Klein v. Iowa Dept. of Revenue and Finance, 88-1817

• Decision Date: 21 February 1990
• Docket Number: No. 88-1817,88-1817
• Parties: Maurice L. KLEIN, Appellee, v. IOWA DEPARTMENT OF REVENUE AND FINANCE, Appellant.
• Court: Iowa Supreme Court

Page 837

451 N.W.2d 837

Maurice L. KLEIN, Appellee, v. IOWA DEPARTMENT OF REVENUE AND FINANCE, Appellant.

No. 88-1817.

Supreme Court of Iowa.

Feb. 21, 1990.

Thomas J. Miller, Atty. Gen., Harry M. Griger, Sp. Asst. Atty. Gen., and Lucille M. Hardy, Asst. Atty. Gen., for appellant.

Dennis J. Naughton of Naughton, Stenlund & Reilly, Dubuque, for appellee.

Considered by HARRIS, P.J., and LARSON, SCHULTZ, LAVORATO and SNELL, JJ.

LAVORATO, Justice.

According to an Iowa income tax statute when married persons file separate returns, both must use the optional standard deduction if either elects to use it. Iowa Code § 422.9(4) (1981). This appeal presents the following question: If one spouse uses the standard deduction, may the other spouse itemize deductions? The district court thought so, but we disagree and reverse. We affirm as to the issues raised in the cross appeal.

Maurice L. and LaVonne M. Klein were divorced on August 19, 1983. They separated in November 1982. But the separation was not pursuant to a decree of dissolution or separate maintenance.

In February 1983 Maurice filed an individual Iowa income tax return for the calendar year 1982. He used the filing status of "married filing separate returns" and itemized his deductions. See Iowa Admin.Code 701-39.4(5) (1981).

On her 1982 return, LaVonne did not itemize deductions. Instead she chose to take the standard deduction. See Iowa Code § 422.9(1).

After auditing Maurice's 1982 return, the Iowa Department of Revenue and Finance disallowed the itemized deductions and replaced them with the standard deduction. The department also denied Maurice the right to claim his two minor stepchildren as dependents.

Maurice received a tax due notice from the department, requesting payment of $773.84. See Iowa Code § 422.25. Maurice later received a tax due notice in the amount of $794.60.

Maurice paid the $794.60 under protest. He then sent the department a claim for income tax refund/protest regarding the 1982 return. See Iowa Admin.Code 701-7.8(17A); 701-7.14(17A).

After an evidentiary hearing, the hearing officer entered a proposed order. See id. at 701-7.17(5). The hearing officer concluded that

Iowa Code section 422.9(4) and 701 Iowa Administrative Code section 41.4 specifically require both spouses to use the optional standard deduction if either spouse elects to use it. The department was correct to disallow [Maurice's] itemized deductions for 1982.

The hearing officer also concluded that Maurice had failed to prove he was entitled to claim LaVonne's two children as dependents.

Maurice appealed to the director of the department, who adopted the hearing officer's proposed order in its entirety. See Iowa Code § 422.28. Maurice then filed a petition for judicial review in the district court. See Iowa Code § 422.55.

The district court initially affirmed the director's decision. Later, in response to Maurice's motion to amend findings and conclusions, the court modified its earlier ruling. This time the court allowed Maurice to itemize deductions as he had done on his 1982 return. It is from this ruling that the department appeals, contending that the district court erroneously interpreted Iowa Code section 422.9(4).

Maurice cross-appealed from the part of the district court ruling that affirmed the director's order on the dependency exemption issue. One of the issues Maurice raises here centers on the hearing officer's refusal to require the department to furnish Maurice with LaVonne's 1982 tax return. Another issue Maurice raises concerns the hearing officer's refusal to require the department to furnish him with information to show that LaVonne supported her two children. These refusals, Maurice argues, shifted the burden of proof on the dependency exemption issue to the department--a burden the department failed to meet.

In addition Maurice contends the department and the district court, in denying the dependency exemptions, incorrectly applied section 152 of the Internal Revenue Code. Finally, Maurice challenges the constitutionality of section 422.9(4) on the grounds of equal protection under both the federal and Iowa constitutions.

I. Scope of Review. Judicial review of the actions of the department of revenue is governed by the Iowa Administrative Procedure Act (IAPA). See Iowa Code §§ 17A.19(8), 422.55. Acting in our appellate capacity, we review the agency's decision solely to correct any errors of law. Norland v. Iowa Dep't of Job Serv., 412 N.W.2d 904, 908 (Iowa 1987).

