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STATE OF WISCONSIN

TAX APPEALS COMMISSION

PATRICK A. O'NEILL,

Petitioner,

vs.

WISCONSIN DEPARTMENT OF REVENUE,

Respondent.

DOCKET NO. 10-V-021-SC(P-III)

DECISION AND ORDER

THOMAS J. MCADAMS, ACTING CHAIRPERSON:

The Petitioner has filed a post-trial motion requesting that the Commission award Mr. O'Neill costs of $7,937.35 under Wis. Stats. §§ 227.485 and 814.245. This matter was tried to the Commission on February 23, 2011 in Madison, Wisconsin. The trial lasted approximately one-half day and each side called witnesses. In a written decision issued on April 29, 2011 the Commission held that the Petitioner had shown at trial that the assessment was incorrect. Now, in a motion filed subsequent to the Commission's written decision, the Petitioner alleges that under the statutes, the Department should have known that its position was not "substantially justified" and that he is, therefore, entitled to have the Department pay his costs in this case under what is sometimes referred to as the Equal Access to Justice Act.(1)

Based on the law and the evidence, however, we conclude that the Department was substantially justified in proceeding with the case and we, therefore, deny the request for costs.

Material Facts(2)

Background Information on Petitioner and His Farming Operation

1. Until his retirement in 2001, Petitioner worked for the State of Wisconsin, Department of Agriculture, Trade and Consumer Protection for 33 years as a sanitation and field inspector. Petitioner testified at the hearing that he has also been a farmer for the past 45 years, and has been raising beef cattle since 2003.

2. In the years 2006, 2007 and 2008, Petitioner purchased dyed diesel fuel from the Blanchardville Co-op, a/k/a Co-Op Oil Association, to use in his tractors that are used in his farming operation. On the record at his hearing before the Wisconsin Tax Appeals Commission, Petitioner identified copies of 2007 and 2008 purchase invoices for the dyed diesel fuel that he had purchased. The invoices state that this product is dyed diesel fuel, that the diesel fuel is for non-taxable use only, and that there is a penalty for taxable use. As relevant to this case, the dyed diesel fuel is to be used in agriculture and in off-road vehicles and equipment.

3. Petitioner testified that in 1995, he first licensed his 1983 diesel Ford 250 pickup truck, which during the years at issue was a flatbed pickup truck that was licensed in 2007 and 2008 for road use. Petitioner drove the truck on the roads.

The Department of Revenue's Audit and Fuel Sample Taken

4. Mr. Kent Harris has been employed by the Wisconsin Department of Revenue since June 21, 2001, and since October 2006 he has been an Excise Tax Field Auditor. He contacted Petitioner by letter dated March 28, 2008, and made inquiries regarding his farm operations, including the equipment used, the kind of farming business, and the licensed vehicles because Petitioner had purchased a substantial quantity of untaxed fuel from a supplier.

5. After Petitioner responded to the March 28 letter, Mr. Harris telephoned Petitioner on April 15, 2008 and spoke with him about various aspects of his farming operation and fuel use. In that conversation, Mr. Harris made arrangements to meet with Petitioner on April 17, 2008, at his Glenview Dairy farm, which is located outside of Blanchardville, Wisconsin, for purposes of conducting a field audit.

6. On April 17, 2008, Mr. Harris arrived at Petitioner's Glenview Dairy farm for the audit and met with him. Mr. Harris reviewed Petitioner's gasoline invoices for 2007. Before the fuel sample was taken from the fuel supply tank of Petitioner's truck, Petitioner informed Mr. Harris that he had placed automatic transmission fluid ("ATF") in it to clean the injectors. Mr. Harris took the fuel sample from the fuel supply tank of Petitioner's truck to check to see if he was using dyed diesel fuel in a taxable manner.

7. After the sample was drawn, Mr. Harris saw that it had "traces of dye, . . . and was more orangeish." After the fuel sample was taken, the Petitioner told Mr. Harris that in either December of 2007 or in January of 2008, he had put 2 or 3 gallons of dyed diesel fuel in the fuel supply tank.

The Test Results of the Fuel Sample

8. Immediately after the fuel sample was taken from the fuel supply tank of Petitioner's truck, Mr. Harris placed it in a sample bottle as reference number 200000280656, labeled it, and assigned it Sample Reference Number 0026122. Mr. Harris took the fuel sample to his office where it was secured until a Field Compliance Officer for the Internal Revenue Service (IRS) came to pick it up for testing. The form accompanying the sample, however, did not include the reference number.

