Wisconsin Tax Appeals Commission Docket No. 05-I-30

STATE OF WISCONSIN

TAX APPEALS COMMISSION

JO H. SOELDNER,

Petitioner,

vs.

WISCONSIN DEPARTMENT OF REVENUE,

Respondent.

DOCKET NO. 05-I-30

DECISION AND ORDER

JENNIFER E. NASHOLD, COMMISSIONER:

This matter comes before the Commission on a Stipulation of Facts, attached exhibits, and briefs filed by the parties, including an affidavit with exhibits attached to the brief of respondent, Wisconsin Department of Revenue (Department). Petitioner, Jo H. Soeldner, appears pro se. The Department appears by Attorney Lili Best Crane.

Having considered the entire record before it, the Commission finds, decides, concludes, and orders as follows:

FINDINGS OF FACT

The facts below are taken from the Stipulation of Facts, the exhibits incorporated therein, and the Department's affidavit.

Jurisdictional Facts

1. On February 2, 2004, the Department issued a Notice of Amount Due to petitioner in the amount of $2,434.18 for tax year 1999, based on an I.R.S. correction to petitioner's adjusted gross income for that year.

2. By letter dated February 25, 2004, petitioner petitioned the Department for a redetermination of the assessment.

3. On January 31, 2005, the Department issued a Notice of Action denying petitioner's petition for redetermination of the assessment.

4. On February 28, 2005, petitioner timely filed a petition for review with the Commission.

Additional Facts

5. On May 12, 1999, petitioner cashed out an IRA account with National Guardian Life Insurance Company. On the date of the cash-out, her account had a total value of $67,401.35. After petitioner paid the surrender charge of $6,740.14, she received a gross distribution of $60,661.21.

6. National Guardian Life Insurance Company issued petitioner a 1099-R for 1999, indicating a gross distribution of $60,661.21, which petitioner properly reported on Line 16b of her 1999 federal tax return. The 1099-R indicates that no state taxes were withheld. Petitioner was not taxed by the I.R.S. or the Department on the $6,740.14 surrender charge.

7. Petitioner had taken loans out against her IRA account in the amounts of $10,000 and $30,000, and had made principal and interest payments on those loans totaling $12,800.34. The balance owed on those loans at the time of the IRA cash-out on May 12, 1999 was $30,574.74, which was paid out of the gross distribution proceeds.

8. Petitioner reported a " loss" on Line 9 of her 1999 federal tax return by subtracting $18,760 from her adjusted gross income.

9. By letter dated June 1, 2000, the I.R.S. notified petitioner that she could not claim a negative amount for dividends on Line 9 (Schedule B), and informed her that if she sold her shares in a security fund and had a loss, she should claim the amounts on Schedule D, " Capital Gains and Losses." The I.R.S. enclosed Schedule D, " to help [petitioner] see if [she could] claim the loss." (Stipulation of Facts, Ex. 7.)

10. Petitioner filed an amended federal Schedule D reporting the $18,760 loss as a long-term capital loss and included a note that stated, " Loss represents interest lost and penalties lost over the past 3 years." (Stipulation, Ex. 8.)

11. By letter to petitioner dated October 12, 2004, the I.R.S. confirmed that petitioner's taxable income for tax year 1999 was $81,007 and not the $60,441.56 petitioner reported on Line 39 of her federal tax return. The I.R.S. had adjusted petitioner's adjusted gross income and disallowed the $18,760 loss deduction.[1]

12. After receiving notification of the I.R.S. adjustment, the Department adjusted petitioner's 1999 reported Wisconsin income based on the correction to her federal adjusted gross income and issued a timely assessment, pursuant to Wis. Stat. � 71.77(7)(b).

13. In her petition for redetermination, petitioner stated that she received erroneous advice from an IRA agent that caused her to cash out her entire IRA and that " the insurance company that [she] went through kept $18,760 as a penalty fee for early withdrawal." (Stipulation, Ex. 2.) Petitioner made similar statements in a letter to the Department dated April 11, 2005 and in a letter to the Commission dated October 1, 2005.

14. In a conversation with Department employee Julie Lotto on October 21, 2005, petitioner stated that the $18,760 figure represented the total amount of principal and interest payments she made on the loans taken out against her IRA account, plus the amount of the surrender charge upon cash-out. These amounts do not add up to $18,760.

15. The only documentation petitioner has provided from National Guardian Life Insurance Company is the letter dated April 21, 2004, attached to her October 1, 2005 letter to the Commission. This letter does not indicate what the amount of $18,760 represents, nor does it even list such an amount.

CONCLUSION OF LAW

Petitioner has not met her burden of showing that the Department's adjustment to her 1999 tax return, disallowing a deduction of $18,760, was in error.

OPINION

The Department based its assessment on a federal notice to the Department of the difference in petitioner's federal adjusted gross income determined by the I.R.S. and the amount shown on Line 1 of her 1999 Wisconsin tax return. That difference amounted to $18,760, the amount petitioner attempted to subtract from federal adjusted gross income on her 1999 tax return. The I.R.S. rejected this deduction, as did the Department.

Assessments made by the Department are presumed to be correct, and the burden is upon petitioner to prove by clear and satisfactory evidence in what respects the Department erred in its determination. Eugene F. Rock, et al v. Dep't of Revenue, Wis. Tax Rptr. (CCH) ¶ 201-953 (WTAC 1981). Tax exemptions, deductions, and privileges are matters of legislative grace and will be strictly construed against the taxpayer. Fall River Canning Co. v. Dep't of Taxation, 3 Wis.2d 632, 637, 89 N.W.2d 203 (1958). Petitioner has not shown why she was entitled to deduct the amount of $18,760 from her 1999 federal adjusted gross income. Indeed, her explanations have changed over the course of the appeal process, and none of them provide a legal basis for the deduction.

