DEPARTMENT OF REVENUE

Transcription

1 STATE OF SOUTH CAROLINA DEPARTMENT OF REVENUE 300A Outlet Pointe Blvd., Columbia, South Carolina P.O. Box 12265, Columbia, South Carolina January 19, 2016 The Honorable Judge H.W. Funderburk, Jr. Administrative Law Court Edgar A. Brown Bldg Pendleton St., Ste. 224 Columbia, SC Re: R. Jefferson Davis, Jr. vs. South Carolina Department of Revenue Docket No. 15-ALJ CC Dear Judge Funderburk: Please find enclosed the South Carolina Department of Revenue's Post-Trial Brief in connection with the above-referenced matter. Should you have any questions, please do not hesitate to contact me at or Very truly yours, OFFICE OF GENERAL COUNSEL FOR LITIGATION Justine Tate Counsel for Litigation Enclosures

2 STATE OF SOUTH CAROLINA ADMINISTRATIVE LAW COURT R. Jefferson Davis, Jr., vs. Petitioner, South Carolina Department of Revenue, Respondent > DOCKET NO. 15-ALJ CC RESPONDENT'S POST-TRIAL BRIEF COMES NOW, the Respondent, South Carolina Department of Revenue (the "Department", by and through its undersigned counsel, submits the following Post-Trial Brief pursuant to this Court's request, stating as follows: INTRODUCTION Section 9 of the Supplemental Appropriations Bill for 2015 (H 4230 (the "Proviso" provides for a nonrefundable state tax credit for taxpayers who donate to a certified Scholarship Funding Organization ("SFO" and a refundable state tax credit for parents/guardians who pay tuition for an exceptional needs child directly to a certified school. In order to be eligible for the tax credit, a taxpayer must make a donation to a SFO or pay tuition to a certified school during Fiscal Year 2016 (July 1, 2015 through June 30, Additionally, a taxpayer must file a Form TC-57A (Application for Exceptional Needs Children Educational Credit with the Department after the donation or after the tuition payment and file his or her South Carolina individual income tax return and claim the tax credit on such return.

3 The previous year's version of the Proviso {Temporary Budget Proviso 1.80 of the General Appropriation Act {2014 Act No. 286, Part IB, Proviso 1.80 ("Proviso 1.80"} allowed only for a nonrefundable tax credit for taxpayers who made a donation to a SFO and expressly set an $8,000,000 cap on the credits available for such donations (the "Donation Credit". The current Proviso allows for a new refundable credit for individuals who pay tuition to a certified school for an exceptional needs child and expressly sets a $4,000,000 cap on the tax credits available for these payments (the "Tuition Credit". The current Proviso sets an overall cap of $12,000,000 for both tax credits. However, unlike Proviso 1.80, the current Proviso does not expressly set forth an $8,000,000 cap on the Donation Credits. By July 23, 2015, applications claiming $8,000,000 in Donation Credits were approved by the Department for Fiscal Year At this same point, applications claiming less than $68,000 in Tuition Credits were received by the Department. On September 8, 2015, the Office of the South Carolina Attorney General opined that "the better interpretation of Section 9 [of the Proviso] is to imply an 8 million dollar cap for SFO contributions and a 4 million dollar cap for contributions for the care and custody of Special Needs students." 1 On September 15, 2015, the Petitioner made a $ cash donation to Palmetto Kids FIRST Scholarship Program, Inc., which is a certified SFO operating in South Carolina. Subsequently, the Petitioner submitted a completed Application for Exceptional Needs Children Educational Credit form to the Department in order to receive approval for the Donation Credit. On September 16, 2015, the Department notified the Petitioner 1 See Respondent's Exhibit 2. 2

