ALAN L WISNE V DEPT OF TREASURY
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STATE OF MICHIGAN
COURT OF APPEALS
ALAN L. WISNE and KATHRYN L. WISNE,
UNPUBLISHED
May 20, 2008
Petitioners-Appellants,
v
MICHIGAN DEPARTMENT OF TREASURY,
No. 270633
Michigan Tax Tribunal
LC No. 00-297661
Respondent-Appellee.
Before: Owens, P.J., and White and Murray, JJ.
PER CURIAM.
Petitioners were assessed a 25 percent penalty by respondent for intentional disregard of
the law, MCL 205.23(4). Petitioners appeal as of right the tax tribunal’s order affirming
respondent’s assessment. We reverse and remand for further proceedings consistent with this
opinion.
I
Petitioners were Michigan residents through March 31, 1999, and Florida residents
thereafter. Petitioners sold their interest in Progressive Tool and Industries Company (“PICO”),
a subchapter S Corporation, in 1999 after becoming residents of Florida. After consulting with
tax specialists and attorneys, petitioners took the position on the basis of their advice, that MCL
206.110(2)(b), which allocates to this state all taxable income received as a distributive share of
the net profits of a business conducted in Michigan, did not apply to the gain on the sale of
PICO. Petitioners paid only $100 in estimated taxes when they applied for an extension of time
to file their 1999 Michigan income taxes on April 12, 2000. Under Michigan’s Income Tax Act
(ITA), MCL 206.311(2), taxpayers are required to “remit with an application for extension the
estimated tax due.” When petitioners filed their Michigan income tax return on October 15,
2000, at the conclusion of the extension period, they paid the $2,416,950 tax due on the gain
under MCL 206.110(2), plus interest. However, believing that petitioners intentionally
disregarded the law, rules and instructions when they failed to pay an estimated tax with their
request for extension in the amount of the tax that would be due under MCL 206.110(2) when
they filed their return, respondent imposed a 25% penalty of $604,238 under MCL 205.23(4).
The tax tribunal affirmed the imposition of the penalty, and petitioners appeal from that decision
as of right.
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I
Petitioners argue that the tribunal erred in finding that petitioners intentionally
disregarded MCL 206.110(2)(b) and MCL 206.311(2). In the absence of fraud, this Court
reviews the decisions of the tax tribunal to determine whether the tribunal erred in applying the
law or adopted a wrong principle. Michigan Bell Tel Co v Dep’t of Treasury, 445 Mich 470,
476; 518 NW2d 808 (1994); Alma Piston Co v Dep’t of Treasury, 236 Mich App 365, 367; 600
NW2d 144 (1999). The tribunal’s findings of fact are conclusive if they are “supported by
competent, material, and substantial evidence on the whole record.” Alma Piston Co, supra at
368.
Petitioners first argue that the “intentional disregard” penalty, MCL 205.23(4), cannot be
sustained because the requisite intent was not present. Petitioners contend that respondent failed
to present any evidence establishing intent, and that both Jim Davis, petitioners’ accountant, and
Alan Wisne (“petitioner” in individual capacity), testified that they did not intend to disregard
any tax law. Respondent relies on Revenue Administrative Bulletin (RAB) 1995-4, which
provides that if a taxpayer objects to a discretionary penalty, “the taxpayer bears the burden of
establishing facts which will negate a finding of intent.” RAB 1995-4, p 8. RAB 1995-4 also
states, “While the intent of a taxpayer is difficult to discern, such intent will be presumed when a
taxpayer has received specific instructions from the department as to the proper reporting of an
item of income or deduction, but fails to do so.” RAB 1995-4, p 5. RAB 1995-4, p 2, defines
intentional disregard as “knowingly and willfully disregarding the laws, rules and instructions
published and/or administered by the department without the intent to commit fraud or evade
payment of tax.”
Respondent argues that Davis testified that petitioners were provided with instructions
with the 1999 Michigan Income Tax Return, but Davis and petitioners chose to disregard them,
claiming that they were instructed by “the law and . . . current statute,” and that while petitioner
claimed that he did not have to pay the taxes because he disagreed with respondent’s assertion
that tax was due pursuant to MCL 206.110(2(b), petitioner gave no explanation regarding why he
chose to pay the taxes on October 15, 2000, except to say he did not want to pay interest in the
event he was wrong about the statute. In addition, Anthony Wisne (“the elder Wisne”),
petitioner’s father, used the same tax accountants and tax attorneys as petitioners, yet the elder
Wisne chose to pay the tax as though he owed it, even though he was litigating the tax statute at
issue. The tribunal rejected the argument that petitioners’ reliance on tax professionals negated
the intent to intentionally disregard the law, concluding that such reliance is relevant to the
reasonable cause defense to mandatory penalties or negligent failures, but is not relevant to
discretionary penalties for intentional disregard. The tribunal concluded that petitioners did not
carry their burden of negating the tax tribunal’s finding that they intentionally disregarded the
law.
