Richards v. Iowa Dept. of Revenue, 84-290

• Decision Date: 16 January 1985
• Docket Number: No. 84-290,84-290
• Parties: Richard K. RICHARDS, and Virginia H. Richards, Appellants, v. IOWA DEPARTMENT OF REVENUE, Appellee.
• Court: Iowa Supreme Court

Page 830

360 N.W.2d 830

Richard K. RICHARDS, and Virginia H. Richards, Appellants, v. IOWA DEPARTMENT OF REVENUE, Appellee.

No. 84-290.

Supreme Court of Iowa.

Jan. 16, 1985.

Richard K. Richards, pro se.

Thomas J. Miller, Atty. Gen., Harry M. Griger, Sp. Asst. Atty. Gen., and Mark R. Schuling, Asst. Atty. Gen., for appellee.

Considered by UHLENHOPP, P.J., and HARRIS, LARSON, CARTER, and WOLLE, JJ.

WOLLE, Justice.

This case concerns the methods which married taxpayers may use to deduct federal income tax and itemized deductions from their Iowa income when they file separate Iowa income tax returns. The Iowa Department of Revenue (department) assessed additional Iowa income taxes against Richard K. Richards and Virginia H. Richards (taxpayers) for the year 1980, because they neither proved the amount of deductions each had paid nor prorated their deductions according to each spouse's contribution to their combined total income. The district court on judicial review affirmed the department's determination of the amount of additional tax due. We affirm.

The taxpayers, husband and wife, separately filed 1980 Iowa income tax returns on a combined form. They applied all their itemized and federal income tax deductions to reduce the total income of the husband who earned substantially more than his wife. Upon review of their return, the department determined that the taxpayers should have allocated the deductions in proportion to each spouse's share of their combined incomes, 83% to the husband and 17% to the wife. Accordingly, it assessed them an additional $678.86 for the 1980 tax year. The taxpayers protested this assessment.

Following an administrative hearing at which the taxpayers declined the opportunity to present additional evidence, the department issued proposed and final decisions upholding the assessment of additional tax. Upon judicial review of the final agency order, the district court upheld the tax assessment, determining that the department had correctly applied pertinent statutes and regulations to the evidence in the administrative record. This appeal followed.

The district court's decision discloses that it correctly reviewed the administrative record and the department's orders in accordance with the provisions of Iowa Code section 17A.19(8) which are applicable to contested case proceedings. This court, like the district court, functions in an appellate capacity to correct any errors of law on the part of the agency. Lefebure Corp. v. Iowa Department of Job Service, 341 N.W.2d 768, 770 (Iowa 1983). The agency's decision must be 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); Mount Pleasant Community School District v. Public Employment Relations Board, 343 N.W.2d 472, 476 (Iowa 1984).

Substantial evidence supported the findings of fact on which the department relied, and the taxpayers do not now contend that the department's orders were factually deficient. The dollar amount of deductions was never in dispute. The department simply contended that the deductions must be prorated between the husband and wife because the taxpayers had not shown that the husband paid more than his proportionate share of their Iowa income. The pivotal finding of fact, unchallenged in this appeal, is that the husband did not prove that he had paid all of the federal income taxes and itemized deductions which he attempted to deduct from his own income. The taxpayers concede that they offered no such proof even though they had the burden to show that the department's assessment was erroneous. See City of Ames v. Iowa State Tax Commission, 246 Iowa 1016, 1025, 71 N.W.2d 15, 21 (1955).

The taxpayers contend that the department's ruling was unlawful because it was contrary to the letter and intent of the statute governing allocation of the deductions in question on their 1980 returns, Iowa Code section 422.9 (1979). Consequently, the test of Iowa Code section 17A.19(8) which is here determinative is whether "substantial rights" of the taxpayers have been prejudiced because the agency action was "in violation of ... statutory provisions" or "affected by other error of law." Iowa Code §§ 17A.19(8)(a), (e).

The department relied upon the same statutory authority as the taxpayers. Iowa Code section 422.9 provided in pertinent part:

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

1. An optional standard deduction....

2. The total of contributions, interest, taxes, medical expense, nonbusiness losses and miscellaneous expenses deductible for federal income tax purposes under the Internal Revenue Code of 1954, with the following adjustments:

a. Subtract the deduction for Iowa income taxes.

b. Add the amount of federal income taxes paid or accrued as the case may be, during the tax year, adjusted by any federal income tax refunds. Provided, however, that where married persons, who have filed a joint federal income tax return, file separately, such total shall be divided between them according to the portion thereof paid or accrued, as the case may be, by each.

(Emphasis added). The department maintains that the emphasized language precluded the taxpayers from allocating all the federal income taxes and itemized deductions paid by both parties to the husband's income alone. It also cites, as authority for proration, two department rules designed to implement that statute. Rule 41.3 pertaining to the federal income tax deduction provided:

Federal income taxes paid or accrued during the tax year are a permissible deduction for Iowa income tax purposes. Taxpayers who are not on an accrual basis of accounting shall deduct their federal income taxes in the year paid. Deductible federal income taxes for cash basis taxpayers shall include:

a. The entire amount of federal income tax withheld during the taxable year from compensation of the taxpayer. The actual federal income tax withheld from wages earned by either or both spouses must be deducted by each in accordance with wage statement(s) and may not be prorated between the spouses.

b. Tax paid at any time during the taxable year on a declaration of estimated tax or on any amendment to such declaration. Where a husband and wife file separately or separately on a combined Iowa return, the estimate of federal income tax shall be prorated between the spouses by the ratio of each spouse's income not subject to withholding to total income not subject to withholding of...