When the agency's action involves statutory interpretation or matters of law, "we owe the agency only limited deference...." Id. This is because "law issues are determinable by the judiciary alone...." Id. (citations omitted).

Our inquiry into the agency's findings is, however, more limited. Id. On appeal, the agency's factual findings are binding if supported "by substantial evidence in the record made before the agency when that record is viewed as a whole." Iowa Code § 17A.19(8)(f). This limited scope of factual review requires us to ask only if the evidence submitted supports the findings actually made. Norland, 412 N.W.2d at 908.

II. The Appeal--The Itemized Deduction Issue. Iowa Code section 422.9(4) provides in pertinent part:

In computing taxable income of individuals, there shall be deducted from net income the largest of the following amounts:

1. [Optional standard deduction].

2. [Itemized deductions].

....

4. Where married persons file separately, both must use the optional standard deduction if either elects to use it.

The district court explained its interpretation of the provision this way:

[Subsection 4] does not award to one spouse the unrestricted election to require the other to use the standard deduction. It merely imposes the requirement that, for either to use the standard deduction, both must. So that, in the absence of a joint election, neither may. In requiring plaintiff to use the standard deduction because his then wife did, [the department] was in error and should not have allowed the wife to use the standard deduction because [Maurice] failed to.

We agree with the department that subsection four is clear: if either spouse elects to use the standard deduction then both must. See Iowa Code § 422.9(4); Iowa Admin.Code 701-41.4; Margulies, An Overview of State Taxation of Individual and Corporate Income in Iowa, 26 Drake L.Rev. 57, 70 (1976-77) (emphasis added). Subsection four does not require a joint election, a requirement the district court read into it. A joint election requires a combined decision made by both spouses. The code, however, uses the word "either," which means that one or the other can make the decision to use the standard deduction. Once this decision is made, the code then requires the nonelecting spouse to use the same deduction. The district court erred in concluding otherwise, and we reverse its judgment on this issue.

III. The Cross Appeal.

A. The discovery issue. During the administrative proceedings Maurice asked the department to give him copies of LaVonne's 1982 return. He also served the department with interrogatories requesting information from that return. In response, the department reminded Maurice that he had already attached a copy of her return to his original protest and that, in any event, confidentiality statutes governing tax records precluded the department from giving him the return. See Iowa Code §§ 422.20, 422.72. The hearing officer refused Maurice's request to require the department to give him the return. Instead the hearing officer gave Maurice a subpoena which would have allowed him to subpoena the return. Maurice apparently failed to use the subpoena.

Maurice contends the hearing officer abused her discretion when she refused to require the department to give him LaVonne's 1982 tax return. This refusal, Maurice argues, shifted the burden of proof to the department to show (1) that LaVonne had claimed her children as dependents on her 1982 return, (2) that she supported them, and (3) that she had used a standard deduction on the return.

The short answer here is that Maurice already had the information he thought the department should have given him. In paragraph three of his protest Maurice alleged that LaVonne had filed a 1982 income tax return with a filing status "married filing separate returns." He also alleged that she had claimed the standard deduction. Finally, he alleged that the return was attached, marked as Exhibit "B", and made a part of the paragraph by reference. In its answer the department admitted paragraph three in its entirety.

So it was uncontroverted that LaVonne had claimed her children as dependents and that she had used the standard deduction. In these circumstances we fail to see how the hearing officer abused her discretion as Maurice contends.

B. The dependency exemption issue. Iowa Code section 422.12(1)(c), Iowa's dependency exemption provision, provides in pertinent part:

There shall be deducted from but not to exceed the tax, after the same shall be computed as provided in this division the following:

1. a personal exemption credit in the following amounts:

....

c. For each dependent, an additional ten dollars. As used in this section, the term "dependent" shall have the same meaning as provided by the Internal Revenue Code of 1954.

The term "dependent" was defined in section 152 of the Internal Revenue Code of 1954 as

any of the following individuals over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer....

(2) a stepson or stepdaughter of the taxpayer.

The hearing officer as well as the district court used these provisions in resolving the dependency exemption issue.

Maurice contends that the special support test in section 152(e)(1)(A) and 152(e)(2)(B)(i, ii) of the Internal Revenue Code of 1954 applies to him rather than the provisions the department and the...