4 via that the $8,000,000 cap for the Donation Credit had been met and thus, denied his application for the Donation Credit. On November 25, 2015, the Department issued its Department Determination to the Petitioner. The Determination stated that the Petitioner is not eligible for a South Carolina tax credit against his individual income taxes for his donation to the SFO pursuant to the Proviso because clear and unambiguous reading of the Proviso provides for a $4,000,000 cap on tuition credits, an $8,000,000 cap on Donation Credits and a $12,000,000 overall cap for both credits.2 LEGAL ARGUMENT THE PETITIONER IS NOT ELIGIBLE FOR A SOUTH CAROLINA TAX CREDIT AGAINST HIS IND MDU AL INCOME TAXES FOR HIS DONATION TO AN SFO PURSUANT TO THE PROVISO. (a The language of the Proviso is clear and unambiguous in that it provides for an $8,000,000 cap on Donation Credits. When asked to interpret the meaning of a statute, the cardinal rule is solely that of seeking to effectuate the Legislature's intent. Laird v. Nationwide Ins. Co., 243 S.C S.E.2d 206 (1964. In deciding legislative intent, the first and most basic inquiry is whether the language of the statute is plain and unambiguous and whether the statute conveys a clear and definite meaning. If the answer is yes, no occasion exists for employing rules of statutory interpretation, and a court has no right to look for or impose another meaning. Paschal v. State Election Comrn'n, 317 S.C S.E.2d 890 (1995. In pertinent part, the Proviso reads as follows:!see Respondent's Exhibit 1. 3

5 (B( 1 A person is entitled to a tax credit against income taxes imposed pursuant to Chapter 6, Title 12, or bank taxes imposed pursuant to Chapter 11, Title 12 for the amount of cash and the monetary value of any publicly traded securities the person contributes to a nonprofit scholarship funding organization up to the limits of this proviso if: (a the contribution is used to provide grants for tuition to exceptional needs children enrolled in eligible schools who qualify for these grants under the provisions of this proviso; and (b the person does not designate a specific child or school as the beneficiary of the contribution. (2 An individual is entitled to a refundable tax credit against income taxes imposed pursuant to Chapter 6, Title 12, or bank taxes imposed pursuant to Chapter 11, Title 12 for the amount of cash and the monetary value of any publicly traded securities, not exceeding ten thousand dollars per child, the individual contributes as tuition for exceptional needs children within their custody or care and enrolled in eligible schools who qualify for these grants under the provisions of this proviso. The cumulative maximum total for credits authorized by this subitem may not exceed four million dollars. However, if a child within the care and custody of an individual receives a tuition scholarship from a nonprofit scholarship funding organization, then the individual only may claim a credit equal to the difference of ten thousand dollars or the cost of tuition, whichever is lower, and the amount of the scholarship. *** (D(l(a The tax credits authorized by subsection (B may not exceed cumulatively a total of twelve million dollars for contributions made on behalf of exceptional needs students. If the deparbnent detennines that the total of such credits claimed by all Petitioners exceeds either limit amount, it shall allow credits only up to those amounts on a first come, first served basis. (b The department shall establish an application process to detennine the amount of credit available to be claimed. The receipt of the application by the department shall detennine priority for the credit. Subject to the provisions of item (5, 4

6 contributions must be made on or before June 30, 2016, in order to claim the credit. The credit must be claimed on the return for the tax year that the contribution is made. The current Proviso allows for a new Tuition Credit and expressly sets a $4,000,000 cap for this credit. The Proviso thereafter expressly sets an overall cap of $12,000,000 for both the Donation Credit and Tuition Credit. Unlike Proviso 1.80, the current Proviso does not expressly set forth an $8,000,000 cap on the Donation Credits. Nevertheless, the General Assembly's intent is clear that the $12,000,000 total cap encompasses both tax credits such that taxpayers may claim each - the $4,000,000 available for the Tuition Credit, with the remaining $8,000,000 to be used toward the Donation Credit. The clear and straightforward language of the Proviso itself supports this reading. To the contrary, the Petitioner argues that a plain reading of the Proviso supports allowing the Donation Credit to exhaust the entirety of the total $12,000,000 available for both credits. This reading of the Proviso's language is not consistent with the intent of the General Assembly. The General Assembly provided for two credits - a new Tuition Credit and a Donation Credit. The total amount available for both credits is $12,000,000. The Tuition Credit is capped at $4,000,000. This leaves $8,000,000 for the Donation Credit. To allow the Donation Credit to eat up the entire $12,000,000 "pot" is untenable and would require the Department to completely ignore the $4,000,000 Tuition Cap expressly outlined by the General Assembly. Relevant case law instructs us that words in a legislative provision cannot be ignored but must be given effect. See, Savannah Bank and Trust v. Shuman, 250 S.C. 344, 157 S.E.2d 864 (1962 ("It is axiomatic that words in a statute cannot be ignored or deleted.". s

