Messner v. Dorgan

• Decision Date: 31 December 1974
• Docket Number: No. 9020,9020
• Citation: 228 N.W.2d 311
• Parties: Theodore MESSNER and Margaret Messner, Petitioners and Appellants, v. Byron L. DORGAN, Tax Commissioner for the State of North Dakota, Respondent and Appellee. Civ.
• Court: North Dakota Supreme Court

Page 311

228 N.W.2d 311

Theodore MESSNER and Margaret Messner, Petitioners and Appellants, v. Byron L. DORGAN, Tax Commissioner for the State of North

Dakota, Respondent and Appellee.

Civ. No. 9020.

Supreme Court of North Dakota.

Dec. 31, 1974.

Rehearing Denied Jan. 31, 1975.

Certiorari Denied April 28, 1975. See 95 S.Ct. 1681.

Syllabus by the Court

1. Presumption of law arising from Rule 50--4--b of Rules and Regulations of the State Tax Commissioner that person reporting income for Federal self-employment tax purposes claimed all right to such income with the consent of his or her spouse is rebutted by statement of both spouses that no such consent was given and no such claim was made.

2. The Federal self-employment tax is a part of the Social Security system and is not a constituent part of the Federal income tax, although self-employment tax returns are filed with personal income tax returns for administrative convenience.

3. A State statute permitting allocation of income between husband and wife cannot be negated by administrative rule which purports to interpret it.

4. It is the duty of the courts to reconcile provisions of law relating to the same subject matter if possible, and particularly so when the statutes are adopted at the same legislative session. Fact that State has partially 'Federalized' the State income tax does not detract from validity of separate statute which relates to a non-Federalized area of income tax law.

5. Decision of administrative agency which is against the law or not sustained by substantial evidence will not be sustained.

L. A. W. Stephan, Valley City, for petitioners and appellants.

Albert R. Hausauer and Robert W. Wirtz, Sp. Asst. Attys. Gen., State Tax Dept., Bismarck, for respondent and appellee.

VOGEL, Judge.

The appellants, Theodore and Margaret Messner, are husband and wife. Since their marriage in 1935, they have purchased 800 acres of farmland. The hand is held in joint tenancy and was farmed by them during the year 1970.

In 1971, they filed a joint Federal income tax return for the 1970 tax year. In the return they listed net farm income of slightly more than $12,000 and income from interest on joint savings investments of slightly more than $1,000. For the same year they filed separate State income tax returns, dividing the income shown on the Federal return between them.

As part of their Federal tax return the Messners filed a self-employment tax return in which the gross income from the farm was shown, for self-employment tax purposes, as the income of Theodore Messner. The Tax Commissioner contends that the Messners are prohibited, by statute and Tax Commissioner's Rule 50--4--b, from filing separate returns splitting income which has been allocated to one of them on a self-employment tax return. The Messners contend that Tax Commissioner's Rule 50--4--b is not authorized by statute and is invalid.

The State Tax Commissioner assessed additional State income taxes for the year 1970 against the Messners, and they appealed to the district court of Burleigh County, which, after remanding the case once to the Tax Commissioner for the taking of further evidence, affirmed the decision of the State Tax Commissioner. This appeal followed.

The dispute between the parties arises over the interpretation of Section 57--38--31, subsection 2, N.D.C.C., and the validity and application of Rule 50--4--b promulgated by the Tax Commissioner. Relevant portions of the statute and the rule follow:

'57--38--31. Duty of individuals and fiduciaries to make return.--1. Every resident individual, every fiduciary for a resident individual, estate or trust, and every individual or fiduciary who receives income derived from sources in this state, who is required by the provisions of the United States Internal Revenue Code of 1954, as amended, to file a federal income tax return, shall file an income tax return with the state tax commissioner in such form as he may prescribe. . . . The return shall be signed by the person required to make it and shall contain a written declaration that it is made and subscribed under penalties of perjury.

