Woller v. Wisconsin Dept. of Taxation

• Decision Date: 06 June 1967
• Citation: 35 Wis.2d 227,151 N.W.2d 170
• Parties: Ervin C. WOLLER, Appellant, v. WISCONSIN DEPARTMENT OF TAXATION, Respondent (two cases).
• Court: Wisconsin Supreme Court

Page 170

151 N.W.2d 170

35 Wis.2d 227

Ervin C. WOLLER, Appellant, v. WISCONSIN DEPARTMENT OF TAXATION, Respondent (two cases).

Supreme Court of Wisconsin.

June 6, 1967.

Rehearing Denied Sept. 11, 1967.

George E. Frederick, Milwaukee, for appellant.

Bronson C. La Follette, Atty. Gen., E. Weston Wood, Asst. Atty. Gen., Madison, for respondent.

WILKIE, Justice.

As to case No. 161, the sole issue presented on this appeal is whether the tax department is entitled to the presumption of correctness of the assessment of additional taxes in 1956.

Sec. 71.11(1), Stats., gives the department the power to assess incomes and also the power to estimate incomes. Sec. 71.11(4) provides that when a taxpayer makes a return that does not disclose his entire taxable income, the department has the power to assess his taxable income 'according to their best judgment.' When the assessment is disputed, as here, the burden of proof is on the taxpayer to show error in the additional assessment because the additional assessment is presumed to be correct. ² In Laabs v. Tax Comm. ³ the taxpayer reported a sale of a patent and claimed a deduction for the experimental cost of development. The court stated:

'In this state of the record the burden was upon plaintiff to isolate from the general expenses of the business such items as were properly chargeable to the development of the patent, and it cannot be said as a matter of law that plaintiff sustained this burden. The evidence is extremely unsatisfactory and inconclusive and having the burden of proof, plaintiff cannot now complain that the doubts were resolved against him by the trier of fact.' ⁴

In Wisconsin Department of Taxation v. O. H. Kindt Mfg. Co. ⁵ the issue was whether there was substantial evidence to support the finding of the WBTA that the amounts paid as salaries to the taxpayer's officers were reasonable. The court discussed the burden of proof as follows:

'* * * The department points out that the burden of proof is upon the taxpayer in cases of this kind to show the incorrectness of the additional assessment. Laabs v. Tax Comm. (1935), 218 Wis. 414, 424, 261 N.W. 404, and H. G. Weber & Co. v. Wisconsin Department of Taxation 1946, 111 WBTA 114. However, we fail to see how the question, of who has the burden of proof, is of any materiality on this appeal. It would only be material where either the taxpayer or the department, or both, had failed to present any evidence on the issue of reasonableness. This is because, where competent evidence is introduced by both the taxpayer and the department before the board on the issue in controversy, the reviewing court is only concerned with whether there is substantial evidence in view of the entire record to sustain the board's finding.' ⁶

These cases show that the burden of showing error in an assessment is on the taxpayer. Failure to present any evidence showing error means that the case must be decided against the taxpayer.

But all of this presupposes a valid assessment. The failure of the state in the case at bar was in its failure to specify that the adjustment in taxable income and in 'additional income' was because of the disallowance of deductions. The taxpayer received no notice that his income tax return for 1956 was being questioned because of improper deductions. The assessment was imcomplete and invalid. Therefore, it was not presumptively correct.

As to case No. 162, the issue presented on this appeal is whether substantial evidence supports the WBTA's conclusion that the taxpayer was not entitled to claim deductions for losses suffered when notes for commissions were transferred to a family benefit trust at 45 percent of the face value.

The WBTA's first premise is that the face amount of the notes was properly reported as income in the years in which the notes were received as payment for insurance premiums. In 2 Mertens, Law of Federal Income Taxation (Zimet rev.), ch. 11--p. 21, sec. 11.07, it is stated:

'Notes or other evidences of indebtedness received in payment for services also constitute income to the extent of their fair market value. That the notes were in fact paid in a subsequent year is a factor often considered in determining market value, although such fact alone is not conclusive of value at the time of receipt. It has been held that proof that the note was sold at a loss in a subsequent year does not by itself meet the burden upon the taxpayer to prove that the note had a fair market value less than its face amount when received.'

Wisconsin cases hold that income is cash or its equivalent; i.e., it must be money or that which is convertible into money. ⁷ The notes in question are includable in the taxpayer's income only to the extent that they are convertible into money, i.e., their fair market value.

The tax department urges that the entire value of these notes is includable as income to the taxpayer because the taxpayer took these notes as part of the ordinary course of his business rather than in a single isolated transaction. The tax department argues that in the Katz, Lawrence, and Zweifel cases, ⁸ which it relies on, our court holds that notes received in the ordinary course of business are includable as income at face value. However, these three cases all involved notes received in isolated transactions so that holdings on the includability as income of the entire amount of notes received in the ordinary course of business is dicta. Moreover, this dicta is based on the cases of State ex rel. Waldheim & Co. v. Wisconsin Tax Commission ⁹ and Motors Acceptance Co. v. Wisconsin Tax Commission, ¹⁰ in both of which cases the court held that notes received in the ordinary course of business were includable at face value. However, in these two cases the taxpayer was on an accrual method of income determination. In the case at bar the taxpayer uses a cash basis method of income determination so that only actual cash received or its equivalent should be held to be income. Hence, only the fair market value of the notes in question can be considered income to the taxpayer. Proof of any difference between the face value of the notes and the fair market value of the notes must be supplied by the taxpayer.

To meet his burden, appellant taxpayer contends that the fair market value of the notes in question can be established by the sale to his family trust. We have held that deductible losses under the income tax statute must be established...