9. The IRS sent the fuel sample taken from the supply tank of Petitioner's truck to the Excise Forensics Laboratory - Pacific Northwest National Laboratory (Lab) for testing. The Lab received the fuel sample taken from Petitioner's truck on May 9, 2008, and analyzed it on May 13, 2008. (Exhibit 10.) The Lab prepared a written report dated May 14, 2008, on the fuel sample taken from Petitioner's pickup truck. The Lab's report shows that the fuel sample taken from Petitioner's truck contained a concentration of Solvent Red 164 Dye (mg/L) at 4.6 parts per million. Mr. Harris testified that the federal minimum standard of red 164 dye in diesel fuel is 11.1 parts per million.

10. Dr. Kenneth Washburn, a Product Specialist and Toxicologist for Citgo Petroleum, testified at Petitioner's hearing before the Wisconsin Tax Appeals Commission that ATF also contains solvent red dye 164, the same dye used in dyed diesel fuel. Dr. Washburn testified that Citgo Petroleum has not done any testing on the effects of adding ATF to diesel fuel.

Assessed Penalty for Taxable Use of Dyed Diesel Fuel

11. Respondent assessed the $1,000 penalty for the period April 1, 2008, through April 30, 2008, because the audit was conducted in April of 2008 and Petitioner did not know exactly when he placed the dyed diesel fuel in the truck and the fuel sample was taken in April of 2008.

Statements Concerning Dyed Diesel Fuel Use

12. In a letter dated August 28, 2008, from Petitioner's attorney to Charles Zwettler, Chief of the Department of Revenue's Excise Section, it was stated that "Mr. O'Neill's use of the fuel in question resulted from an emergency situation." (A copy of the letter is attached to Exhibit 1.) The same statement was made in a letter dated June 12, 2009, to Mr. Zwettler. (Exhibit 2).

13. In Petitioner's Petition for Review, which is a pleading, on Page 2, Paragraph 1, it is stated in part:

Mr. O'Neill informed the Wisconsin Department of Revenue agent that he put roughly two gallons of dyed diesel fuel into his truck in December of 2007. (Affidavit of Patrick O'Neill.) He was plowing out the driveway of a farm several hours from his dairy and realized he had forgotten to fill his truck's fuel tank. (Id.) Rather than risk running out of fuel and essentially stranding the elderly couple who lived on the farm, Mr. O'Neill used just enough dyed fuel to get to the closet fuel station in the nearby town. (Id.) . . .

Petitioner's Affidavit, a sworn statement, is attached to his Petition for Review and in Paragraph 5 of his Affidavit it is stated in part:

Rather than risk running out of fuel and stranding the elderly couple who lived on the farm, I used two gallons of dyed diesel fuel, left over in a container in the back of my truck, to get to the closet fuel station in town.

Thus, on several occasions, Petitioner admitted that he had used dyed diesel fuel in his truck in an emergency situation. (Exhibit 4.)

ATF Use

14. ATF has a high concentration of red dye 164, about 20 times higher than that of dyed diesel fuel.

15. The Petitioner's mechanic testified at the hearing that years ago, he had recommended to the Petitioner that he add ATF to his vehicles, because it is inexpensive and acts as a lubricant and as a cleanser.

16. The Petitioner testified that prior to April of 2008, he would sometimes put half a quart of ATF in his truck when filling the tank with clear fuel.

17. The Petitioner testified that he had filled the truck's tank with clear diesel fuel a number of times after the incident on the other farm that happened in either December of 2007 or January of 2008.

INTRODUCTION

This is a motion for costs the Petitioner makes both under Wis. Stat. § 227.485 and under Wis. Stat. § 814.245. The Department argues, however, that Wis. Stat. § 227.485 is the applicable statute to this request and for purposes of this motion we will assume the department is correct as there is case law explicitly applying Wis. Stat. § 227.485 to Commission decisions. See, e.g., Susie Q. Fish Co., Inc., v. Dep't of Revenue, 148 Wis. 2d 862, 436 N.W.2d 914 (Ct. App. 1989); Regency Partners v. Dep't of Revenue, Wis. Tax Rptr. (CCH) ¶400-181 (WTAC 1995).(3)

