion to deem matters admitted. Those admissions are contained in the factual findings, below.
Having considered the Department's motion for summary judgment, brief, and affidavit in support thereof, and the entire record herein, the Commission finds, rules, and orders as follows:
1. On March 31, 1996, upon or immediately prior to her death, Grace Schraufnagel gifted Super Excavators, Inc. (SEI), stock to her children and grandchildren. She gave the SEI stock to her grandchildren by " issuing"  stock certificates to trusts in their names. Petitioner and his cousin, Peter Schraufnagel, minor children on March 31, 1996, were among the grandchildren who received SEI stock issued to trusts in their names (referred to herein as the Michael Schraufnagel Trust and the Peter Schraufnagel Trust).
2. The trust that held the stock certificate assets for the benefit of petitioner was not a grantor trust, under � 671 of the Internal Revenue Code.
3. The trust that held the stock certificate assets for the benefit of Peter Schraufnagel was not a grantor trust, under � 671 of the Internal Revenue Code.
4. The Michael Schraufnagel Trust is not a natural person.
5. The Peter Schraufnagel Trust is not a natural person.
6. On March 31, 1996, the date of Grace's gift, some of the shareholders of SEI stock were trusts.
7. On March 31, 1999, petitioner sold the shares of SEI stock to the Peter Schraufnagel Trust. As of the date of that sale, some of the shareholders of SEI stock were trusts.
8. The gain from the sale of petitioner's SEI stock was subtracted by petitioner on Line 11 of his Wisconsin Form 1 income tax returns during the years in which he received the proceeds, 2000, 2002, and 2003, based on the sale of business assets to a related person exclusion set out in Wis. Stat. � 71.05(6)(b)25. Petitioner subtracted $1,867 in 2000, $1,294 in 2002, and $23,406 in 2003.
9. By notice dated July 26, 2004, the Department issued an income tax assessment to petitioner for tax years 2000, 2002, and 2003 in the amount of $2,444.98. 10. On September 13, 2004, petitioner filed a petition for redetermination with the Department.
11. By notice dated August 8, 2005, the Department issued its Notice of Action denying petitioner's petition for redetermination, disallowing the subtraction modifications. On the date of the Notice of Action, the Department claimed an amount due of $2,634.93.
12. On October 7, 2005, petitioner filed a petition for review with the Commission by certified mail received on October 12, 2005, in which he claimed that the Michael Schraufnagel Trust and the Peter Schraufnagel Trust were grantor type trusts, and that they should not be treated as separate taxable entities from Michael Schraufnagel and Peter Schraufnagel individually.
13. On January 11, 2006, the Department filed motions to deem matters admitted and for summary judgment in this matter. No response to the motions was filed on behalf of petitioner.
14. By Ruling and Order dated April 12, 2006, the Commission denied the Department's motions without prejudice, stating its concerns as to whether Ms. Wilcox was representing petitioner, and scheduled a telephone status conference for April 27, 2006. At the conference, Ms. Wilcox admitted that she had been representing petitioner throughout the case, and the Department renewed its motions to deem matters admitted and for summary judgment.
15. By Order dated May 4, 2006, the Commission granted the Department's motion to deem matters admitted.
A summary judgment motion will be granted if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Wis. Stat. � 802.08(2). A party moving for summary judgment has the burden to establish the absence of a genuine, that is, disputed, issue as to any material fact. Grams v. Boss, 97 Wis. 2d 332, 338-39, 294 N.W.2d 473 (1980).
Wisconsin Statutes � 71.05(6)(b)9 provides an exclusion for 60% of the capital gain on the sale or disposition of certain assets held more than one year, and Wis. Stat. � 71.05(6)(b)25 provides a subtraction modification to individuals for gains not excluded from taxation under � 71.05(6)(b)9 on certain assets. In order to qualify for the subtraction modification provided by � 71.05(6)(b)25, the taxpayer must meet the conditions set out by the statute, which provides, in pertinent part:
(b) Subtractions. From federal adjusted gross income subtract to the extent included in federal taxable or adjusted gross income . . . :
* * *
25. All gains that are not excluded from taxation under subd. 9, on business assets or on assets used in farming, including shares in a corporation or trust that meets the standards under s. 182.001(1), or both, held more than one year, that are sold or otherwise disposed of to persons who are related to the seller or transferor by blood, marriage or adoption within the 3rd degree of kinship as determined under s. 990.001(16), as computed under the Internal Revenue Code, not including amounts treated as ordinary income for federal income tax purposes because of the recapture of depreciation or any other reason.
