Auer v. Department of Treasury, Docket No. 67137
Decision Date | 09 November 1984 |
Docket Number | Docket No. 67137 |
Parties | E. David AUER and Patricia Auer, Petitioners-Appellants, v. DEPARTMENT OF TREASURY, Respondent-Appellee. |
Court | Court of Appeal of Michigan — District of US |
Rothstein, Erlich & Rothstein by Stewart I. Erlich, Southfield, for petitioners-appellants.
Frank J. Kelley, Atty. Gen., Louis J. Caruso, Sol. Gen., and Richard R. Roesch and Curtis G. Beck, Asst. Attys. Gen., for respondent-appellee.
Before BRONSON, P.J., and R.B. BURNS and BORSOS *, JJ.
This case is an appeal from the Michigan Tax Tribunal, which affirmed a deficiency assessment against petitioners for intangibles tax liability. We affirm.
The deficiency assessments apply to tax years 1975 and 1977. In addition, petitioners did not file an intangibles tax return for 1978, but the tribunal found petitioners liable in the amount of $4,063, plus interest and penalty. The deficiency for 1975 and 1977 totalled $8,437, plus interest and penalty.
The controversy arises out of the Department of Treasury's audit of Clintonview Care Center, Inc., as a subchapter S corporation, which provides nursing home health care services in the State of Michigan and of which petitioner E. David Auer is a 25 per cent shareholder and officer. The Department of Treasury audited petitioners for tax years 1975 and 1977. Subsequently, a notice of intent to assess was issued on July 19, 1979, and notices of final assessment were issued on August 9, 1979, and on December 12, 1980. The notices erroneously indicated that the involved assessment was for tax years 1974 and 1975. A "corrected assessment", indicating that the years involved were 1975 and 1977, was later issued. Respondent contends that the corrected assessment was requested on August 23, 1979, and issued in the latter part of that month. Petitioner E. David Auer stated, however, that he did not remember receiving such corrected assessment.
On November 23, 1979, the Department of Treasury also sent petitioners the notice of assessment for the tax year 1978. Since petitioners had not filed an intangibles tax return for the year 1978, respondent computed the assessment using the 1977 audit base plus 10 per cent.
During the years in question, the records of the corporation indicated substantial distributions of dividends to petitioners. The amounts received by petitioners from the corporation during these years were reported in their federal and state income tax returns as being dividend income. Further, the corporation did not issue any wage statements to petitioners indicating payment of wages or salary to Mr. Auer.
Mr. Auer testified that he provided various services to the corporation and that the payments he received from the corporation were actually earned income for such services. These services included his managing of financial and real estate matters, as well as general maintenance and the chairing of several committees. He further contended that the payments received by him were not reported as compensation because he did not want to jeopardize Clintonview's participation in Medicare/Medicaid programs. He asserted that the amounts due and paid him as owner would not be permissible under federal and Michigan Department of Social Services regulations. According to Mr. Auer, these regulations permit an administrator to earn only $65,000 annually. Since the Center's administrator was paid a salary of $50,000, there remained only $15,000 which could be considered compensation for comparable services. This amount had to be divided among himself and the other shareholders who performed services. Mr. Auer claimed that his classification of the income for purposes of meeting federal and state regulations did not affect the true nature of the income, i.e., compensation for services. Accordingly, he argued that his federal and state tax returns were not determinative for intangibles tax liability. Finally, he testified that his compensation (in fact) was to be between $115,000 and $120,000 per year, so that he reported as dividends subject to intangibles tax only that income which exceeded $120,000. The corporation's other shareholders, however, even though not providing services to the corporation, received distributions in proportion to their holdings and equal to those received by him.
During the evidentiary hearing before the tribunal, petitioners indicated that 1978 payments received from the Clintonview Care Center amounted to $116,000, and respondent stipulated that the 1978 tax year assessment should be reduced by $583.20.
The tribunal affirmed the Treasury Department's intangibles tax deficiency assessment for the years 1975 and 1977, and also affirmed the department's intangibles tax deficiency assessment for tax year 1978, as modified by the stipulated agreement of the parties at the time of the hearing.
Petitioners claim that the respondent failed to give proper notice of a deficiency assessment for 1977 so that petitioners are not liable for any tax imposed upon for that year.
M.C.L. Sec. 205.23; M.S.A. Sec. 7.657(23) provides that if the department determines that a taxpayer has not satisfied his tax liability, the taxpayer shall be notified of that determination. This section became effective September 16, 1980; however, M.C.L. Sec. 205.143; M.S.A. Sec. 7.556(13) formerly provided that actual notice must be given to the taxpayer of an intent to assess. Also, if a taxpayer does not pay the tax upon notice of the intent to assess, the taxpayer must be given notice of a final assessment. Respondent first notified petitioners that the years in question were 1974 and 1975. Petitioners claim that there was never any notice with respect to 1977, that notice is a condition precedent to the imposition of tax and that therefore the Tax Tribunal erred in finding petitioners liable for any tax for 1977.
The statutory notice provisions are ostensibly designed to provide due process of law, viz., the purpose is to provide the taxpayer with notice that deficiency assessments have been levied for certain tax years and to afford the taxpayer an opportunity to contest them. A defect in...
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