7 (b Even if the language of the Proviso is considered ambiguous, the Department submits that the better interpretation is to cap the Donation Credit at $8,000,000. The Department does not believe the language of the Proviso is ambiguous, but to the extent any ambiguity exists, that ambiguity is most reasonably resolved in support of an interpretation providing an $8,000,000 cap on Donation Credits and a $4,000,000 cap on Tuition Credits. 3 Proviso 1.80 expressly set an $8,000,000 cap for Donation Credits. It is presumed that the General Assembly is familiar with existing legislation. Amisub of South Carolina. Inc. v. S.C. Dept. of Health and Environmental Control, 407 S.C. 583, 597, 757 S.E.2d 408, 415 (2014. Thus, the following rule of statutory construction is applicable: "It is a rule of construction that changes made by a revision of the statutes will not be construed as altering the law, unless it is clear that such was the intention, and if the revised statute is ambiguous or susceptible of two constructions, reference may be had to prior statutes for the purpose of ascertaining the intent of the legislature." Town of Forest Acres v. Seigler, 224 S.C. 166, , 77 S.E.2d 900, 906 (1953, quoting Dennis v. Ind. School Dist., 166 Iowa 744, 148 N.W (1914. While the Proviso does not expressly set forth an $8,000,000 cap for the Donation Credit, the interpretative cannon outlined above dictates that the current Proviso must be read in connection with Proviso Accordingly, there is no language in the current Proviso that shows the General Assembly intended to abandon the $8,000,000 Donation Credit cap which existed under Proviso There is also no language in the current Proviso that allows the $4,000,000 Tuition Credit "pool" to be exhausted by Donation Credits. Instead, it is more reasonable to conclude that the General Assembly simply 3 See Respondent's Exhibit 2, page 6. 6

8 intended to add the $4,000,000 Tuition Credit cap to the pre-existing $8,000,000 cap for the Donation Credit from Proviso 1.80, thereby equaling a total cap of $12,000,000 for both credits. Finally, the Department submits that the Petitioner's recitation of the various drafts of the Proviso leading up to the final version during the hearing actually supports the Department's interpretation of the Proviso. The Petitioner maintains that the House/Senate conference gave up the extension of credits to parents with foster children and instead allowed the full amount set aside for tuition credits to be exhausted by the Donation Credit. However, given the Senate's insistence on providing money for the tuition tax credit, it seems unlikely that this trade actually formed the basis of the House/Senate compromise. Instead, while it is correct that the final version of the Proviso did not include relief for foster children, it is much more likely that the resulting compromise preserved $4,000,000 for Tuition Credits as a hard cap that must be set aside for the benefit of parents who pay tuition directly to the qualifying schools, leaving $8,000,000 for the Donation Credit. 4 4 See Respondent's Exhibit 2, page 1. The query by Sen. Tom Davis to the S.C. Attorney General is instructive on this point: I served on the Senate Finance Subcommittee that drafted the Senate version of the Proviso and it was my understanding the reconciled version of the Senate and House versions passed by the budget conferees had kept the $8, cap for SFO contributions and created a new refundable credit, capped at $4,000,000. for parents who paid tuition directly to certified schools. Again, however, the $8,000,000 cap for SFO contributions is not expressly slated; it can only be inferred through the Proviso's reforences to an overall cap of $12,000,000 for both credits and a stated $4,000,000 cap for the new "direct payment to 7