We conclude the tribunal’s decision must be set aside for several reasons. The tribunal
relied on RAB 1995-4, which provides that if a taxpayer objects to a discretionary penalty, “the
taxpayer bears the burden of establishing facts which will negate a finding of intent.” Unlike the
Single Business Tax Act, MCL 208.83, and the General Sales Tax Act, MCL 205.67, the
Michigan Income Tax Act of 1967 does not declare that an assessment is prima facie correct and
that the burden of proof is on the tax payer. Also, although MCL 205.23(3), which deals with
the penalty for negligence, provides “[i]f a taxpayer subject to a penalty under this subsection
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demonstrates to the satisfaction of the department that the deficiency or excess claim for credit
was due to reasonable cause, the department shall waive the penalty,” MCL205.23(4), at issue
here, places no such burden on the taxpayer. The Tax Tribunal has the authority to allocate the
burden of proof in a manner consistent with the legislative scheme, Kostyu v Treasury Dept, 170
Mich App 123, 130; 427 NW2d 586 (1988),1 but here the tribunal allocated the burden based on
respondent’s RAB. The Michigan Income Tax act does not grant respondent the authority to
determine the burden of proof.
Similarly, the tribunal relied on provisions of RAB 1995-4 that declare that “[w]hile the
intent of a taxpayer is difficult to discern, such intent will be presumed when a taxpayer has
received specific instructions from the department as to the proper reporting of an item of
income or deduction, but fails to do so,” and define “intentional disregard” as “knowingly and
willfully disregarding the laws, rules and instructions published and/or administered by the
department without the intent to commit fraud or evade payment of tax.” The statute, however,
authorizes the imposition of a penalty where there has been intentional disregard of a law or rule,
and does not authorize the imposition of a penalty for intentional disregard of instructions.
Relying on various RABs concerning the purpose and effect of respondent’s RABs, and
on RAB 1995-4, the tribunal found that petitioners’ intentional disregard of respondent’s
instructions for preparing the 1999 Michigan Income Tax Return,2 constituted intentional
disregard of a rule. This too was error. MCL 205.3(b) grants respondent the authority to
promulgate rules in accordance with the Administrative Procedures Act, MCL 24.201 et seq.
However, RABs are not adopted under the APA, but rather are “bulletins that explain the current
department interpretations of current state tax laws,” authorized by MCL 205.3(f). RABs are not
rules and do not have the force of law. Catalina v Dep’t of Treasury, 470 Mich 13, 21; 678
NW2d 619 (2004). Moreover, petitioners, in fact, followed the instructions for preparing a tax
return when they reported the PICO gain on the return itself, and paid the tax in full, plus
interest.
The tribunal also found that petitioners intentionally disregarded the law. In this regard,
the tribunal found significant that the elder Wisne employed the same tax professionals, had
litigated the matter, and still chose to pay the tax as if it were due. The tribunal also found
significant that petitioners paid the tax, plus interest, when they filed their return. We fail to see
the significance of these observations. The elder Wisne presumably paid the tax for the same
reason petitioners paid the tax when filing their return - - to avoid paying considerable further
interest on any amounts eventually found to be due. We fail to see why petitioners’ decision to
1
Petitioners provided full information with their tax return, distinguishing this case from the
circumstances that justified the imposition of the burden of proof on the taxpayer in Kostyu.
2
Respondent’s instructions for preparing the 1999 Michigan Income Tax Return state for
nonresidents, “You must pay Michigan income tax on the following types of income: . . . Income
(including dividend and interest income) from an S corporation . . . or other business activity in
Michigan.”
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pay the tax when the return was filed undermines their position. Rather, it can be seen as
supporting their claim that they did not intend to disregard the law.3
The tribunal also concluded that Alan Wisne’s good-faith reliance on the advice of tax
professionals would be irrelevant because the penalty at issue here is neither a mandatory penalty
nor a discretionary penalty imposed for negligence, but rather a discretionary penalty for
intentional disregard. In reaching its conclusion the tribunal analogized to federal law. Section
6653(a) of the Internal Revenue Code makes taxpayers subject to a 5% penalty for “intentional
disregard of tax rules or regulations.” The cases relied on by the tribunal, Druker v
Commissioner, 697 F2d 46 (CA 2, 1982), and Cramer v Commissioner, 64 F3d 1406 (CA 9,
1995), stand in sharp contrast to the instant case. In those cases, the taxpayers intentionally
disregarded pertinent IRS regulations, believing them to be either unconstitutional (Druker) or
invalid interpretations of the Internal Revenue Code (Cramer). In Drucker, the taxpayers were
aware that their position was directly contrary to the Internal Revenue Code. In Cramer, the
taxpayers were informed by tax professionals that “they had a plausible position . . ., but that
Treasury regulations were to the contrary. Further, in reporting the gain at issue, the Cramer
taxpayers misreported their basis in the asset. Here, it is undisputed that petitioners correctly
reported the income when they filed their actual return. Further, it is undisputed that they neither
violated nor intentionally regarded any rule. There were no pertinent rules regarding the issue.4
Unlike the taxpayers in Cramer, respondents did not “play the audit lottery.” They filed their
return in accordance with respondent’s instructions.
