A Taxing Affair

I recently participated in an ‘informal conference’ with a Michigan tax division worker, hosted by the state’s Dept. of Treasury. At issue was the claim for refund of money withheld in 2001 from my earnings. The state had responded shortly after our filing with a counterclaim on the money, proposing that a liability had arisen during that year as a consequence of my alleged receipt of “wages, as defined in 26 USC 3401 and 26 USC 3121”, thanks to an erroneous W-2 filed by the company for which I worked.

Technically, the conference concerned the state’s ‘counterclaim’, although within the same week that it scheduled the meeting, Michigan had informed us that its ‘claim’ was satisfied. After wrestling with the matter for almost two years (during 18 months or so of which our brief in response and formal request for a conference was on the record), the state has decided that its best approach is to propose that it possesses the authority to unilaterally choose to recognize only any evidence on record which serves its interest, and to disregard any that does not. By means of this fancy, the state seeks to achieve the effect of a power that it does not have: that of determining the amount of “income” someone has received. Pursuant to this ploy, Michigan has more-or-less announced its intention to simply keep my money, barring a court order to the contrary. I went ahead with the conference after informing the hearings officer in charge that the issue from our perspective has been, and remains, the state’s obligation to remit our properly claimed refund. This is not because we accord arguing the matter in an administrative forum presided over by a state executive-branch official any propriety, of course-- but is simply so that we will not find our further pursuit of the matter dismissed by a court for failing to take advantage of available ‘administrative remedies’.

The state’s argument-- according to Nancy Carvey, the ‘Senior Auditor’ who represented the treasury department at the conference-- is based on MCL 205.23. This section of the Michigan code says (in relevant part):

It is clear that the state is seeking to deliberately confuse its legitimate authority to determine liability (the amount of tax owed on the amount of “income” to which the rate of tax is applied) with an authority to determine the underlying amount of “income”, an authority which is does not have. In other words, the state is suggesting that it has the authority to say, “This is what you owe in taxes, period”-- by decree, in effect; rather than, “This is what you owe in taxes on the amount of income reported on your return”, which is the power actually granted by the revenue act. (The state is not proposing that our claim is "excessive", and has acknowledged the amount withheld.) This effort mimics a typical ploy of the federal government’s in the same regard, which is discussed in detail in ‘Cracking the Code- The Fascinating Truth About Taxation In America’.

But these are both merely ploys, which seek to capitalize on what is hoped to be the ignorance of the target citizenry. Just as does the federal system on which it is dependent, Michigan’s “income” tax system fully incorporates the legal principles first expressed in section 93 of the 1862 federal revenue act, under which the authority to determine the amount of “income” received by a citizen is outside the state’s hands. In both systems, the sworn testimony on a 1040 is the sole starting point for the making of any ‘determinations’, etc., and no parallel or superceding authority has been granted to either government. This reality is summarily demonstrated by Michigan’s relying on MCL 205.23, rather than being able to cite a statute actually conferring an authority by which the state can unilaterally declare the relevant amount of “income”. It is true that the federal system provides a mechanism (codified at 26 USC 6020(b)) by which the Secretary of the Treasury (or his delegate) can create certain kinds of returns over his own sworn signature-- either when a citizen has not done so for himself or herself, or to contest the accuracy of a return already filed-- but even then, such a return is only prima facie legally sufficient (that is to say, rebuttable), and 1040’s are not among the substitute returns so authorized:

Internal Revenue Manual 5.1.11.6.10
IRC 6020(b) Authority

1. The following returns may be prepared, signed and assessed under the authority of IRC 6020(b):

A. Form 940, Employer’s Annual Federal Unemployment Tax Return

B. Form 941, Employer’s Quarterly Federal Tax Return

C. Form 943, Employer’s Annual Tax Return for Agricultural Employees

D. Form 720, Quarterly Federal Excise Tax Return

E. Form 2290, Heavy Vehicle Use Tax Return

F. Form CT–1, Employer’s Annual Railroad Retirement Tax Return

G. Form 1065, U.S. Return of Partnership Income.

Pursuant to IRM 1.2.2.97, Delegations of Authority, Order Number 182 (rev. 7), dated 5/5/1997, revenue officers GS-09 and above, and Collection Support Function managers GS-09 and above, have the authority to prepare and execute returns under IRC 6020(b).

Anyway, the available ‘administrative remedy’ has now been pursued, with the only worthwhile consequence likely to be the confirmation of the nature of the “income” tax scheme unavoidably revealed by the state’s argument. We’ll wait for the issuance of a recommendation by the conference hearing officer, and subsequent decision by the state treasury department, of course. However, it seems a virtual certainty that Doreen and I will have to force Michigan to acknowledge our filed evidence by means of a lawsuit before recovering our money-- making this a very taxing affair, indeed. (Other states have a higher regard for the requirements of the law-- click here to see what I mean.)

Update

The Treasury Department DID eventually issue its decision-- it was not hugely surprising. The following question and answer, which were exchanged on The Lost Horizons Forum will serve to communicate the pertinent details:

Q: PH, on your www.losthorizons.com/ATaxingAffair.htm you take the position that the State of Michigan Can NOT "declare the relevant amount of (your) 'income'".

