Wallace v. Commissioner of Taxation

• Decision Date: 29 January 1971
• Docket Number: No. 42321,42321
• Citation: 184 N.W.2d 588,289 Minn. 220
• Parties: Wayne M. WALLACE, et al., Relators, v. COMMISSIONER OF TAXATION, Respondent.
• Court: Minnesota Supreme Court

Page 588

184 N.W.2d 588

289 Minn. 220

Wayne M. WALLACE, et al., Relators, v. COMMISSIONER OF TAXATION, Respondent.

No. 42321.

Supreme Court of Minnesota.

Jan. 29, 1971.

Rehearing Denied March 24, 1971.

Syllabus by the Court

1. The state legislature may not delegate its legislative powers to any outside agency, including the Congress of the United States.

2. In 1961 the legislature by enacting Minn.St. 290.01, subd. 20, adopted by reference the provisions of the Internal Revenue Code governing computation of adjusted gross income, including 26 USCA, § 105(d), with respect to the deductibility of sick pay, which was substantially the same as Minn.St. 1965, § 290.08, subd. 5(a). The amendment of 26 USCA, § 105(d), in 1964 to require a 30-day waiting period before sick pay could be excluded from gross income was without force and effect upon Minnesota law, and the taxpayers are entitled to the exemption expressed in Minn.St.1965, § 290.08, subds. 1 and 5(a), for sick pay received in 1966.

3. Since Minn.St. 1967, § 290.09, subd. 10, in effect for the year 1966, contained no limitation with reference to deductibility of medical expenses compensated by insurance, the commissioner's claim that such deduction should be denied on philosophical grounds is without merit.

4. In construing a statute, courts may not supply that which the legislature purposely omits or inadvertently overlooks.

5. Even though certain expenses for hospital and medical care were paid by the taxpayer's insurer to his creditors pursuant to assignments by the taxpayer, such expenses were nevertheless 'incurred by the taxpayer' so as to be deductible within the meaning of § 290.09, subd. 10. The transaction was the same as if the taxpayer had sold an asset and used the proceeds to pay a debt.

6. While the legislature has conferred upon the commissioner of taxation authority to enact regulations with reference to the administration of incoime tax law, it has not given him authority to determine what the law should be or to supply a substantive provision of law which he thinks the legislature should have enacted in the first place.

7. The fact that the legislature amended Minn.St.1967, § 290.09, subd. 10, in 1969, by providing that a taxpayer is not entitled to a deduction for medical expense which has been compensated for 'by insurance or otherwise,' indicates not only a legislative awareness that such limitation had not existed prior thereto but also an unwilligness to rely on the commissioner of taxation's Regulation 2008(5), which attempted to impose that condition upon minn.St.1967, § 290.09, subd. 10.

Wayne M. Wallace and Jean E. Wallace, pro se.

Douglas M. Head, Atty. Gen., Paul B. Saltzman, Spec. Asst. Atty. Gen., St. Paul, for respondent.

Heard before KNUTSON, C.J., and NELSON, MURPHY, ROGOSHESKE, and FRANK T. GALLAGHER, JJ.

OPINION

MURPHY, Justice.

Certiorari to review a decision of the Tax Court denying taxpayers certain allowances claimed in their 1966 joint state income tax return. Relators contend that the Tax Court was in error in denying the exclusion of sick pay from gross income (Minn.St.1965, § 290.08, subd. 5) when such exemption is not permitted in arriving at Federal adjusted gross income. It is also contended that the Tax Court erred in denying a deduction for medical expense payments (Minn.St.1967, § 290.09, subd. 10) for which relator Wayne M. Wallace was compensated by insurance.

According to the stipulated facts, the taxpayer was ill and absent from work for a period of 7 weeks. During most of this time he was hospitalized. Also, during this period, his employer continued to pay him a salary in excess of $100 a week. Payments for medical insurance premiums and payments to hospitals, physicians, and pharmacists for medical services furnished the taxpayer and his dependents during the taxable year totaled $6,142.25. Of this amount $2,135.45 was paid by the taxpayer without any reimbursement by the medical insurer. The sum of $3,991.60 was paid by the insurer to hospitals and physicians pursuant to assignments by the taxpayer for medical services furnished him. In addition, $15.20 was paid by the insurer to a physician for medical services furnished a dependent of the taxpayer.

The commissioner of taxation denied the taxpayers' claim for exclusion of sick pay and deduction for the medical expenses paid by Wallace's insurer. This order was affirmed on appeal to the Tax Court.

