TAXATION

Minnesota Tax Court (2008) State tax independent of federal tax

 

Montagne v. Comm’r of Revenue

State tax independent of federal tax

 

Montagne v. Comm’r of Revenue

Minnesota Tax Court

2008 WL 4906421

Nov. 14, 2008

 

Summary of the Case

 

Appellants were audited and additional taxes were assessed, partially due to their income from horse breeding and training activities.  They appealed the assessment, arguing that the state tax assessment was dependent upon a proper federal tax assessment, but the Court disagreed and found that the state tax was independent of the federal tax.

 

Text of the Case

 

Minnesota Tax Court, Regular Division.

Carlton County.

Brad J. and Teri L. MONTAGNE, Appellants,

v.

COMMISSIONER OF REVENUE, Appellee.

No. 7556-R.

 

Heard Sept. 30, 2008.

Nov. 14, 2008.

 

Brad J. and Teri L. Montagne, appeared for the Appellannts pro se.

Kyle R. Gustafson, Assistant Attorney General, appeared for the Appellee, Commissioner of Revenue.

 

ORDER for SUMMARY JUDGMENT

 

KATHLEEN H. SANBERG, Judge.

The Court upon the evidence at the hearing and all of the files, records and proceedings herein, now makes the following:

 

ORDER

 

Appellants' Motion for Summary Judgment is hereby denied.

 

Appellee's Motion for Summary Judgment is hereby granted.

 

LET JUDGMENT BE ENTERED ACCORDINGLY. A STAY OF FIFTEEN DAYS IS HEREBY ORDERED. THIS IS A FINAL ORDER.

 

Memorandum

 

Introduction

 

The two main issues in this income tax case are: 1) whether the Commissioner of Revenue (“Commissioner”) has the authority to assess income tax apart from the federal government's power to tax and, 2) whether Appellants are estopped from raising an issue regarding federal income tax that has been litigated and determined in federal court. For the reasons stated below, we find that the State of Minnesota has the authority to tax Appellants' income independent of the U.S. right to tax income. We do not reach the issue of collateral estoppel.

 

Facts

 

Brad J. and Teri L. Montagne (“Appellants”) resided in Minnesota for the taxable year 1998. In April 1999, Appellants filed their Minnesota income tax return, indicating they had federal taxable income of $86 and they were entitled to an $846 refund. Based on the results of an Internal Revenue Service (“IRS”) audit, the Commissioner assessed additional tax, along with interest and penalty, of $4,777, in an Order of Assessment dated October 15, 2002. Appellants administratively appealed the assessment, which was affirmed in a Notice of Determination on Appeal dated December 18, 2002. The sources for the additional tax were 1) income received by Appellants in their horse breeding and training activities, and 2) self-employment tax arising out of Appellant Brad Montagne's chiropractic practice.

 

On February 25, 2003, Appellants filed a “Protest & Appeal” of the Commissioner's Order of Assessment (“Notice of Appeal”) with this Court. In their Notice of Appeal, Appellants assert that there was a pending U.S. Tax Court case with the same issues for federal income tax as for this state income tax case. Appellants did not contest the basis for the tax nor the calculation of the state tax in their Notice of Appeal; rather they asserted that the federal case needed to be resolved before this Court could consider the validity of the Commissioner's assessment.^FN1The Commissioner did not object to delaying a determination in this case until after the federal case was concluded. This Court agreed to a continuance and held periodic pretrial telephone calls to monitor the status of the federal case.

 

The U.S. Tax Court determined that Appellants were properly assessed for additional federal income tax,^FN2 holding that Appellants' horse breeding and training activities were subject to tax and that Appellant Brad Montagne was not exempt from self-employment tax. Appellants appealed to the Eighth Circuit Court of Appeals. On February 10, 2006, the Eighth Circuit affirmed the U.S. Tax Court decision.^FN3

 

On January 31, 2008, Appellants moved to vacate the Eighth Circuit's decision as void, claiming, for the first time, that they had never received a Notice of Deficiency from the IRS, required for the IRS to properly assess tax. The Eighth Circuit denied Appellants' motion in an order dated February 20, 2008. Appellants did not appeal this decision and judgment was final.

 

The Commissioner filed a Motion for Summary Judgment on August 27, 2008. On September 19, 2008, Appellants filed a Cross-Motion asserting, for the first time in this case, that they never received the federal statutory Notice of Deficiency, thereby depriving this Court of jurisdiction over the state tax. Appellants did not present any facts or dispute the amounts determined by the Commissioner to be due for additional tax, penalty and interest.

