Opinion
No. 617 F.R. 2010
01-17-2013
L. William Steinmeyer, Petitioner v. Commonwealth of Pennsylvania, Respondent
BEFORE: HONORABLE RENÉE COHN JUBELIRER, Judge HONORABLE MARY HANNAH LEAVITT, Judge HONORABLE ANNE E. COVEY, Judge
OPINION NOT REPORTED
MEMORANDUM OPINION BY JUDGE COHN JUBELIRER
L. William Steinmeyer (Steinmeyer), pro se, petitions for review from an Order of the Board of Finance and Revenue that denied Steinmeyer's petitions for review from the determinations of the Department of Revenue (Department) Board of Appeals, which upheld the assessment of past due Pennsylvania personal income tax (Income Tax), penalties, and interest for the tax years 2005, 2006, and 2007. Steinmeyer argues that the Board of Finance and Revenue erred in denying his petitions because the Department's assessments for these tax years are without factual foundation. The Commonwealth argues that, because Steinmeyer failed to cooperate with or respond to requests for information, the Department had no information upon which to base its assessments except for mortgage interest statements received by the Internal Revenue Service (IRS). Discerning no error, we affirm.
Steinmeyer paid no Income Tax for the 2005, 2006, and 2007 tax years, nor did he file Pennsylvania Income Tax returns during these tax years. The Department initiated an audit of Steinmeyer through an Audit Engagement Letter dated February 19, 2009. The letter directed Steinmeyer to appear at the Department's offices on April 3, 2009, and to bring his personal income and expense records along with his Federal tax forms. Steinmeyer did not appear on April 3, 2009, and the Department sent a second letter directing Steinmeyer to appear on May 8, 2009 and stating that, based on the available information, the Department believed Steinmeyer's Income Tax liability to be $10,183.00. Steinmeyer did not appear on May 8, 2009. On May 8, 2009, the Department sent Steinmeyer a Post Audit Conference Letter informing him that the audit established Steinmeyer's Income Tax deficiency as $10,183.00. (Stipulation ¶ 2; Narrative Report of Audit Findings at 1, R. at 5; Audit Engagement Letter, February 19, 2009, R. at 9; Second Letter to Taxpayer, April 9, 2009, R. at 11; Post Audit Conference Letter, May 8, 2009, R. at 15; Final Determination of the Board of Finance and Revenue (Board Determination) at 1.)
During the audit, the Department found an online listing and advertisement for Steinmeyer as a general contractor. Based on this information, the Department determined that Steinmeyer made his living as a general contractor. The Department did not find evidence that Steinmeyer had any other sources of income. The Department received information from the IRS regarding the amounts of mortgage interest Steinmeyer paid for the tax years at issue. Using the information from the IRS, the National Association of Home Builders has statistically correlated mortgage interest payments with adjusted gross income. The Department has determined that this data may be used to estimate an individual's income based on the amount of mortgage interest paid by the individual: "[b]ased on this study, a computer[-]generated formula was used to determine the statistically likely federal adjusted gross [i]ncome for any given amount of mortgage interest paid." (Narrative Report of Audit Findings at 3, R. at 7.) Lacking other information, the Department used the resulting formula to estimate Steinmeyer's income for the tax years at issue from the mortgage interest payments reported to the IRS. On June 9, 2009, the Department issued Steinmeyer assessments for Income Tax for the 2005, 2006, and 2007 tax years. The Department estimated Steinmeyer's 2005 income as $74,636.00 net profit as a contractor, with $2,291.00 owed in Income Tax, with an additional $652.19 in penalties and $510.96 in interest. The Department estimated Steinmeyer's 2006 income as $97,009 in net profit, with $2,978.00 owed in Income Tax, $875.24 in penalties, and $446.89 in interest. The Department estimated Steinmeyer's 2007 income as $160,079.00 in net profit, with $4,914.00 owed in Income Tax, $1450.51 in penalties, and $359.75 in interest. (Narrative Report of Audit Findings at 1-3, R. at 5-7; Taxpayer's Advertising Materials, R. at 13; Stipulation ¶ 3; Board Determination at 2.)
Steinmeyer appealed the assessments to the Board of Appeals, arguing that the Department's estimate lacked a rational foundation and that its method of estimating his income was unreasonable. The Board of Appeals denied Steinmeyer's appeal and Steinmeyer appealed to the Board of Finance and Revenue. The Board of Finance and Revenue held that: (1) there was no Pennsylvania precedent applying the Federal "naked assessment" doctrine upon which Steinmeyer sought to rely; and (2) the Department's assessments would not constitute naked assessments that lacked a rational foundation. Therefore, the Board of Finance and Revenue denied Steinmeyer's appeals. (Board Determination at 2, 4-5.) Steinmeyer now appeals to this Court.