In any case, the underlying standard for relief in both statutes is the same, i.e. "substantial justification."(4)

LEGAL ARGUMENTS

We summarize briefly the arguments the parties make in their briefs. The Petitioner argues that the Department did not have a reasonable basis in law or fact to assess the $1000 penalty, as under Wisconsin law, ATF which contains dye is not to be considered dyed fuel. Further, the Department applied the wrong legal standard in assessing a penalty against Mr. O'Neill, relying on its interpretation of IRS policies and procedures regarding dyed diesel fuel rather than Wisconsin law. Finally, the Petitioner argues that the assessment against Mr. O'Neil had no reasonable basis in fact because Mr. O'Neill told the Department from the beginning that he believed the red dye found in the fuel sample resulted from ATF. Nevertheless, the Department continued to pursue this case, under an incorrect legal standard, while ignoring evidence presented by Mr. O'Neill.

The Department responds that the controlling statute here is Wis. Stat. § 227.485 because this is an administrative proceeding, and that Wis. Stat. § 814.245 does not apply in this case because the Commission is not a court. The Department also argues that the taxpayer does not qualify for relief under Wis. Stat. § 227.485 because his sole proprietorship does not qualify as a small business.(5) Finally, the Department argues that its position before the Commission was substantially justified because it had a reasonable basis in law and fact. In particular, the Department points to the statements the taxpayer made.

SUBSTANTIAL JUSTIFICATION

The primary issue is if the Department's position before the Commission was "substantially justified." In relevant part, Wis. Stat. § 227.485(3) states as follows:

In any contested case in which an individual, a small nonprofit corporation or a small business is the prevailing party and submits a motion for costs under this section, the hearing examiner shall award the prevailing party the costs incurred in connection with the contested case, unless the hearing examiner finds that the state agency which is the losing party was substantially justified in taking its position or that special circumstances exist that would make the award unjust.

[emphasis added]. An agency's position is substantially justified if it has "a reasonable basis in law or fact." Sec. 227.485(2)(f), Stats. "The test is essentially one of reasonableness, without more." Behnke v. DHSS, 146 Wis. 2d 178, 183, 430 N.W.2d 600, 602 (Ct. App. 1988) (citation omitted). In Behnke, the court of appeals held that the agency meets the test of reasonableness if its position has "arguable merit." To meet this burden, it must be shown that there is 1) a reasonable basis and truth for the facts alleged; (2) a reasonable basis and law for the theory propounded; and (3) a reasonable connection between the facts alleged and the legal theory advanced. SeeUniversity of Wisconsin System v. State Personnel Com'n, 2002 WI 79,254 Wis. 2d 148, 646 N.W.2d 759. We start with the proposition that merely because the government loses a case, an award under sec. 227.485, Stats., is not justified. Behnke at 183.

WHY THE DEPARTMENT'S POSITION WAS SUBSTANTIALLY JUSTIFIED

Each party in its brief goes through the evidence in detail. In brief, a department auditor took a fuel sample from the taxpayer's truck and an analysis of the sample found red dye in about 50% of the concentration of red dye normally present in dyed diesel fuel. The Taxpayer made a statement to the effect that months earlier he had used about a gallon or two of dyed diesel fuel on a cold day to avoid running out of fuel. He also said that he had been adding ATF to the tank. The Department issued a $1000 penalty assessment. At trial, the taxpayer's mechanic testified that he had been advising the taxpayer to add ATF to his fuel tank as an inexpensive lubricant. The Commission found this testimony credible and voided the assessment. Now we must decide if the Department was "substantially justified" under Wis. Stat. § 227.485 in proceeding with its case.

For two reasons, we believe that the Department has shown that it was substantially justified in proceeding with its case to the hearing. First, at the time the hearing began, the facts appeared to be on the Department's side. The Department had a positive test result, confirming the presence of red dye 164 in the fuel sample. Further, the Petitioner had made a statement to the effect that he had used a small amount of dyed diesel fuel in an emergency situation a few months before. Taking both the statements and the test result together, the Commission could possibly have concluded that the fuel in the Petitioner's truck in the spring was dyed diesel fuel and found for the Department, especially given the presumption in tax litigation that the Department's assessment is correct. Had the Petitioner not put its own evidence before the Commission, it very possibly might have. At trial, however, the Commission evaluated the credibility of the Petitioner's witness and determined that the Petitioner had proven that the red dye was from ATF, and not dyed diesel fuel. Nevertheless, the Department's connection between its theory of the case and the evidence was reasonable, even if it was not the one the Commission ultimately picked after hearing all of the evidence. The statements and the test result were enough to enable the Department to go forward to a hearing. The Department was entitled to give the Petitioner's denials little or no weight in its decision to proceed with this matter before the Commission.