 

Summary Judgment

 

Appellants and the Commissioner have filed timely Cross Motions for Summary Judgment. Summary judgment is appropriate where it is determined that there are no genuine issues of material fact and that either party is entitled to judgment as a matter of law.^FN4Here, because there are no genuine issues of material fact, the issues are properly presented for summary judgment.

 

State Authority to Tax

 

The first issue in this case is whether the Commissioner has the authority to assess state income tax separate from the federal government's authority to assess income tax. Appellants argue that state tax assessment is dependent upon a proper federal tax assessment; if the federal tax was not valid, the state tax cannot be valid. The federal tax assessment is not valid, according to Appellants because they did not receive a required IRS Notice of Deficiency. Thus, Appellants argue, the Commissioner has no authority to determine and assess additional tax on their income. The Commissioner argues that the State of Minnesota has independent authority to determine income and to assess income tax. We agree with the Commissioner.

 

In addition and finally, the State of Minnesota possesses the powers of a sovereign, and that power includes the power of taxation .^FN5Specifically applicable here, Minn.Stat. § 289A.35 authorizes the Commissioner to determine the amounts that are properly includable in taxable income, regardless of the information provided to the IRS or contained in a federal tax return.^FN6Here, the Minnesota Department of Revenue, while using the federal return as a guide,^FN7 properly considered additional information about Appellants' horse breeding activities and Appellant Brad Montagne's chiropractic practice in calculating Appellants' state income tax. Appellants presented no facts to dispute the calculations or determination of tax by the Commissioner. Rather, Appellants argued that the state tax was invalid because the federal tax was invalid. Appellants' argument fails. Because Minnesota has its own independent authority to determine income and to tax income, the failure, if any, by the IRS to provide a Notice of Deficiency has no bearing on the validity of Minnesota's assessment.

 

There are no material facts in dispute as Appellants presented no facts in its Motion or in opposition to the Commissioner's Motion to dispute the calculation or determination of tax by the Commissioner. We find, therefore, that the Commissioner is entitled to judgment as a matter of law.

 

We do not reach the second issue of whether Appellants are estopped from raising the alleged lack of notice by the IRS because, as stated above, the State of Minnesota's authority to tax is separate from any federal authority to tax.

 

Conclusion

 

Summary judgment is granted in favor of the Commissioner of Revenue and Appellants' Motion is denied.

 

FN1. Appellants sought judicial review by the United States Tax Court of the IRS assessment of additional tax and penalties. The United States Tax Court found that the IRS correctly assessed Appellants' tax (see  Montagne v. Comm'r of Internal Revenue, File No. 11648-02, 2004 WL 2504388 (U.S.Tax Ct. Nov.8, 2004)). Appellants appealed the decision to the Eighth Circuit Court of Appeals and on February 10, 2006, the Eighth Circuit affirmed the United States Tax Court's decision (see  Montagne v. Comm'r of Internal Revenue, File No. 04-4137, 2006 WL 305642 (8th Cir. Feb.10, 2006)). On January 31, 2008, Appellants moved to vacate the Eighth Circuit's decision as void, claiming for the first time that they never received a federal Notice of Deficiency. In an order dated February 20, 2008, the Eighth Circuit denied Appellants' motion. Appellants declined to appeal the judgment to the United States Supreme Court, resulting in a final judgment.

 

FN2.See Montagne v. Comm'r, File No. 11648-02, 2004 WL 2504338 (U.S. Tax Ct. Nov. 8, 2004).

 

FN3. Montagne v. Comm'r, File No. 04-4137, 2006 WL 305642 (8th Cir. Feb.10, 2006).

 

FN4.Minn. R. Civ. Proc. 56.03. Accord  DLH Inc. v. Russ, 566 N.W.2d 60, 69 (Minn.1997) (summary judgment permits the court to dispose of an action on the merits if there is no genuine issue as to any material fact.)

 

FN5.Minn.Stat. § 290.03 imposes, for each taxable year, “[a]n annual tax ... upon the taxable income for such year of ... resident ... individuals ...”  Weed v. Commissioner of Revenue, 489 N.W.2d 525, 529 (Minn.Ct.App.1992); Reed v. Bjornson, 191 Minn. 254, 257-258, 253 N.W. 102 (1934).

 

FN6.Minn.Stat. § 289A.35. See also Spektor v. Commissioner of Revenue, 308 N.W. 806, 807-809 (Minn.1981).

 

FN7.Minn.Stat. § 290.01, subd. 19, provides that the Minnesota taxable net income of a resident individual is “federal taxable income as defined in Section 63 of the Internal Revenue Code of 1986....”

 

Minn.Tax Regular Div.,2008.

Montagne v. Commissioner of Revenue

2008 WL 4906421

 

 

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