The tribunal determined that petitioner’s reliance on professional advice is irrelevant as a
matter of law because intentional disregard, rather than negligence, is at issue. The tribunal
refused to consider that petitioners relied on the advise of tax professionals who advised them
that there were no rules or appellate cases addressing the specific issue, and that the elder Wisne
had a good chance of prevailing on appeal. Such reliance is, indeed, relevant to the underlying
question whether petitioners, in fact, intentionally disregarded the law. We see no reason why
good-faith reliance on professional tax advice should not be considered in deciding whether a
taxpayer’s intentional disregard of instructions constituted an intentional disregard of the law.
There is no indication in the record that petitioners in any way misrepresented the facts to the tax
professionals, or that they ignored admonitions that their position was contrary to a rule or law.
All that can be said is the obvious; petitioners were on notice that respondent and the tax tribunal
disagreed with their and the elder Wisne’s position, but that the matter was before the Court of
Appeals. Under these circumstances, we find the tribunal’s analogy to Druker and Cramer
misplaced.
The tribunal also concluded that petitioners intentionally disregarded the clear meaning
of MCL 206.110(2)(b). The tribunal found Gillette v Dep’t of Treasury, 5 MTT 839 (1989),
aff’d 198 Mich App 303; 497 NW2d 595 (1993), inapposite, noting that § 110(2)(b) was
amended in 1990, and petitioners’ taxes at issue were for tax year 1999; that while there was no
3
We also do not understand the relevance of a finding that Alan Wisne is a “sophisticated”
businessman where Michigan tax law is at issue and tax professionals were consulted.
4
Respondent concedes that it also had issued no RAB addressing the underlying issue.
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appellate precedent directly on point in 2000, there was dicta supporting respondent’s position in
both Alma Piston Co v Dep’t of Treasury, 236 Mich App 365, 366-367; 600 NW2d 144 (1999)
(“[A]s amended, subsection 110(2)(b) clearly imposes tax liability on petitioner’s nonresident
shareholders for their distributive shares.”), and Bachman v Dep’t of Treasury, 215 Mich App
174, 180 n 2; 544 NW2d 733 (1996) (“The legislative analysis for this bill stated that this change
was to make it clear that nonresidents could be taxed on their share of the net profits from a
subchapter S corporation.”); and that petitioners were aware of respondent’s position, which was
apparent in respondent’s defense of the elder Wisne’s challenge and in the income tax
instructions for preparation of tax returns. The tribunal concluded that the law was sufficiently
established to preclude an “honest difference of opinion,” regarding the law’s meaning.
It is undisputed that at the time petitioners filed their request for extension, there was no
promulgated rule or appellate precedent addressing the effect of the 1990 amendment of
§ 110(2)(b) on tax years after 1990, and the issue was in litigation. The first appellate case to
address the 1990 amendment’s effect on tax years after 1990, Anthony Wisne v Dep’t of
Treasury, 244 Mich App 342; 625 NW2d 401 (2001), was decided well after petitioners filed for
an extension of time to file their return. The tribunal specifically noted that its summary of the
state of the law on the underlying tax issue was not intended to criticize the advice given by the
tax professionals, but only to shed light on petitioners’ intent. We fail to see the distinction. If
petitioners fully and fairly disclosed the underlying transactions to the tax professionals, and the
tax professionals gave the advice Wisne and Davis testified they gave, it is difficult to understand
why the advice is not subject to criticism, but petitioners’ intent in following that advice is, and
why their following that advice would justify imposition of a penalty for intentional disregard of
the law. In this connection, it is significant that this Court in Wisne characterized the taxpayer’s
argument as “misplaced,” and explained why in a careful discussion of statutory history. There
is no suggestion in Wisne that the taxpayer’s argument was not in good faith or was frivolous.
Many of the above points were made by petitioners in their motion for rehearing and
were rejected by the tribunal, which, in essence, repeated its determination that it is up to
respondent whether to impose a penalty, and once imposed, it was petitioners’ burden to show
that they did not intentionally disregard the law, a position that could not be sustained under the
circumstances that respondent’s position on the matter was clear given the instructions and its
litigation position. For the reasons stated above, we conclude that the tribunal came to this
conclusion by deciding this case in an incorrect legal framework.
In conclusion, our attention has not been directed to anything in the record relied on by
the tax tribunal or urged by respondent that would support a finding of intentional disregard of
the law. Nevertheless, in deference to the role of the tax tribunal as finder of fact, we reverse and
remand for proceedings consistent with this opinion. We do not retain jurisdiction.
/s/ Helene N. White
/s/ Donald S. Owens
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