The second reason the Department had substantial justification was that there was at least one reported case which supported the decision to go forward. In fact, this case was similar in some respects to Apollo Fuel Oil v. U.S., 73 F. Supp. 2d 254 (E.D.N.Y. 1999), a case we discussed in detail in the opinion. In Apollo Fuel, the IRS issued a dyed diesel fuel penalty assessment based on a low test result, lower than that here in fact. Apollo Fuel Oil then brought a refund action to recover the $1,000 penalty. In brief, the fuel sample taken by the IRS inspector was found to have a red dye concentration of 3.0 milligrams per liter. At trial, the taxpayer posited several possible sources of the red dye, including accidental contamination by hoses previously used with red fuel. After listening to the witnesses and evaluating their credibility, the magistrate judge determined that it strained credulity to believe that a few drops of fuel with a dye concentration of 11.2 milligrams per liter could dye the 15 to 20 gallons of fuel in the propulsion tank to a concentration of 3 milligrams per liter and found for the IRS, even though like here, the IRS's test result was below the standard. In this case, the Commission performed the same analysis at the trial, but the opposite result occurred as Mr. O'Neill was able to substantiate his claim through credible testimony. The Department's position in this case was essentially the same as that of the IRS in Apollo, and hence, in our view, reasonable.

CONCLUSION

The Petitioner's motion for costs must be denied as the Department has shown that it was substantially justified in proceeding with the case to the hearing.

Dated at Madison, Wisconsin, this 3rd day of August, 2011.

WISCONSIN TAX APPEALS COMMISSION

Thomas J. McAdams, Acting Chairperson

Roger W. Le Grand, Commissioner

ATTACHMENT: "NOTICE OF APPEAL INFORMATION"

1 For more information about these laws, see Gregory C. Sisk, The Essentials Of The Equal Access To Justice Act: Court Awards Of Attorney's Fees For Unreasonable Government Conduct (Part One),55 La. L. Rev. 217 (1994); Phillip S. Dingle, Examining Unreasonable IRS Behavior And The Award Of Attorney's Fees In Tax Cases: Underlying Action v. Litigation Position, 37 U. Fla. L. Rev. 1013 (1985); Harold J. Krent, Fee Shifting Under The Equal Access To Justice Act -- A Qualified Success, 11 Yale L. & Pol'y Rev. 458 (1993).

2 The material facts for this decision are taken verbatim from the written decision the Commission issued after the trial, omitting only the jurisdictional facts for the underlying assessment.

3 There is also case law applying Wis. Stat. § 814.025 and Wis. Stat. § 814.245 to Commission decisions. See, e.g., The Newark Group, Inc. v. Dep't of Revenue, Wis. Tax Rptr. (CCH) ¶400-809 (Dane Co. Cir. Ct. 2005)(overturning the Commission's award of costs under Wis. Stat. § 814.025); Sunburst IV Limited Partnership v. Wis. Dep't of Revenue, Wis. Tax Rptr. (CCH) ¶400-623 (Waukesha Co. Cir. Ct. 2002) (overturning the Commission's denial of request for costs under Wis. Stat. § 814.245).

4 In Sheely v. Wisconsin Department of Health and Social Services, 150 Wis. 2d 320, 442 N.W.2d 1 (1989), the Wisconsin Supreme Court discusses briefly the relationship between Wis. Stat. § 227. 485 and Wis. Stat. § 814.245 and writes the following:

The Legislative Reference Bureau Analysis of 1985 Special Session Senate Bill 10, which was enacted and created sec. 814.245, Stats., states:

This bill provides procedures for awarding a more complete recovery of actual costs for individuals and small businesses if they prevail in an administrative contested case proceeding or judicial review of a contested case proceeding, regardless of who initiates the proceeding or review ...

This analysis was present on the bill when the legislature voted on it and this court has held such an analysis as "significant" in determining legislative intent.

[emphasis added].

5 Our resolution of this motion makes it unnecessary to decide this question.