9 Furthennore, the Petitioner's reference to the version of the House version of this legislation passed on June 16, 2015 is instructive (Exhibit E to Petitioner's Supplemental Memorandum. Per the House Journal, subsection (D(l(a of this version originally provided: (D(I(a The tax credits authorized by subsection (8 may not exceed cumulatively a total of twelve million dollars for contributions made on behalf of exceptional needs students and foster children. The cumulative maximum total for credits authorized by subsection (8( l may not exceed eight million dollars and the cumulative maximum total for credits authorized by subsection (8(2 may not exceed four million dollars. However, this version was later amended to read: Amend the bill, as and if amended, SECTION 1, Proviso l.68{filill and inserting: ru An individual is entitled to a refundable tax credit against income taxes imposed pursuant to Chapter 6, Title t 2, or bank taxes imposed pursuant to Chapter 11. Title l '2 for the amount of cash and individual contributes as tuition for exceptional needs children or foster children within their custody or care and enrolled in eligible schools who qualify for these grants under the provisions of this paragraph. However, if a child within the care and custody of an individual receives a tuition scholarship from a nonprofit scholarship funding organization, then the individual may only claim a credit equal to the difference of ten thousand dollars and the amount of the scholarship. Amend the bill further, SECTION 4, Proviso 1.68, by striking 1.68(D(l(a and inserting: (D(l(a The tax credits authorized by subsection (8 may not exceed cumulatively a total of twelve million dollars. schools by parent" credit, and also through knowledge of the $8,000,000 cap that had been provided in the prior year's version. (Emphasis added. 8

10 (Emphasis added. The department shall allow the credit only on a first come, first serve basis. The last sentence of the June 16, 2015 amendment is significant to the issue under consideration here. The House version created a $12,000,000 "pot" for both credits. The language "the department shall allow the credit only on a first come first serve basis" would have, if it remained in the final version, allowed exactly what the Petitioner argues now - that all $12,000,000 could have been used by the Donation Credit. After first referencing a $4,000,000 cap for the Tuition Credit, the final legislation approved by both chambers (after the conference committee, provides that: (Emphasis added. The tax credits authorized by subsection (B may not exceed cumulatively a total of twelve million dollars for contributions made on behalf of exceptional needs students. If the department determines that the total of such credits claimed by all Petitioners exceeds either limit amount, it shall allow credits only up to those amounts on a first come, first served basis. As stated earlier, given the Senate's insistence on providing money for the Tuition Credit, it is highly unlikely that the General Assembly intended to essentially allow exactly what had earlier been proposed and rejected in the June 16, 2015 House version of the legislation to become law. (See also, June 17, 2015 version. (c Even a literal reading of statutory language must be rejected if it would lead to an absurd result. The Department's fair administration of the tax credits available under the current Proviso must cap the Donation Credit at $8,000,000 to allow parents the ability to access the $4,000,000 in Tuition Credits the General Assembly expressly reserved for this 9

11 purpose. The Petitioner's argument that the General Assembly intended to allow the Donation Credit to exhaust the entire $12,000,000 in credits available under the Proviso is inconsistent with the plain language of the Proviso and produces an absurd result. Even a literal reading of statutory language must be rejected if it would lead to an absurd result. Kiriakides v. United Artists Communications, Inc., 312 S.C. 271, 275, 440 S.E.2d 364, 366 (1994." "... However plain the ordinary meaning of the words used in a statute may be, the courts will reject that meaning when to accept it would lead to a result so plainly absurd that it could not possibly have been intended by the Legislature or would defeat the plain legislative intention.... If possible, the court will construe the statute so as to escape the absurdity and carry the intention into effect... " Kiriakides v. United Artists Communications. Inc., 312 S.C. 271, 275, 440 S.E.2d 364, 366 (1994. The $8,000,000 Donation Credit cap for Fiscal Year 2016 was reached quickly, within the first thirty (30 days of the Proviso's July 1, 2015 effective date. Taxpayers claiming the Donation Credit simply make a donation and fill out a fonn. Any taxpayer can submit an application to the Department for a Donation Credit. Alternatively, taxpayers claiming the Tuition Credit (i.e. parents and guardians of children who attend certified schools are at a disadvantage vis a vis those taxpayers claiming the Donation Credit. Taxpayers who may claim the Tuition Credit make tuition payments throughout the school year - on a monthly, quarterly or semester basis. In fact, the Department's witness testified that he receives multiple applications for the Tuition Credit from the same parents throughout the school year as they pay tuition on a periodic basis. Accordingly, these taxpayers must be given a reasonable time to actually pay tuition and then submit the application fonn to the Department. Additionally, the Department's 10

