Wisconsin Tax Appeals Commission Docket No. 98-I-223

STATE OF WISCONSIN

TAX APPEALS COMMISSION

THOMAS W. and MARILYNNE A. MACIEJCZAK

P.O. Box 5

Fairchild, WI 54741,

Petitioners,

vs.

WISCONSIN DEPARTMENT OF REVENUE

P.O. Box 8933

Madison, WI 53708-8933,

Respondent.

DOCKET NO. 98-I-223

DECISION and ORDER

DON M. MILLIS, COMMISSIONER:

This matter came before the Commission for trial on February 23, 1999, in Black River Falls. Petitioners were represented by Thomas W. Maciejczak.⁽¹⁾ Respondent was represented by Attorney Sheree Robertson.

Based upon the evidence received at trial, the submissions of the parties, and the record in this matter, the Commission hereby finds, concludes, and orders as follows:

FINDINGS OF FACT

1. Under the date of February 23, 1998, respondent assessed petitioners $5,697.75 in additional income taxes, plus $ 2,492.17 in interest, for 1991 and 1993 through 1995 (the "years at issue").

2. The bulk of the assessment was the result of respondent's determination that the amount of petitioners' nonfarm Wisconsin adjusted gross income limited the amount of farm losses they could claim in 1991, 1993, and 1994. With respect to these years, the table below shows the amount of petitioners' nonfarm income, the losses they claimed, and the losses permitted by respondent:

1991 1993 1994

Nonfarm Income $ 79,539 $ 72,043 $ 92,866

Claimed Farm Loss $ 36,302 $ 50,052 $ 48,744

Allowed Farm Loss $ 17,500 $ 20,000 $ 17,500

1. Petitioners filed a timely petition for redetermination with respondent objecting to the assessment.

2. Respondent granted in part and denied in part the petition for redetermination, reducing the amount of income tax due to $4,114.09, plus $2,285 in interest. That portion of the petition for redetermination that was granted pertained to the allowance of a casualty loss that is unrelated to the remaining issues.

3. Petitioners filed a timely petition for review with the Commission.

4. During the years at issue, petitioners operated a farm in Jackson County. During the years at issue, Mrs. Maciejczak was employed full-time as a school teacher. In 1991 and 1993, Mr. Maciejczak was employed full-time off the farm. In 1994, he was employed part-time off the farm. In 1995, Mr. Maciejczak had no employment other than petitioners' farm.

5. In 1993, a barn on petitioners' farm was destroyed by fire.

6. In 1994, petitioners experienced financial hardship caused in part by the loss of the barn the previous year. To remedy this hardship, Mr. Maciejczak withdrew $40,000 from a 401(k) plan that he was in the process of converting to an individual retirement account. The 401(k) account was from his previous nonfarm employment.

7. Later in 1994, Mr. Maciejczak withdrew an additional $5,000 from his IRA to deal with continued financial problems.

8. Had it not been for the $45,000 withdrawn from Mr. Maciejczak's 401(k) and IRA, petitioners would not have faced a farm loss limitation in 1994.

APPLICABLE WISCONSIN STATUTES

(1991-92 & 1993-94)

71.05 Income computations.

* * *

(6) MODIFICATIONS AND TRANSITIONAL ADJUST-MENTS. Some of the modifications referred to in s. 71.01(13), (14) and (15) are:

(a) Additions. To federal adjusted gross income add:

* * *

10. For the taxable year, combined net losses, exclusive of net gains from the sale or exchange of capital or business assets and exclusive of net profits, from businesses, from rents, from partnerships, from S corporations, from estates or from trusts, under section 165 of the internal revenue code, except losses allowable under sections 1211 and 1231 of the internal revenue code, otherwise includable in calculating Wisconsin income if those losses are incurred in the operation of a farming business, as defined in section 464(e)1 of the internal revenue code to the extent that those combined net losses exceed $20,000 if nonfarm Wisconsin adjusted gross income exceeds $55,000 but does not exceed $75,000, exceed $17,500 if nonfarm Wisconsin adjusted gross income exceeds $75,000 but does not exceed $100,000, exceed $15,000 if nonfarm Wisconsin adjusted gross income exceeds $100,000 but does not exceed $150,000, exceed $12,500 if nonfarm adjusted gross income exceeds $150,000 but does not exceed $200,000, exceed $10,000 if nonfarm Wisconsin adjusted gross income exceeds $200,000 but does not exceed $250,000, exceeds $7,500 if nonfarm Wisconsin adjusted gross income exceeds $250,000 but does not exceed $300,000, exceed $5,000 if nonfarm Wisconsin adjusted gross income exceeds $300,000 but does not exceed $400,000 and exceed $0 if nonfarm adjusted gross income exceeds $400,000, except that the amounts applicable to married persons filing separately are 50% of the amounts specified in this subdivision.