This Court's review of appeals from the Board of Finance and Revenue is governed by Rule 1571 of the Pennsylvania Rules of Appellate Procedure, Pa. R.A.P. 1571. Such appeals are in this Court's appellate review, but this Court acts, essentially, as a trial court in such cases. Pa. R.A.P. 1571(f), (h); Armco, Inc. v. Commonwealth, 654 A.2d 1191, 1192 (Pa. Cmwlth. 1993). This Court considers the legal and factual issues, de novo, on a record stipulated to by the parties. Pa. R.A.P. 1571(f); America Online, Inc. v. Commonwealth, 932 A.2d 332, 335 n.7 (Pa. Cmwlth. 2007).
Before this Court, Steinmeyer argues that the Department has failed to carry its burden of proving that its assessments have a factual basis and are not "naked" assessments. (Steinmeyer Br. at 4.) As support, Steinmeyer relies on United States v. Janis, 428 U.S. 433 (1976) and other federal cases interpreting the Internal Revenue Code, 26 U.S.C. §§ 1 - 9834. Generally, "the burden is on the taxpayer challenging [an] assessment to show that the tax has been improperly assessed, while the Commonwealth is not required to prove facts necessary to sustain the assessment." Fiore v. Commonwealth, 668 A.2d 1210, 1215 (Pa. Cmwlth. 1995). When Janis was decided, this was also the general rule with regard to Federal tax cases. Janis, 428 U.S. at 440. In Janis, the Supreme Court considered whether a general rule imposing the burden on the taxpayer could apply where the evidence upon which the government based the assessment might be excluded as the fruit of an illegal search. Id. at 441-43. The Supreme Court stated that where an assessment was "without any foundation whatsoever," then it was "not subject to the usual rule with respect to the burden of proof in tax cases." Id. at 441.
The Internal Revenue Code now sets out a more refined and specific burden of proof. When the assessment is based solely on statistical information relating to other taxpayers, the initial burden is now on the IRS per Section 7491 of the Internal Revenue Code, 26 U.S.C. § 7491, enacted in 1998 and since amended. This section sets forth a statutory burden of proof providing that the burden shifts to government after a taxpayer introduces credible evidence with respect to an issue of fact bearing on the taxpayer's tax liability:
(a) Burden shifts where taxpayer produces credible evidence.
(1) General rule. If, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B [26 USCS §§ 1 et seq. or 2001 et seq.], the Secretary shall have the burden of proof with respect to such issue.
(2) Limitations. Paragraph (1) shall apply with respect to an issue only if--
(A) the taxpayer has complied with the requirements under this title to substantiate any item;
(B) the taxpayer has maintained all records required under this title and has cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews; and
(C) in the case of a partnership, corporation, or trust, the taxpayer is described in section 7430(c)(4)(A)(ii).
Subparagraph (C) shall not apply to any qualified revocable trust (as defined in section 645(b)(1)) with respect to liability for tax for any taxable year ending after the date of the decedent's death and before the applicable date (as defined in section 645(b)(2)).
(3) Coordination. Paragraph (1) shall not apply to any issue if any other provision of this title provides for a specific burden of proof with respect to such issue.
(b) Use of statistical information on unrelated taxpayers. In the case of an individual taxpayer, the Secretary shall have the burden of proof in any court proceeding with respect to any item of income which was reconstructed by the Secretary solely through the use of statistical information on unrelated taxpayers.26 U.S.C. § 7491. Thus, under Section 7491, it appears that the burden is still initially on a taxpayer disputing an assessment—unless the assessment is based on statistical information on other taxpayers—but Section 7491 provides more specific guidance to the shifting of this burden.
(c) Penalties. Notwithstanding any other provision of this title, the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title.
Steinmeyer argues that, in this case, the Commonwealth's estimate of his income is similarly without foundation because it is based on statistical data. Therefore, Steinmeyer argues, the Commonwealth has failed to carry its burden of proof and the assessment must be overruled. Even if Pennsylvania would follow the naked assessment doctrine, however, Steinmeyer has not shown that the assessments here are without foundation. Steinmeyer argues that the Department's assessments are without foundation because they are based on statistical estimates of his income derived from mortgage interest payments reported to the IRS, that such statistical estimates are little more than guesses, and the fact that he paid his mortgage does not prove that he earned income with which to pay it.
We note that Steinmeyer has not cited any Pennsylvania state court case adopting the Federal rule on naked assessments and this Court has found no such case. In addition, the cases cited by Steinmeyer as articulating the naked assessment doctrine do not cite the United States Constitution as authority for the doctrine (although there would appear to be due process concerns if an assessment were without any foundation whatsoever). With regard to assessments made by the Department after December 31, 2007, "[e]xcept as otherwise provided by this act, in all cases of petitions filed pursuant to this article, the burden of proof shall be upon the petitioner or appellant, as the case may be." Section 2705 of the Tax Reform Code of 1971, Act of March 4, 1971, P.L. 6, added by Section 28 of the Act of October 18, 2006, P.L. 1149, 72 P.S. § 9705. Thus, the Tax Reform Code of 1971 places the burden squarely on Steinmeyer to show that the Department's assessments are inaccurate. Steinmeyer has offered no evidence regarding his income or lack thereof.
