STATE OF ARKANSAS DEPARTMENT OF FINANCE AND ADMINISTRATION OFFICE OF HEARINGS & APPEALS ADMINISTRATIVE DECISION IN THE MATTER OF (ACCT. NO.: ) INDIVIDUAL INCOME TAX ASSESSMENT DOCKET NO.: 17-061 TAX YEAR 2015 ($ ) RAY HOWARD, ADMINISTRATIVE LAW JUDGE APPEARANCES This case is before the Office of Hearings and Appeals upon a written protest dated July 25, 2016, signed by on behalf of himself and the Taxpayers. The Taxpayers protested the assessment of Individual Income Tax made by the Department of Finance and Administration ( Department ) resulting from an audit conducted by Matthew Benson and Wade Gambill, Tax Auditors Individual Income Tax Section. The Letter ID Number is. This case was submitted on written documents included with the protest at the request of the Taxpayers. The Department was represented by Michael Wehrle, Attorney at Law, Office of Revenue Legal Counsel. A Briefing Schedule was mailed to the parties on August 15, 2016. The Department filed an Opening Brief on August 17, 2016. The Taxpayers filed a Response Brief on October 6, 2016. This matter was submitted for decision on October 12, 2016. 1
ISSUE Whether the assessment for Individual Income Tax issued by the Department against Taxpayers should be sustained? Yes. FINDINGS OF FACT/ CONTENTIONS OF THE PARTIES The Department issued an assessment against the Taxpayers for Individual Income Tax for the calendar year of 2015. The Department s Opening Brief provided, in pertinent part, as follows: The taxpayers claim the earnings from their employment in 2015 are not taxable income. However, the Department's Individual Income Tax Section determined that the income from the taxpayers' employment is taxable and therefore adjusted their Arkansas income tax return accordingly. Exhibit A Auditor's Report. Exhibit B 2015 AR1000F as originally filed. Exhibit C Tax Inquiry Letter from the Department. Exhibit D Letter to Auditor from. Exhibit E Explanation of Tax Adjustment Letter. Exhibit F Notice of Proposed Assessment. Exhibit G 2015 AR1000 as adjusted by the Auditor. Exhibit H Taxpayers Protest. [P. 1]. The Taxpayers Response Brief described the instant case as this matter of protest to the changing of the amount of my income on the sworn return I filed for 2015 [P. 1] and provided, in pertinent part, as follows: (4) The Notice of Proposed Assessment I received on July 1st, 2016 stated an adjustment of tax liability, which I am of course protesting. Primarily due to the fact that this adjustment is not taking into account the stated amount of "income" which I received from my paymaster in 2015. This notice is in fact using W-2s for the information I already specifically rebutted on my substitute forms 4852.... Furthermore, the "Explanation of Tax Adjustment" notice I received gives this explanation: "Arkansas income on your W-2 form does not agree with amount claimed for Arkansas taxes on your 2
return." My "income" does not agree with my claimed Arkansas taxes? My substitute Forms 4852s are what was submitted with my sworn return. (5) "the Department's Individual Income Tax Section determined that the income from the taxpayers' employment is taxable" What is the basis of this determination? I believe my return was a properly sworn affidavit. Is this "Department" or persons working therein making this determination possessed of direct personal knowledge of the nature of receipts reported? If not, and since I do have personal knowledge, profoundly disagree with that conclusion. Information returns such as W-2s are capable of being wrong in reporting of "wages". Amounts can be mistakenly withheld under tax-related protocols from payments which are not actually subject by law to such protocols, and are not actually subject to reporting requirements and/or tax. This is the reason for my reporting of -0- "income". Once again, the burden of proof is upon the claimant to prove that my receipts were in fact of a taxable nature.... Please, do explain, in broader terms than "Arkansas 'income' on your W-2 form does not agree with amount claimed for Arkansas taxes on your return", how my occupation is not that of common right and how I have derived an "income" from it. [P. 1-2]. The Auditor s Report 1 described the adjustments made to the Taxpayers 2015 Individual Income Tax return by the Department and stated, in part: filed an Arkansas State individual income tax return for year 2015 with zero income, and a refund of 2,609 dollars. The auditor looked in the warehouse, and our records indicated that had a W-2 from with income of dollars and withholding of dollars. The warehouse also shows that had a W-2 from with income of dollars and withholding of dollars. The auditor sent a letter requesting their W-2's on May 16th, 2016. sent in 2 Federal 4852 forms (a substitute W-2 form) that he had filled out himself. Instead of claiming the dollars of income on his 4852 he wrote down zero on the wages line. 1 See Department s Exhibit A. 3
