Williams v. State Tax Assessor
| Decision Date | 19 June 2002 |
| Docket Number | KEN AP-99-89 |
| Parties | DONALD J. WILLIAMS, Petitioner v. STATE TAX ASSESSOR, Respondent DONALD J. WILLIAMS, Petitioner v. STATE TAX ASSESSOR, Respondent |
| Court | Maine Superior Court |
Date 12/22/99
SUPERIOR COURT CIVIL ACTION
This matter is before the court on the State Tax Assessor's Motion for Summary Judgment on petition for review of final agency action filed pursuant to M.R. Civ. P. 80C. For the reasons explained below, the motion for summary judgment is granted.
Petitioner Donald Williams (Williams) has brought an 80C appeal seeking judicial review of a decision by the State Tax Assessor (Assessor) to issue him a supplemental assessment for tax year 1988 pursuant to M.R.S.A. § 141 (1990 & Supp 2001). This is the second assessment regarding Williams income tax liability for 1988. In July, 1995, Williams was assessed a tax of $102,275, plus interest and penalties, for income derived from the sale of a concrete plant in Leeds Maine in 1988.[1] Williams appealed the assessment to this court [hereinafter Williams I], based largely upon the issue of his 1988 state residency, and a trial was commenced in August, 2000. On the third day of trial, the parties settled and a settlement agreement and consent judgment were drafted and signed.
While Williams I was pending, the Assessor reviewed Williams' capital gain income for 1988 and found he underreported $556,800 by improperly claiming contingent liabilities totalling that amount. In May, 1998, Williams was issued a second assessment for 1988 adding up to $129,205 in tax interest and penalties. Following a reconsideration upholding the assessment, Williams has petitioned this court for review. In his petition, Williams alleges six separate counts in which the second assessment was erroneous. This court will address each of these counts individually as the Assessor has moved for summary judgment on all of the allegations set forth in the petition.
Summary judgment is appropriate if the record reflects that there is no genuine issue of material fact and the moving party is entitled to a judgment as a matter of law. M.R. Civ. P. 56(c); Saucier v. State Tax Assessor, 2000 ME 8, ¶ 4, 745 A.2d 972, 974. "A genuine issue of material fact is present only when 'there is sufficient evidence supporting the claimed factual dispute to require a choice between the parties' differing versions of the truth at trial.'" Francis v. Stinson, 2000 ME 173, ¶ 37, 760 A.2d 209, 217 (quoting Prescott v. State Tax Assessor, 1998 ME 250, ¶ 5, 721 A.2d 169, 171-72).
The Superior Court serves as the forum of origin for a determination of both facts and law when reviewing decisions of the State Tax Assessor. 36 M.R.S.A. § 151 (1990 & Supp. 2001). On review of a decision of the Assessor, this court Id. "The burden of proving that a transaction was not taxable shall be upon the person charged with tax liability." 36 M.R.S.A. § 1763 (1990); see also 36 M.R.S.A. § 151 (). "The well settled principle that taxation is the rule and tax exemption is the exception places the burden on the [taxpayer] to bring its request unmistakably within the spirit and intent of the claimed exemption." SST & S, Inc. v. State Tax Assessor, 675 A.2d 518, 521 (Me. 1996).
As a threshold matter, the petitioner questions the validity of the Assessor's investigation. He contends the Assessor is required to assess the tax based on the taxpayer's federal adjusted gross income and any actions taken to recalculate this amount are ultra vires. He relies on the holding of Tiedemann v. Johnson, 316 A.2d 359 (Me. 1974) for the principle that federal adjusted gross income represents the entire taxable income of a Maine resident.