In her initial petition for redetermination of the Department's assessment, dated February 25, 2004, petitioner claimed that " As a result of having to cash out the IRA, the insurance company that I went through kept $18,760 as a penalty fee for early withdrawal." This statement contradicts a letter from National Guardian Life Insurance Company, dated April 21, 2004, in which National Guardian stated that petitioner's surrender charge upon cash-out was only $6,740.14. However, even if the $18,760, or part of it, included a surrender charge or penalty for early withdrawal, penalties for early withdrawal or surrender charges are not deductible from federal adjusted gross income. Deductions are matters of legislative grace, and petitioner has not cited any federal or state statute that allows such a deduction.

Petitioner's next explanation for the deduction occurred after she was informed by the I.R.S. that she had misreported the $18,760 " loss" on her 1999 federal tax return and told that, if her loss was the result of selling shares in a security fund, she should examine Schedule D to discern whether she could claim the loss. At that point, she filed a 1999 Schedule D attempting to report the $18,760 as a long-term capital loss. However, petitioner provided no documentation from National Guardian or anyone else that explained what type of account she had, whether the account involved securities, and what her original basis in the account was. Moreover, her notation on her Schedule D claimed that the " loss represents interest lost and penalties lost over the past 3 years." It did not refer to a long-term capital loss from the sale of shares in a security fund. Petitioner has failed to show that she was entitled to deduct $18,760 as a long-term capital loss.

In a subsequent conversation with the Department on October 21, 2005, petitioner stated that the $18,760 figure represented the total amount of principal and interest payments she made on the loans taken out against her IRA account, plus the amount of the surrender charge upon cash-out. However, this amount does not add up to $18,760. Moreover, petitioner has not shown that these amounts are allowable as deductions from her federal adjusted gross income. Indeed, the payments of principal made on the loans did not constitute deductible losses; they were merely repayments of funds she had borrowed. With regard to interest payments, I.R.C. � 163(h)(1) provides that in the case of a taxpayer other than a corporation, no deduction shall be allowed for personal interest paid or accrued during the taxable year. Personal interest includes interest paid on loans to purchase personal expenses. Petitioner states in her brief that the loans she took out against her IRA account were for home repairs. Interest on those loans is therefore nondeductible.

In her brief to the Commission, petitioner claims that an advisor at National Guardian provided her with erroneous information that she would have to cash out the remainder of her account or repay the amount remaining on the funds she had borrowed, approximately $30,000, within a short time period. She states that she cashed out the remainder of the account because she did not have $30,000 available to repay the amount. Petitioner also states that she had requested National Guardian to withhold sufficient amounts to cover federal and state income tax liability, but that National Guardian did not withhold any state tax and withheld insufficient federal tax. These arguments are insufficient to show that petitioner was entitled to the deduction of $18,760 she claimed on her Wisconsin tax return.

As a preliminary matter, petitioner has failed to provide any substantiation of poor advice or of her request to withhold appropriate taxes. Nor has she shown that National Guardian either assured her that they would withhold the appropriate taxes or were required to honor a request to withhold. Moreover, even if she had provided substantiation, the law places the filing and reporting obligation on the taxpayer, and any arrangement between the taxpayer and third parties for assistance in fulfilling that obligation must necessarily remain between them. Dolphin Swimming Pool Co., Inc. v. Dep't of Revenue, Wis. Tax Rptr. (CCH) ¶400-249 (WTAC 1996).

Petitioner also claims in her brief that when she filed her 1999 tax return, she " reported a loss for the tax shelter annuity due to the withdrawal penalty assessed by the company, and the amount of interest lost on the borrowed money, and interest I paid in." (Petitioner's Brief at 1.) She further states that she cannot remember exactly how she computed the amount, but that she had called the I.R.S. hotline for advice.

Petitioner has failed to provide any authority suggesting that these amounts are allowable as deductions. As stated, the penalty for early withdrawal and the interest payments are not deductible.

In petitioner's brief, she also claims financial hardship and states, " If you do still feel that I owe additional taxes, I believe it should be at a reduced amount." (Petitioner's Brief at 2.) The Commission does not have the authority to reduce the amount owed based on financial hardship. To the extent payment agreements may be worked out, they are between the taxpayer and the Department, and typically occur only after the appeal before the Commission is resolved.

In sum, petitioner has not provided any authority for the deduction of $18,760 from her 1999 federal adjusted gross income (reported on Line 1 of her Wisconsin return), nor has she proven by clear and satisfactory evidence in what respects the Department erred in its determination.

Therefore,

IT IS ORDERED

That the Department's action on petitioner's petition for redetermination is affirmed.

Dated at Madison, Wisconsin, this 20th day of July, 2006.

WISCONSIN TAX APPEALS COMMISSION

Jennifer E. Nashold, Chairperson

Diane E. Norman, Commissioner

David C. Swanson, Commissioner

ATTACHMENT: " NOTICE OF APPEAL INFORMATION"

[1] In her petition for redetermination, petitioner states that she " did get the $18,000 deduction" from the I.R.S. (Stipulation, Ex. 2.) However, she subsequently stipulated that the deduction was disallowed by the I.R.S.