follows: Instead of claiming dollars of income he wrote zero on her 4852 form. To allow a Federal 4852 form we must also have his last paycheck stub to back it up. Instead of providing a paycheck stub just wrote zero dollars for income and thought that would be acceptable. The auditor added the two incomes together and put the dollars of income on line eight of the tax return as wages. This resulted in an adjusted gross income of dollars and a tax of. had withholding of dollars and his wife had withholding of dollars. This resulted in a tax due of dollars (which is currently at due to interest). was sent an adjustment letter on June 21, 2016 that explained that his income was understated. The letter reads "Arkansas income on your W-2 form(s) does not agree with amount claimed for Arkansas taxes on your return". [P. 1] CONCLUSIONS OF LAW Standard of Proof Ark. Code Ann. 26-18-313 (Supp. 2015) provides, in pertinent part, as (a) When the state seeks to impose a tax under the terms of a state tax law, then the statute imposing the tax shall be strictly construed in limitation of the imposition of the tax. (b) When a taxpayer claims to be entitled to a tax exemption, deduction, or credit under the terms of a state tax law, then the statute providing the tax exemption, deduction, or credit shall be strictly construed in limitation of the exemption, deduction, or credit. (c) The burden of proof applied to matters of fact and evidence, whether placed on the taxpayer or the state, in controversies regarding the application of a state tax law shall be by preponderance of the evidence. (d) When the meaning of a state tax law is in controversy, the burden of establishing the proper construction of the statute shall be on the party claiming application of the tax or benefit of the tax exemption, deduction, or credit. (e) Words used in statutes imposing a tax and in statutes providing for a tax exemption, deduction, or credit shall be given their plain and ordinary meaning, not their narrowest possible meaning. 4
(f)(1) Statutes imposing a tax and statutes providing a tax exemption, deduction, or credit shall be fairly and reasonably construed, taking into consideration the purpose and spirit of the tax, exemption, deduction, or credit and the public policy at the time the statute was passed. (2) If after taking this section and other applicable rules of statutory construction into account, a well-founded doubt exists with respect to the meaning of a statute imposing a tax or providing a tax exemption, deduction, or credit, the rule of strict construction shall require that the doubt be resolved against the tax, exemption, deduction, or credit. [Emphasis added]. A preponderance of the evidence means the greater weight of the evidence. See Chandler v. Baker, 16 Ark. App. 253, 700 S.W.2d 378 (1985). In Edmisten v. Bull Shoals Landing, 2014 Ark. 89, at 12-13, 432 S.W.3d 25, 33, the Arkansas Supreme Court explained that: [a] preponderance of the evidence is not necessarily established by the greater number of witnesses testifying to a fact but by evidence that has the most convincing force; superior evidentiary weight that, though not sufficient to free the mind wholly from all reasonable doubt, is still sufficient to incline a fair and impartial mind to one side of the issue rather than the other. Tax Assessment The Taxpayers claimed zero dollars ($0.00) of [w]ages, salaries, tips, etc on their 2015 Individual Income Tax return. See Department s Exhibit B. In response to the Department s request for additional information to substantiate the Taxpayers 2015 Individual Income Tax return, 2 submitted a letter 3 which stated, in part: I received a letter requesting 2015 employer provided W-2s. With my original return I provided substitute Forms 4852 to rebut the allegations of "income" paid by the employers listed on said forms. My "income" is as it is listed on the 2015 Form AR1000F which lists all my gross and taxable income for the tax year 2015. The forms 2 See Department s Exhibit C. 3 See Department s Exhibit D. 5