Title 36 M.R.S.A. § 5121 defines taxable income as "that individual's federal adjusted gross income as defined by federal law . . ." (emphasis added). Since state law requires that the Assessor use a taxpayer's adjusted gross income as defined by federal law, he may then look to federal law to determine whether the taxpayer's adjusted gross income is legally correct, consistent with 36 M.R.S.A. §§ 141, 5121. The Assessor contends that, under Maine law, the starting point for determining Maine adjusted gross income is the figures that appears on an individual's federal return for adjusted gross income. Green v. State Tax Assessor, 562 A.2d 1217, 1219. (Me. 1989) (emphasis added). The Green court explained the holding in Tiedemann by stating that "[w]e explicitly rejected in Tiedemann the argument advanced by plaintiffs . . . that the Maine Legislature intended that Maine income tax law mirror the federal scheme of income taxation." Green, 562 A.2d at 1220. Maine adjusted gross income is defined as "the federal adjusted gross income of that individual," with allowable statutory modifications. 36 M.R.S.A. § 5102(1-C). Tiedemann and Green require the Assessor to interpret Maine tax law without reference to federal law, except where terms are not defined under state law. See also 36 M.R.S.A. § 5102(11). On the other hand, where state law requires definition under federal law, the Assessor must follow federal law. See 36 M.R.S.A. § 5121. As the Assessor appears to have properly understood his duty to interpret the applicable federal tax provisions in reviewing the petitioner's 1988 Maine return, this court finds that the Assessor actions are not ultra vires.
The Assessor argues that Williams is barred by the doctrine of collateral estoppel from claiming he was not a Maine resident when he received the $556,800 in capital gain. The Assessor maintains that, based on a paragraph from the settlement agreement in Williams I, the issue of Williams' residency in both 1988 and 1989 is precluded. Paragraph 5 from the settlement agreement reads "Mr. Williams agrees that he has been a resident individual of Maine since no later than May 1, 1987, within the meaning of 36 M.R.S.A. § 5102(5)." Record, Vol I, Sect. 2, Exh. A.
Williams raises little argument with his Maine residency for 1988, but takes great exception to any use of the settlement agreement paragraph to determine his residency for subsequent years because the litigation in Williams I dealt solely with the 1988 tax year.
Collateral estoppel, or "issue preclusion," prevents the reopening in a second action of an issue of fact actually litigated and decided in an earlier case "if the identical issue was determined by a prior final judgment, and the party estopped had a fair opportunity and incentive to litigate the issue in a prior proceeding." Cline v. Maine Coast
Nordic, 1999 ME 72, ¶ 9, 728 A.2d 686, 688 (quotation and citation omitted).
The central issue here, as in Williams I, is Williams' 1988 residency for tax liability purposes. He had a full and fair opportunity to litigate the issue, as evidenced by three days of trial testimony, with similar motivation to litigate (avoidance of tax liability), and the settlement agreement clearly references Williams' admission of Maine residency after May, 1987. While the court will not stretch the settlement provisions beyond their intended scope to included Williams' status for tax year 1989, he is collaterally estopped from raising any argument as to his residency in 1988.
D.J. Williams, Inc. was a Maine corporation of which the petitioner was the sole shareholder. D.J. Williams, Inc. in turn was the sole shareholder of several corporate subsidiaries, including Doran-Maine and Doran-Union. D.J. Williams, Inc. was liquidated in December, 1988 and the final return for the corporation listed the value of the distributed assets as $1,271,067. Williams reduced this amount by $801,939 for actual and contingent liabilities, deducted a cost basis of $10,000, and then reported a taxable gain of $59,128. The issue central to this appeal is whether the petitioner should be allowed to deduct $556,800 in contingent liabilities from the capital gain realized by the liquidation.[2] The Assessor disallowed these deductions for three reasons: (1) under federal law, only known liabilities may be used to reduce the amount of a liquidation gain, (2) many of the contingent liabilities were never incurred, and (3) some of the deductions had already been claimed on the final tax return of D.J. Williams, Inc. Williams argues that these deductions were actually unpaid debts of the corporation.
When these "debts" were paid in subsequent years, the payment resulted in a capital loss which the petitioner seeks to carry back to offset any gains realized in 1988. In his petition, Williams also requests the deductions of five additional contingent liabilities (Count III). The Assessor objects to this request as untimely and inappropriate as these additional deductions were never part of the assessment or the decision on reconsideration.
Contingent liabilities may not be used to reduce the gain realized by a shareholder from distributed assets of a corporate liquidation during the year of the liquidation. Rev. Rul. 72-137 (Jan. 1972). Only known liabilities may be realized in the year of liquidation. Id. (emphasis added). If a contingent liability is discharged in a subsequent year, the discharge will create a capital loss in the year it is discharged. Id.; Arrowsmith v. Commissioner, 344 U.S. 6 (1952) (...
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