If, (1) Michigan "believes you have not satisfied a tax liability" (I believe that point is uncontested), based upon your "return, a payment, or an audit" (they have examined your return, recognize all payments correctly and conducted an audit), and (2) it is authorized by MCL 205.23 to "determine the tax liability and notify the taxpayer of that determination" (obviously a unilateral action) in such a situation , and (3) if they can only make a determination of 'liability' by making a determination of 'income' or accepting your asserted 'income', how can you say that they are NOT authorized to determine your 'income', however inaccurately they may make a try of it? Why must they accept your determination of the 'income' amount?

Obviously NO ONE is authorized to miscalculate 'income' or 'tax liability'. But that isn't what your saying; you're saying they don't have authority to 'declare the relevant amount of 'income'.

The only controversy at issue is the difference in your 'income' figure and the one determined from audit; the original W-2 statement issued by the one professing that you're an employee that was paid a wage. Even though inaccurate, the W-2 is a 1st party statement not hearsay. Certainly if it were a disputed issue at trial, the Government would have the employer testify while presenting the W-2 into evidence. You may refute the accuracy but you could not prevail on an objection that the W-2 was hearsay.

Certainly we agree with you that MI is taking the erroneous position that the original W-2 is correct. But you're not saying they are wrong in their determination; your saying they can't make the determination at all!

Under what principle or authority in the face of MCL205.23 can you say that? If this can be established with points and authorities, I believe it would be very useful (a silver bullet to stop the vamps). Thanks.

Hereafter appears the MCL205.23 quoted without comments:

(1) If the department believes, based upon either the examination of a tax return, a payment, or an audit authorized by this act, that a taxpayer has not satisfied a tax liability or that a claim was excessive, the department shall determine the tax liability and notify the taxpayer of that determination. MCL 205.23. This section of the Michigan code says (in relevant part): (1) If the department believes, based upon either the examination of a tax return, a payment, or an audit authorized by this act, that a taxpayer has not satisfied a tax liability or that a claim was excessive, the department shall determine the tax liability and notify the taxpayer of that determination.

A: --, Michigan law provides for one single source of authoritative information as to "income" received, which is the figure recorded on the filer's federal return. The state certainly has the authority to calculate a liability by correctly applying the rate of tax to that figure, but that is not the same as the authority to establish that figure in the first place. You are slipping into the mistake (strongly encouraged by the beneficiaries of the scheme) of confusing ‘determine’, which means 'ascertain' (or more relevantly, 'calculate'), with dictate-- reasoning that because the state is authorized to determine liability, then it must be able to dictate the amount on which that liability arises; as though how much tax you are to pay is pre-ordained, and the only question is what “income” figure must be assigned to you in order to make the calculation work out. Intellectually, this is having the tail wag the dog, like suggesting that because the cashier is entitled to determine how the bill at the restaurant totals up, he or she must therefore be authorized to dictate how much food the diner ate. This fallacy is addressed in considerable detail in ‘About 1040’s And Claiming Refunds’, and I’m not going to restate it all here.

As to some specifics, your #1 is not actually ‘uncontested’. Michigan, as it turns out, has not examined our return, and that is where the whole issue rests. The latest Dept. of Treasury decision in our contest so far, issued on October 8th, is that Michigan is correct in denying our claim of refund because it relied upon the “income” figure on our federal tax return in determining our tax liability-- in complete consistency with what I maintain that the law requires. The trick here is that the state is denying that the federal return which we executed (and furnished to them) exists-- just as does the IRS, and instead has used the “income” figure appearing on the IRS’s unsigned and legally meaningless IRS-produced Substitute For Return in its calculations: “...the Department requested and received from the IRS copies of Petitioners’ ACTUAL federal return for the 2001-tax year.” (emphasis added.) The state is not disputing my contentions as to the law at all. Thus, when my wife and I take this matter to the Court of Claims, the only real issue will be what IS our ‘actual’ return. Once that has been established, the state will be obliged to engage in a re-determination. (Some background on our 2001 federal filing can be seen at www.losthorizons.com/overpay.htm.)

The means by which Michigan leaves the determination of “income” received to the declaration of the filer is by piggy-backing itself on to the federal filing. Having done so, the state has abandoned any pretense of being able to itself contest or judge the information as to “income” received furnished on an ‘information return’ such as a W-2 or 4852. That evidence is considered in calculating the figure which appears on the federal return, and has no application in the Michigan determination process. This can be demonstrated by analysis of Michigan law-- involving consideration of both what is there and what is not, but this has already been largely done in the brief I have posted on this subject, and it also will not be repeated here. However, I will supplement that analysis for the purposes of this discussion by pointing out that to have it otherwise would require a provision in law (both federal and state) for Michigan’s re-calculations to oblige a change in the relevant federal figures (up or down, I might add)-- a provision which does not exist.

Michigan’s interest in ‘information returns’ extends solely to the accuracy of claims as to amounts withheld. The state’s sole contention regarding W-2’s etc. reflects this point precisely: “Your claim of tax withheld disallowed. No W-2s were received to support your claim”. The state has never argued any other point with regard to an ‘information return’. Our discussion of the subject of information returns in our brief is solely in response to that contention, and not for the purpose of arguing whether or not the state is authorized to dispute assertions as “wages” paid. The state was denying that my 4852 was cognizable as an information return for any purpose, even the limited one with which it is properly concerned.