1. We direct our attention to the claim that the commissioner erred in denying Wallace an exclusion of the sick pay received during the first 4 weeks of his illness in 1966 up to the amount of $400 from his Minnesota gross income. The taxpayers rely on Minn.St.1965, § 290.08, subds. 1 and 5(a). Subd. 5(a) provides that amounts received as compensation by a sick or injured taxpayer may be excluded up to the amount of $100 a week. ¹ Since the taxpayer was actually hospitalized for a period of at least 4 weeks, it would seem, under the plain wording of § 290.08, subd. 5(a), that he would be entitled to an exclusion of $400 of sick pay received from his employer.

The commissioner contends, however, that the exclusion must nevertheless be denied because the Federal statute governing the same subject requires exclusion of sick pay for the first 30 days of illness and the Internal Revenue Code must control because it has been made a part of our law by Minn.St. 290.01, subd. 20, which provides in part:

'The term 'gross income' in its application to individuals, estates and trusts means the adjusted gross income as computed for federal income tax purposes as defined in the laws of the United States for the taxable year with the modifications specified in this section.'

The relevant provision of the Internal Revenue Code which the foregoing statute purports to incorporate by reference, is 26 USCA, § 105(d), ² which provides:

'Gross income does not include amounts referred to in subsection (a) if such amounts constitute wages or payments in lieu of wages for a period during which the employee is absent from work on account of personal injuries or sickness; but this subsection shall not apply to the extent that such amounts exceed a weekly rate of $100. The preceding sentence shall not apply to amounts attributable to the first 30 calendar days in such period, if such amounts are at a rate which exceeds 75 percent of the regular weekly rate of wages of the employee * * *.'

We pass over the points raised by briefs and arguments with reference to the implied repeal of Minn.St.1965, § 290.08, or whether Minn.St. 290.01, subd. 20, was intended as a complete revision of all statutes dealing with determination of individual gross income for tax purposes, and proceed directly to an examination of the effect and vitality of § 290.01, subd. 20, which purports to assimilate into Minnesota law the Internal Revenue Code provisions governing computation of adjusted gross income, including 26 USCA, § 105(d) relating to sick-pay exclusion for the tax year of 1966.

It should be noted that the term 'adjusted gross income as computed for federal tax purposes,' referred to in § 290.01, subd. 20, expresses an artificial concept created solely by Federal statute. Certain deductions or exclusions are permitted after arriving at Federal adjusted gross income. The term serves the purpose of simplifying certain individual tax returns by establishing a basis for or a limitation on allowable deductions or exclusions. The distinction between deductions allowed in arriving at adjusted gross income and those allowed thereafter is not precise. The amounts which are to be included or excluded in the determination of adjusted gross income are numerous and are subject to change. Many of the exclusions are based on political and social rather than economic considerations. The same political and social considerations which are of significance to the Federal tax policy are not necessarily of significance to the state's tax collection scheme. Federal provisions with respect to long-term capital gains exclusion, as well as depletion allowances, are continually the subject of controversy. Any and all of these provisions, as well as others, may be changed at any time by the Congress of the United States--without consulting the Minnesota Legislature.

One of the items which Congress changed without consulting either the Minnesota Legislature or the commissioner of taxation is the provision here in issue with respect to sick-pay exclusion. In 1961, when the Federal adjusted gross income concept was included in the Minnesota statutes, the wording of the Federal counterpart (26 USCA, § 105(d)) was, in substance, the same as the wording of Minn.St.1965, § 290.08, subd. 5(a). In 1964, the Federal statute was changed to require the 30-day waiting period. The commissioner contends that, by this act, Congress, in effect, amended the state law with reference to sick-pay exemption. The taxpayers contend that the 1964 amendment could not validly deprive them of the benefits of the provisions of § 290.08, subds. 1 and 5(a).

In considering the issue of whether a change in Federal law may alter the force and effect of provisions in a prior state law governing the same subject, it may be said that the principle which controls is that a state legislature may not delegate its legislative powers to any outside agency, including the Congress of the United States. The reason for this rule is that changes in the foreign legislation may not fit the policy of the incorporating legislature and the person subjected to the changed law would be denied the benefit of the considered judgment of his legislature on the matter. The basic objection derives from the principle that laws should be made by elected representatives of the people responsible to the electorate for their acts. That principle is expressed in Minn.Const. art. 9, § 1, which states in part: 'The power of taxation shall never be...