Wall v. Wisconsin Dept. of Revenue

• Decision Date: 08 March 1990
• Docket Number: No. 89-2017,89-2017
• Citation: 157 Wis.2d 1,458 N.W.2d 814
• Parties: Thomas WALL, Petitioner-Respondent, d v. WISCONSIN DEPARTMENT OF REVENUE, Respondent-Appellant. . Oral Argument
• Court: Wisconsin Court of Appeals

Page 814

458 N.W.2d 814

157 Wis.2d 1

Thomas WALL, Petitioner-Respondent, ^d v.WISCONSIN DEPARTMENT OF REVENUE, Respondent-Appellant.

No. 89-2017.

Court of Appeals of Wisconsin.

Oral Argument March 8, 1990.

Opinion Released May 23, 1990.

Opinion Filed May 23, 1990.

Edward S. Marion, Asst. Atty. Gen., argued, Donald J. Hanaway, Atty. Gen., and Edward S. Marion, Asst. Atty. Gen., on brief, for respondent-appellant.

Gaar W. Steiner of Michael, Best & Friedrich, Milwaukee, for petitioner-respondent.

Before NETTESHEIM, P.J., and BROWN and SCOTT, JJ.

SCOTT, Judge.

The Department of Revenue appeals from a judgment reversing a decision of the Wisconsin Tax Appeals Commission which had affirmed the department's earlier determination that Thomas Wall underpaid his income taxes for the years 1982-84.The department raises three issues on appeal: (1) whether improper service deprived the circuit court of subject matter jurisdiction; (2) whether for tax purposes record title constitutes legal title; and (3) whether 100% allocation of losses to Thomas lacked "substantial economic effect."

The first issue is waived for failure to timely raise it.As to the second, we conclude that record title does not conclusively establish legal title and so reverse that portion of the judgment.We affirm on the third issue because the partnership's records do not support Thomas's position.

In 1986, the department issued against Thomas Wall a notice of income tax deficiency totaling $9,038.38 for the years 1982-84.A portion of the alleged underpayment stemmed from the 1981 purchase of some investment property in Columbus, Ohio.It is undisputed that Thomas and his wife, Barbara, intended to purchase the property jointly but, through the seller's mistake, the deed named Barbara as sole owner of the property.Though aware that Thomas's name was not on the deed, the Walls made no effort to change it, believing that as joint obligors on the mortgage note they were also joint owners.In fact, other than the deed, all pertinent documents relating to the sale listed both Thomas and Barbara as joint purchasers.

In each of the years at issue, losses of approximately $10,000 were attributable to the Ohio property; Thomas and Barbara each claimed one-half.The department disallowed Thomas's portion of the claimed losses on the ground that, for tax purposes, record title was determinative of ownership.

The other portion of the alleged underpayment arose from the Walls' ownership of a Waukesha county horse farm ("Harmony Farm") purchased in 1983.After purchase, the Walls entered into a partnership agreement with their son Steven.The agreement provided that each partner was to contribute $500 as initial capital, and that the partners:

shall contribute any additional capital deemed necessary for carrying on the business and to the extent such capital contributions are unequal, the capital account records shall reflect any such capital contributions.

In addition, the agreement allocated gains and losses as follows:

The partners shall be entitled to the net profits or shall share losses of the partnership in equal shares or as agreed....Unless otherwise agreed, all profits shall be allocated to Steven and all losses to Thomas and all losses shall be charged against the partners [sic] capital account.

In each of the relevant years, Thomas, a physician, earned an average of $155,000, while Barbara earned less than $25,000.In 1983, Harmony Farm showed losses of nearly $51,000; in 1984, nearly $68,000.All were claimed by Thomas.The department ruled that Thomas was entitled to claim only one-half of those losses, a proportion equal to his ownership interest in the partnership.

Thomas petitioned the department for redetermination of the amount allegedly due.The petition was denied and the Wisconsin Tax Appeals Commission affirmed.The circuit court reversed, holding that the Walls jointly owned the Ohio property and that, as to Harmony Farm, the agreed-upon allocation of profits and losses had substantial economic effect, i.e., that it accurately reflected economic reality.The department appeals.