CONCLUSIONS OF LAW

1. The $45,000 withdrawn by Mr. Maciejczak from his retirement savings constitutes "nonfarm Wisconsin adjusted gross income" as that term is used in section 71.05(6)(a)10.

2. The Commission may not modify respondent's assessment based on the legislative intent of the farm loss limitation set forth in 71.05(6)(a)10 because the meaning of "nonfarm Wisconsin adjusted gross income" as applied in this case is clear and unambiguous.

3. Respondent's assessment was properly issued within the time periods specified in sections 71.77(2) and (4).

4. The farm loss limitation in section 71.05(6)(a)10 does not unconstitutionally discriminate against farmers with nonfarm income in excess of $55,000.

5. The farm loss limitation in section 71.05(6)(a)10 does not violate the uniformity clause of the Wisconsin Constitution.

DECISION

Petitioners raise only one issue before the Commission: Did respondent properly limit petitioners' farm losses for 1991, 1993, and 1994?

Before addressing petitioners' challenges to the assessment, we note that since the assessment with respect to 1991 was issued more than six years after 1991, respondent bears the burden of proving the assessment is correct. Wis. Stat. § 71.77(4). Petitioners bear the burden of proving that the assessment with respect to the remaining years is incorrect. Woller v. Dep't of Taxation, 35 Wis. 2d 227, 232-33 (1967). For the reasons stated below, we conclude that respondent has met its burden of proof for 1991 and that petitioners have failed to meet their burden of proof for the remaining years.

Except for the treatment of $45,000 withdrawn from Mr. Maciejczak's retirement savings in 1994, there is no issue that respondent properly applied section 71.05(6)(a)10. In 1991 and 1993, petitioners had nonfarm income that triggered the farm loss limitations in this statute.

Treatment of Retirement Withdrawals

Petitioners argue that the $45,000 withdrawn from Mr. Maciejczak's retirement savings should not be considered "nonfarm Wisconsin adjusted gross income" within the meaning of section 71.05(6)(a)10. This term is not defined in the statute. However, nonfarm income clearly includes income from whatever source that is derived from employment or enterprises unrelated to a farm operation. There is no doubt that the $45,000 did not come from employment or an enterprise related to petitioners' farm operation. This amount came from retirement funds generated from Mr. Maciejczak's nonfarm employment. Therefore, respondent properly included the $45,000 of withdrawn retirement funds as nonfarm income.

Intent of Farm Loss Limitation

Petitioners assert that the legislature intended the farm loss limitation in section 71.05(6)(a)10 to limit the ability of investors and other high-income individuals from using farms as tax shelters, and that a common sense application of this intent would allow petitioners to claim the farm losses they experienced. The intent of the law is probably close to that described by petitioners. In particular, the drafters might not have intended this loss limitation to apply to farmers who withdrew their retirement savings to meet a financial crisis.

However, the Commission may not consider the intent of the law, where language of the law is clear and unambiguous. See, State v. Kenyon, 85 Wis. 2d 36, 49 (1978). The terms of the statute make it clear that the nonfarm income received by petitioners, including that withdrawn from Mr. Maciejczak's retirement savings, mandated the farm loss limitations imposed by respondent. Thus, we may not modify respondent's action based on the legislative intent of the farm loss limitation.

Timeliness of Respondent's Action

Petitioners complain that respondent did not audit their returns and inform petitioners in a timely manner after they filed their 1991 return so as to minimize the amount of interest that they will have to pay if found liable. There is no doubt that, had petitioners realized their failure to limit the amount of farm losses claimed on their 1991 income tax return, they would not have repeated this mistake on their 1993 and 1994 returns.