12 witness testified that the Department can only process Tuition Credit applications for payments made to "certified schools". He further testified that the Education Oversight Committee began to certify these schools between mid-july and mid-august, giving those individuals claiming a Donation Credit essentially at least a two week advantage over those parents claiming the Tuition Credit. Given how quickly $8,000,000 of Donation Credits were claimed, if the Department had immediately permitted taxpayers claiming the Donation Credit to claim additional credits out of the pool of the $4,000,000 reserved for Tuition Credits, the parents for whom the Tuition Credit was designed to assist may not have been able to talce advantage of it. As the Departmenf s witness testified, if we allowed this scenario to play out, there would be nothing left in the Tuition Credit pool to claim if parents submitted Tuition Credit application forms if the $12,000,000 total cap was exhausted before the end of Fiscal Year As stated above, there is no language in the Proviso that allows for the $4,000,000 "pool" expressly outlined in the Proviso for the Tuition Credit to be exhausted by any other means, specifically by taxpayers claiming the Donation Credit. The Department submits this result completely ignores the express $4,000,000 cap set out in the Proviso specifically set aside for the Tuition Credit, and therefore, creates an absurd result that is inconsistent with legislative intent. 5 5The Petitioner seemed to suggest that it was absurd to create a refundable credit that was taxable to parents of special needs children who paid tuition directly to schools. TI1ere was certainly no evidence that the refundable credit would be considered income to these parents - the Department's witness could only testify that the credit would not be reported on a l 099-G. The Petitioner has not provided any legal basis for his assertion. Further, the Petitioner seems to argue that the General Assembly intended to get funds "quickly" to the parents of special needs children and the Department's interpretation frustrates that intent because the Tuition Credit is claimed on a subsequently filed tax 11

13 CONCLUSION A clear, straightforward reading of the current Proviso clearly demonstrates that the General Assembly intended that the $12,000,000 total cap provided for in the Proviso encompasses the $8,000,000 Donation Credit cap in Proviso 1.80, plus a new $4,000,000 Tuition Credit cap. Any alternative reading of the current Proviso that suggests the entire $12,000,000 "pool" be used for both credits before the end of Fiscal Year 2016 would create an absurd result as it ignores the express language of the Proviso. Accordingly, such an interpretation of the Proviso should be disregarded. Here, the Petitioner applied for a Donation Credit after the $8,000,000 Donation Credit cap had been reached for Fiscal Year Therefore, the Petitioner's application for the Donation Credit must be denied. January tine M. Tate ounsel for Litigation ilton G. Kirnpson eneral Counsel for Litigation South Carolina Department of Revenue PO Box Columbia, SC Justine.Tate@dor.sc. gov Courtorders@dor.sc. gov ( return. However, neither the timing of the credit nor whether the credit is taxable as income is determinative. The General Assembly created the refundable credit and allowed $4,000,000 to be used for this purpose. The issues the Petitioner raises, even if true, are inherent in creating this kind of benefit as a tax credit. The General Assembly nevertheless, has made a decision. Making these funds available to the taxpayer for Donation Credits at the time of his donation to an SFO would certainly ensure exhaustion of the $4,000,000 fund which in tum, would frustrate the intent of the General Assembly that parents be allowed to claim these credits. 12

14 STATE OF SOUTH CAROLINA ADMINISTRATIVE LAW COURT R. Jefferson Davis, Jr., Petitioner, vs. South Carolina Department of Revenue, Respondent. DOCKET N0.15-ALJ CC PROOF OF SERVICE I, Jean M. O'Connor, certify that I have caused to mailed, via first class mail, postage prepaid, the Respondent's, Department of Revenue, Post Trial Brief to Mr. R. Jefferson Davis, Jr. via electronic transmission to rjdavisjr@gmail.com. The same was mailed with a Proof of Service to The Honorable H. W. Funderburk, Jr., Administrative Law Court, Edgar A. Brown Bldg., 1205 Pendleton Street, Suite 224, Columbia, SC this 19th day of January 2016.