SUBJECT MATTER JURISDICTION/COMPETENCY TO PROCEED

The department first argues that the circuit court lacked subject matter jurisdiction because Thomas improperly served his petition for review upon the department and the commission by regular mail rather than by certified mail or in person.Seesec. 227.53(1)(a)1, Stats.Noting the timely service and lack of any resultant prejudice, the court held that there was substantial compliance with the statute and denied the department's motion to dismiss.

The department urges this court to rule that failure to strictly comply with the statute deprives the circuit court of subject matter jurisdiction.Because the department did not timely object to any defect in service, and because it does not now claim lack of notice or prejudice, we need not address the issue beyond briefly observing that the question is more precisely framed as one of competency to proceed rather than subject matter jurisdiction.SeeMueller v. Brunn, 105 Wis.2d 171, 176-77, 313 N.W.2d 790, 792-93(1982).

No circuit court is without subject matter jurisdiction to entertain actions of any nature whatsoever.Id. at 176, 313 N.W.2d at 792.A circuit court nevertheless may lack competency to exercise its jurisdiction because the state has not conferred upon it the power to do so.Id. at 177, 313 N.W.2d at 793.In such instances, the court is not without jurisdiction; rather, its jurisdiction has not been properly invoked.

Here, the department submitted to the circuit court's jurisdiction by filing a "Notice of Appearance."The department did not allege in it any jurisdictional objections, but first raised the issue four months later in a motion to dismiss.Failure to timely object to the court's competency to proceed constitutes a waiver of that objection.SeeIn re G.L.K., 153 Wis.2d 245, 248, 450 N.W.2d 498, 499(Ct.App.1989).

LEGAL TITLE

The department next contends that since Barbara held sole record title to the Ohio property, she also holds sole legal title and, therefore, is solely entitled to claim the property's associated losses.Thomas responds that legal title is not determined by record title alone, but by the parties' intent.

The parties agree that legal ownership is a question of law, but disagree as to our standard of review.The department contends that, for tax purposes, the commission has long held bare legal title to be dispositive of ownership.It therefore urges that we give deference to the commission's expertise.SeeWisconsin Dep't of Revenue v. A.O. Smith Harvestore Prods., Inc., 72 Wis.2d 60, 65-66, 240 N.W.2d 357, 359(1976).

Thomas, by contrast, contends de novo review is more appropriate because legal ownership is a question of general law, not one particular to tax law.Seeid. at 66, 240 N.W.2d at 359.He also contends that this court may reject the commission's consistent interpretation of legal title if it is contrary to law.SeeDairyland Harvestore, Inc. v. Wisconsin Dep't of Revenue, 151 Wis.2d 799, 802, 447 N.W.2d 56, 57(Ct.App.1989).We agree.

Record title does not necessarily equate with ownership.SeeMitchell Aero, Inc. v. City of Milwaukee, 42 Wis.2d 656, 660, 168 N.W.2d 183, 184(1969);see alsoCommissioner of Internal Revenue v. Bollinger, 485 U.S. 340, 345, 108 S.Ct. 1173, 1177, 99 L.Ed.2d 357(1988)(affirming that a corporation holding title to property as agent for a partnership, is not, for tax purposes, the owner; the partnership is).Ownership means "something substantially more in the way of enjoyment or the possession of other indicia of ownership than bare or paper title."Mitchell Aero, 42 Wis.2d at 660, 168 N.W.2d at 184.

Beneficial ownership, therefore, not mere technical title, is determinative.Id.;see alsoNorthwestern Tele. Co. v. Tax Comm'n, 212 Wis. 219, 225, 248 N.W. 164, 166(1933)(stating that "[i]t matters not so much where the title to the property is from which the income accrues; the test is control over that which is taxed").From this we conclude that an intent contrary to the document of title, if clearly expressed, may negate the wording of the title.

The department concedes that Barbara and Thomas intended to own the property jointly and that all other documents necessary to the sale reflect that intent.The department also concedes that it was the seller's error which caused Barbara's name alone to appear on the deed.Moreover, the department offers no compelling authority for its contention that we be confined to record title in determining legal ownership.To adopt the department's position would run counter to established law that even an unrecorded conveyance is fully effective between the parties.State v. Barkdoll, 99 Wis.2d 163,...