It would certainly have been better for petitioners if they had been audited sooner. However, the error was petitioners' and respondent acted within the parameters set forth in the law. The assessment for 1991 fell within the statute of limitations in section 71.77(4), and the remaining years fell within the four-year statute of limitations in section 71.77(2). Therefore, the Commission lacks the authority to modify respondent's action based on the time it took for respondent to uncover petitioners' errors.

Discriminatory Effect

Petitioners argue that the farm loss limitation set forth in section 71.05(6)(a)10 is unconstitutional because it discriminates against farmers who have nonfarm income. There is no doubt that the farm loss limitation discriminates against farmers with substantial amounts of nonfarm income. This fact alone is not sufficient to conclude the farm loss limitation is unconstitutional.

Laws are presumed constitutional, and the presumption of consti-tutionality of tax laws is particularly strong. GTE Sprint Communications Corp. v. Wisconsin Bell, Inc., 155 Wis. 2d 184, 192 (1990). A person challenging a law must prove it is unconstitutional beyond a reasonable doubt. Id.

As petitioners frame this issue, the farm loss limitation creates two classes: farmers with more than $55,000 in nonfarm income and farmers with $55,000 or less in nonfarm income. This classification must be held constitutional if there is a rational basis for treating these two classes differently. Id. at 193. The Supreme Court has set forth five factors to consider when determining whether a classification has a rational basis.

First, the classification must be based on substantial distinction that makes one class really different from another. Id. at 194. While the cut-off point will necessarily be arbitrary, in general the classification clearly separates those farmers with significant nonfarm income from those without significant nonfarm income. This is a substantial distinction, and petitioners offer no evidence or argument to the contrary.

Second, the classification must be germane to the purpose of the law. Id. Petitioners argue that the purpose of the law was to limit the ability of investors and other high-income individuals from gaining tax advantages from farm losses. Making this limit a function of a farmer's nonfarm income is clearly germane, if not integral, to this stated purpose.

Third, the classification must not be based solely on existing circumstances and must not be constituted so as not to preclude additional members. Id. Because there will always be farmers with annual nonfarm income in excess of $55,000 and farmers with annual nonfarm income less than $55,000, this classification is not based on existing circumstances and will not preclude additional members in both classes.

Fourth, to whatever class a law may apply, it must apply to each member thereof. Id. There is no doubt that the farm loss limitation applies to each member of the class of farmers with more than $55,000 in nonfarm income.

Fifth, the characteristics of each class must be so far different from other classes as to reasonably suggest the propriety of substantially different legislation. Id. Any tax law based on income will necessarily have arbitrary thresholds. Petitioners have offered no evidence that the class of farmers with more than $55,000 in nonfarm income have the same characteristics as farmers with $55,000 or less in nonfarm income. Common sense would indicate that as the amount of a farmer's nonfarm income rises, the greater the differences between that farmer and farmers with little or no nonfarm income. The farm loss limitation statute recognizes this and phases out the availability of farm losses as nonfarm income increases.

Each of the five factors set forth by the Supreme Court indicates that the classification in section 71.05(6)(a)10 is rational. Therefore, we cannot conclude that the farm loss limitation in section 71.05(6)(a)10 is unconstitutionally discriminatory.

Uniformity Clause

Petitioners argue that the farm loss limitation violates the uniformity clause of the Wisconsin Constitution. Article VIII, section 1 of the Wisconsin Constitution indeed provides that the "rule of taxation shall be uniform." However, the last sentence of section 1 provides:

Taxes may also be imposed on incomes, privileges and occupations, which taxes may be graduated and progressive, and reasonable exemptions may be provided.

The farm loss limitation clearly falls within the authority granted to the legislature under the excerpted sentence. Therefore, the farm loss limitation in section 71.05(6)(a)10 does not violate the uniformity clause.

ORDER

Respondent's action on the petition for redetermination is affirmed.

Dated at Madison, Wisconsin, this 19th day of July, 1999.

WISCONSIN TAX APPEALS COMMISSION

Mark E. Musolf, Chairperson

Don M. Millis, Commissioner

Thomas M. Boykoff, Commissioner

ATTACHMENT: "NOTICE OF APPEAL INFORMATION"

¹ Respondent waived the appearance at trial of petitioner Marilynne A. Maciejczak.