The shares of SEI stock did not " meet the standards under s. 182.001(1)," as required by � 71.05(6)(b)25. In particular, the stock shares did not satisfy the requirement of Wis. Stat. � 182.001(1), which requires, inter alia, that at the time of the sale or disposition all of the corporation's shareholders, other than any estate, are " natural persons." See Wis. Stat. � 182.001(1); Wisconsin Tax Bulletin 111, Admin-Rul, (CCH) Wis. Tax Rptr. ¶ 300-116 (Nov. 5, 1998).
Rather than conveying the SEI stock to petitioner and Peter Schraufnagel directly, Grace Schraufnagel conveyed the stock to trusts in their names. Petitioner has admitted that as of the date of the sale of the SEI stock in 1999, some of the shareholders of SEI stock were trusts, and that neither the Michael Schraufnagel Trust nor the Peter Schraufnagel Trust is a grantor trust, as argued in petitioner's petition for review. Petitioner has also admitted that neither the Michael Schraufnagel Trust nor the Peter Schraufnagel Trust is a natural person. Thus, at the time of the stock sale to the Peter Schraufnagel Trust in 1999, not all shareholders of SEI stock were natural persons as required by Wis. Stat. � 182.001(1). Accordingly, petitioner did not satisfy the requirements of � 71.05(6)(b)25, and the subtraction modifications claimed for 2000, 2002, and 2003 were impermissible.
The Department also asserts that petitioner is disqualified from taking the subtraction modifications under � 71.05(6)(b)25 because the statute states that the assets must be sold to persons related to the seller by blood, marriage or adoption, and that the Peter Schraufnagel Trust is not a natural person related to the seller by blood, marriage or adoption. In light of petitioner's admission that the Peter Schraufnagel Trust is not a natural person, the Commission agrees.
IT IS ORDERED
The Department's motion for summary judgment is granted, and its Notice of Action is affirmed.
Dated at Madison, Wisconsin, this 5th day of June, 2006.
WISCONSIN TAX APPEALS COMMISSION
Jennifer E. Nashold, Chairperson
Diane E. Norman, Commissioner
David C. Swanson, Commissioner
ATTACHMENT: " NOTICE OF APPEAL INFORMATION"
 This is the term used by the Department in its Request for Admissions, and is apparently intended to be synonymous with the term " transferring."
 The actual statement regarding the 1999 sale, contained in the Department's Request for Admissions and which has been deemed admitted, is that there was a " sale of Petitioner's stock to his cousin Peter, March 31, 1999." (Affidavit of Julie A. Lotto, Ex. 5, p. 2.) However, in his petition for review, petitioner stated that he " sold his stock to [the] Peter Schraufnagel Revocable Trust." (Petition for review, p. 1.)
 The record contains some discrepancy as to whether Peter Schraufnagel is petitioner's cousin or uncle. On Line 11 of Wisconsin Form 1 for tax year 2000, petitioner claimed the subtraction as a " [s]ale of business asset to related person." (Lotto Affidavit, Ex. 6, p. 1.) On Form 6252 for that year, " Installment Sale Income," under " Part III Related Party Installment Sale Income," petitioner entered Peter Schraufnagel's name and address. (Lotto Affidavit, Ex. 6, p. 6.) On Line 11 of Form 1 for tax years 2002 and 2003, petitioner claimed the subtraction as a " [s]ale of business assets to uncle" and " stock sold to uncle," respectively (Lotto Affidavit, Ex. 6, pp. 7 and 13). No other information as to the uncle's name appears on the tax forms or other documents contained in the record.
The Commission notes that in the Department's First Set of Interrogatories to Petitioner, dated November 14, 2005, the Department asks, " The list of stockholders presented to Respondent's Resolution Officer indicated that the relationship between Petitioner and Peter Schraufnagel is that of first cousins. However, Petitioner's 2002-2003 tax returns (WI Form 1) reported 'stock sold to uncle.' How does Petitioner explain this discrepancy?" (Lotto Affidavit, Ex. 5, p. 9.) Petitioner never responded to the Department's interrogatories.
Despite this discrepancy, the Commission finds that petitioner and Peter Schraufnagel are cousins, and that petitioner's claimed subtraction modifications were based on the sale of SEI stock to his cousin. The Commission's finding is predicated on the above-quoted information contained in the Department's interrogatories, as well as the following admissions by petitioner, contained in the Request for Admissions and deemed admitted by the Commission's May 4, 2006 Order: " As of the date of the sale of Petitioner's stock to his cousin Peter, March 31, 1999, some of the shareholders of SEI stock were trusts," and " Michael and Peter Schraufnagel, minor children upon acquisition of the SEI stock, were among the grandchildren who received stock issued to a trust in their name." (Lotto Affidavit, Ex. 5, p. 3.)