4852 report that information returns issued to the IRS and State are disputed and -0- wage amounts listed thereon accurately and truthfully list my wage income received from the parties identified thereon. The W-2 should not have been submitted because I did not receive "Wages" as defined in Section 3401(a) of the IRC. I do not classify as an "employee" according to Section 3401(c) which defines the term "employee" thus: "For purposes of this chapter (Ch 24A), the term 'employee' includes an officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term 'employee' also includes an officer of a corporation." The amounts of withholding are however correct. [P. 1]. The State of Arkansas imposes an income tax upon the entire income of every resident, individual, trust, or estate. The tax shall be levied, collected, and paid annually upon the entire net income as defined and computed in this chapter at the following rates.... See Ark. Code Ann. 26-51-201(a) (Supp. 2015). The term employee is defined in Ark. Code Ann. 26-51-902(5) (Repl. 2012) to mean any individual subject to the Income Tax Act of 1929, 26-51-101 et seq., who performs or performed services for an employer and receives wages for the services. Ark. Code Ann. 26-51-902(13) (Repl. 2012) defines wages as remuneration in cash or other form for services performed by an employee for an employer.... The Taxpayers rely on asserted inconsistencies or flaws in definitions contained in the Internal Revenue Code for the terms employee and wages in support of their opposition to the proposed assessment. 4 The Taxpayers reliance 4 See Department s Exhibit D. In McNeil v. Commissioner of Internal Revenue, T. C. Memo. 2011-150, 2011 WL 2559802 (U.S. Tax Court), the United States Tax Court addressed a similar argument and its opinion stated that, petitioner argues that he did not receive wages as defined by applicable law. Courts have considered and repeatedly rejected similar arguments as frivolous. See, e.g., United States v. Gerads, supra at 1256; Funk v. Commissioner, supra at 265; Robert v. 6
is misplaced. As reflected in the above quoted provisions, Arkansas law sets forth plain and unambiguous definitions for the terms employee and wages. Furthermore, as reflected in Ark. Code Ann. 26-51-201(a) (Supp. 2015), the tax at issue in this case is imposed on income. The Arkansas General Assembly enacted the Income Tax Act of 1929 by passage of Act 118 of 1929. The Arkansas Supreme Court upheld the constitutionality of Act 118 of 1929 in the case of Morgan v. Cook, 211 Ark. 755, 202 S.W.2d 355 (1947). The court in Morgan concluded that the entire income of every resident of Arkansas, regardless of the source, was taxable. Ark. Code Ann. 26-51-404(a)(1) (Supp. 2015) defines gross income as follows, in relevant part: (a)(1) Gross income includes: (A) Gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid;... (E) Gains or profits and income derived from any source whatever; and (F) Any payments of alimony and separate maintenance received pursuant to a court order. [Emphasis added]. Net income is derived from adjusting gross income by any allowed deductions. Ark. Code Ann. 26-51-403 (Repl. 2012). A preponderance of the evidence established that: (1) was paid wages by ; and (2) was paid wages by. The wages (or compensation) that the Taxpayers were paid by and were income subject to taxation under the Ark. Commissioner, T.C. Memo.2010-40. As discussed more fully below, we find that wages petitioner earned in 2006 and 2007 are compensation for services contemplated by section 61 and taxable to him as income. Id. at 3. 7
Code Ann. 26-51-101 et seq (Repl. 2012 & Supp. 2015). The Department correctly assessed Individual Income Tax against the Taxpayers for the calendar year of 2015. The assessment of interest was also correct since interest is a charge for the use of the State s tax dollars. See Ark. Code Ann. 26-18-508 (Repl. 2012). The Department did not assess a penalty against the Taxpayers. DECISION AND ORDER The assessment is sustained. The file is to be returned to the appropriate section of the Department for further proceedings in accordance with this Administrative Decision and applicable law. Pursuant to Ark. Code Ann. 26-18-405 (Supp. 2015), unless the Taxpayers request in writing within twenty (20) days of the mailing of this decision that the Commissioner of Revenues revise the decision of the Administrative Law Judge, this Administrative Decision shall be effective and become the action of the agency. The revision request may be mailed to the Assistant Commissioner of Revenues, P.O. Box 1272, Rm. 2440, Little Rock, Arkansas 72203. The Commissioner of Revenues, within twenty (20) days of the mailing of this Administrative Decision, may revise the decision regardless of whether the Taxpayers have requested a revision. The Taxpayers may seek relief from the final decision of the Administrative Law Judge or the Commissioner of Revenues on a final assessment of a tax deficiency by following the procedure set forth in Ark. Code Ann. 26-18-406 (Supp. 2015). 8
OFFICE OF HEARINGS & APPEALS DATED: October 14, 2016 9