'2. A husband and wife each having separate income may include their income in a single joint return, or if they have separate income from personal or professional services or from business or property in which the other has no ownership and if they file a joint federal income tax return in which such income is reported, they may file separate returns in which the separate income of each and the deductions and exemptions for themselves or their dependents are reported in the same way that they would have been required to report them in separate federal returns if they had filed separate federal returns.

'A husband and wife who have income from property or business in which both have an ownership interest may file a single joint return in which the income of both, along with any other income they may be required to report, is included, or they may file separate returns in the same way as provided in the preceding paragraph, provided that the income from the property or business in which both have an ownership interest shall be allocated between them according to the capital interest of each, the management and control exercised by each, and the services performed by each with respect to such property or business, pursuant to rules and regulations promulgated by the tax commissioner for the reasonable allocation thereof.

'INCOME TAX RULE NO. 50/REPORTING OF INCOME BY HUSBAND AND WIFE

'4. Income from a business in which both husband and wife have an ownership interest.

'b. Allocation of income derived from a business other than a partnership in which both a husband and wife claim an ownership interest

'In the case of a business owned by a husband and wife who filed a joint federal income tax return in which one of them claimed all of the income therefrom for federal self-employment tax purposes, it will be presumed for purposes of administering the state income tax law, unless expressly shown to the contrary by the taxpayer, that the spouse who claimed that income for federal self-employment tax purposes did, thereby, with the consent of the other spouse, claim all right to such income and that therefore such income must be included in the state income tax return of the spouse who claimed it for federal self-employment tax purposes if the husband and wife file separate state income tax returns.

'd. Management and control

'Participation in the control and management of a business must be distinguished from the regular performance of nonmanagerial services. Contribution of management and control with respect to the business must be of a substantial nature in order to accord it weight in making an allocation of income. Substantial participation in management does not necessarily involve continuous or even frequent presence at the place of business, but it does involve genuine consultation with respect to at least major business decisions, and it presupposes substantial acquaintance with an interest in the operations, problems, and policies of the business, along with sufficient maturity and background of education or experience to indicate an ability to grasp business problems that is appreciably commensurate with the demands of the enterprise concerned. Vague or general statements as to family discussions at home or elsewhere will not be accepted as a sufficient showing of actual consultation, but evidence of genuine consultation with respect to specific matters is entitled to consideration even though it has taken place in the home. Evidence of genuine consultation with respect to the distribution of profits or the retention in the business is significant and to be accorded weight in determining proper allocation of income.

'e. Services performed

'The amount of services performed by each spouse is factor to be considered in determining proper allocation of income from a business in which each spouse has an ownership interest. In order to accord weight to services performed by an individual spouse, the services must be of a beneficial nature in that they make a direct contribution to the business. For example, for a business operation, whether it is a retail sales enterprise, farming operation or otherwise, in which both husband and wife has an ownership interest, the services contributed by the wife must be directly connected with the business operation; services for the family such as planting and maintaining family gardens, domestic housework, cooking family meals, and routine errands and shopping, are not considered to be services performed or rendered as an incident of or a contribution to the particular business; such activities by a wife must be disregarded in determining the allocable income attributable to the wife.'

The Messners obviously were aware of the provisions of Rule 50--4--b, because attached to each of the separate individual State tax returns was the following

statement: STATEMENT OF HUSBAND AND WIFE RELATIVE TO INCOME

FROM FARM LAND HELD IN JOINT TENANCY OWNERSHIP

Taxpayers, husband and wife, have filed a joint federal income tax return for 1970 listing joint income from land held in joint tenancy ownership. Under federal regulations (See below husband was required to pay self-employment tax on All earnings from farm. Wife was not permitted to claim part for self- employment tax purposes. This was not optional on the part of either.

This statement is made to set forth clearly that taxpayers on their separate state income tax returns each claims his share of income from jointly owned land, that neither has given any consent of any kind to husband's including such income in the federal tax return for self-employment purposes, and that such was done because it was mandatory under federal laws and regulations.

Dated 3/26/71

(Signed) THEODORE MESSNER.

(Signed) MARGARET MESSNER

The Messners' quotation from the...