To resolve this issue, we must first resolve Steinmeyer's evidentiary objection. Steinmeyer objected to the admission of the Department's Narrative Report of Audit Findings and attached exhibits on the grounds that they are not relevant. (Stipulation ¶ 4.) In fact, the Narrative Report of Audit Findings and its attached exhibits are key to the issue Steinmeyer raises. Rule 401 of the Pennsylvania Rules of Evidence defines "relevant evidence" as "evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence." Pa. R.E. 401. Steinmeyer raises the issue of whether the Department's assessments have a factual foundation. Therefore, the means by which the Department calculated Steinmeyer's income are relevant; without this information, we would be unable to review the validity of the assessments. While Steinmeyer may dispute the validity of the Department's methods, the methods are relevant to the assessments' validity.
In his Reply Brief, Steinmeyer argues that the Narrative Report of Audit Findings and its exhibits are: (1) hearsay; and (2) based on fraudulently-obtained IRS documents. However, Steinmeyer has waived these arguments because he failed to raise them in his original Brief or when these documents were submitted with the Stipulation. Rule 1571(f) of the Pennsylvania Rules of Appellate Procedure provides that parties must identify any issues of fact that must be tried. Pa. R.A.P. 1571(f). Whether the Narrative Report of Audit Findings and its exhibits have a proper foundation as, for example, business documents or governmental records, involves factual questions. By failing to raise this as a factual issue or objection when these documents were included in the Stipulation, and raising only the issue of their relevance, Steinmeyer waived the issue. In addition, issues must be raised in a party's brief to be preserved. Pa. R.A.P. 2119; Marshall v. Commonwealth, 41 A.3d 67, 73 (Pa. Cmwlth. 2012). Steinmeyer could have raised his contention that the Narrative Report of Audit Findings is based upon fraudulently-obtained IRS documents below, but did not. Rule 1571(h)(1) of the Pennsylvania Rules of Appellate Procedure provides that issues to be considered by this Court in appeals from decisions of the Board of Finance and Revenue must be raised and preserved below. Pa. R.A.P. 1571(h)(1). Because Steinmeyer raised these arguments for the first time in his Reply Brief, they are waived.
With regard to the validity of the Department's method of calculating his income, Steinmeyer argues that the use of statistics to extrapolate his income is irrational and has not been accepted by any court. Steinmeyer also argues that the use of his mortgage interest payments as the basis for the extrapolation of his income is not reasonable because he did not necessarily use earned income to pay his mortgage. The Department responds that it was forced to use the amounts of Steinmeyer's mortgage interest payments, obtained from the IRS, to reconstruct his income because, despite requests, he did not provide the Department's auditor with any information. (Audit at 3, R. at 7.) Section 338 of the Tax Reform Code of 1971 authorizes the Department to gather information about a taxpayer's income and to estimate income when a taxpayer fails to file an income tax return:
Added by Section 4 of the Act of August 31, 1971, P.L. 362, as amended, 72 P.S. § 7338. --------
(a) The department is authorized and required to make the inquiries, determinations and assessments of all taxes imposed by this article.72 P.S. § 7338. Under Section 338, where Steinmeyer did not file tax returns for the tax years at issue, the Department was justified in estimating his income for the tax years at issue based on the information it had available. Steinmeyer disputes the accuracy and validity of the Department's method; however, he neither explains how the Department's method is in error, nor does he cite any authority for the principle that this method is an unreasonable way to estimate income. Steinmeyer argues that his mortgage payment amounts did not increase because his income increased, but because he has an adjustable rate mortgage. Steinmeyer does not point to any evidence in the record of an adjustable rate mortgage, and Steinmeyer never provided the Department or this Court with any evidence as to his actual income or lack thereof. While this Court has been unable to locate precedents opining on this method of income estimation, it appears reasonable that mortgage interest payment amounts would correlate roughly with income. While the Department's calculation may not be entirely precise, it appears to have been arrived at through a reasonable method of estimation utilizing the information available. Therefore, applying the naked assessment doctrine, we conclude that the Department's assessments were not "without any foundation whatsoever." Janis, 428 U.S. at 441.
. . . .
(c) In the event that any taxpayer fails to file a return required by this article, the department may make an estimated assessment (based on information available) of the proper amount of tax owing by the taxpayer. . . .
For these reasons, we affirm the Order of the Board of Finance and Revenue.
/s/ _________
RENÉE COHN JUBELIRER, Judge ORDER
NOW, January 17, 2013, the Order of the Board of Finance and Revenue in the above-captioned matter is hereby AFFIRMED. This judgment shall become final unless exceptions are filed within thirty (30) days pursuant to Pa. R.A.P. 1571(i).
/s/ _________
RENÉE COHN JUBELIRER, Judge