5-2700-10384-2

STATE OF MINNESOTA

OFFICE OF ADMINISTRATIVE HEARINGS

FOR THE MINNESOTA DEPARTMENT OF REVENUE

In the Matter of the Proposed Denial of Tax Clearance Certificates to Marshall H. and Mary D. Everson; Minnesota ID Nos. 477-18-3127 and 477-16-8569.

FINDINGS OF FACT,

CONCLUSIONS AND

RECOMMENDATION

The above-entitled matter was heard before Howard L. Kaibel, Jr., duly appointed Administrative Law Judge, on March 14 and April 15, 1996, in Minneapolis, Minnesota. The record closed on August 20, 1996, upon receipt of the last post-hearing submission.

Linda Geier, a staff attorney at the Department of Revenue, 10 River Park Plaza, Mail Station 2220, St. Paul, MN 55146-2220 appeared on behalf of the Collection Staff at the Bloomington Office of the Department of Revenue (hereinafter: "Department Staff"). Mary and Marshall Everson, 7244 York Avenue South, No. 419, Edina, MN 55435 (hereinafter: "Respondents") appeared on their own behalf, without benefit of counsel. They have been represented in past discussions with Department Staff by Ronald Lahner, an attorney at Rider, Bennett, Egan & Arundel, 2000 Metropolitan Centre, 333 South Seventh Street, Minneapolis, MN 55402.

NOTICE

This Report is a recommendation, not a final decision. The Commissioner will make the final decision after a review of the record. The Commissioner may adopt, reject or modify the Findings of Fact, Conclusions, and Recommendations. Under Minn. Stat. § 14.61, the final decision of the Commissioner shall not be made until this Report has been made available to the parties to the proceeding for at least ten days. An opportunity must be afforded to each party adversely affected by this Report to file exceptions and present argument to the Commissioner. Parties should contact Matthew G. Smith, Commissioner of Revenue, 10 River Park Plaza, St. Paul, MN 55146 (296-3403) to ascertain the procedure for filing exceptions or presenting argument.

STATEMENT OF ISSUE

Should Respondents be entitled to the issuance of a tax clearance certificate to avoid revocation of their occupational licenses, pursuant to Minn. Stat. § 270.72?

Based upon all of the proceedings herein, the Administrative Law Judge makes the following:

FINDINGS OF FACT

1. Mr. & Mrs. Everson are 70 and 69 years old respectively and are basically semi-retired.

2. Prior to retirement, they ran a Montessori school for roughly 22 years. When the school ran into financial difficulties, they were forced to close it, selling off the buildings and other assets.

3. After the sale of the business and their home and other personal assets, Respondents were left with a current net debt of roughly $500,000.

4. The sales of these assets also left Respondents with substantial capital gains "income" on paper and commensurate substantial State and Federal tax liabilities, without funds to retire them.

5. Considering Respondents' advanced age, lack of assets and virtually non-existent disposable personal income (detailed subsequently herein) the Federal Internal Revenue Service agreed with Respondents' children to compromise and settle the Federal tax liability on their parents' behalf for roughly two cents on the dollar.

6. Respondents' children have offered to settle their parents tax liability with Minnesota on the same or similar two cents on the dollar terms, but Department Staff has refused to consider a lump sum cancellation of the debt for anything less than eighty cents on the dollar or roughly $20,000.

7. Mr. James Wyatt, the Revenue Collection Officer assigned to Respondents' account from Department Staff's Bloomington Office, wants Respondents to pay off the entire liability and compounding interest over an extended period of time, under a monthly payment plan. He believes Respondents could cut back on their living expenses and make monthly payments of roughly $1,500 to the Department to retire the delinquency and interest which currently approach $27,000.

8. Mr. Wyatt's position was based on his conclusion that Respondents were substantially overstating and falsifying their monthly expenses, while substantially understating and concealing their incomes.

9. Respondents' estimates of their living expenses were contained in a document prepared and submitted to the Department Staff prior to the hearing by their attorney. They had not reviewed the details of this document prior to the hearing and have subsequently produced evidence indicating that it significantly understated their actual expenses in several categories. The document itself was never offered into evidence.

10. Respondents' largest expense category was rent. At the time of the hearing, they were paying $1,400 per month and had given their landlord notice that they were moving, but they were having some difficulty finding a cheaper acceptable residence. The Department Staff's unpublished guidelines relied upon by Mr. Wyatt would allow them a maximum of $1,000 per month, which evidently would include heat, water, sewer and garbage assessments. This departmental allowance is specifically found to be a reasonable shelter expense for use in computing potential obligor payments.

11. Department Staff specifically approved Respondents' reported expenses in four categories as fitting within their allowance guidelines: electricity ($80), telephone ($50), medical/other ($100) and auto insurance ($150).

12. The Department Staff allowance for groceries of a total of $300 per month combined for both Respondents was significantly less than their reported expenditures in this category of $475. This category evidently includes non-prescription drugs, cleaning supplies and sundries such as light bulbs. While this departmental allowance is not found herein to be unreasonable based on this record, it is distinctly spartan.

13. Another notably frugal departmental expense allowance is $80 per month per person for transportation. Because this would more than cover a monthly pass for metro bus line residents, it is per se reasonable. However, Respondents have grown accustomed to driving their son's 1988 Accura (with 187,000 miles) particularly to pick up Mrs. Everson from her late night job at Dayton's because of "safety" concerns. They report credibly that they spend $300 per month on gas, maintenance and repairs. They certainly cannot afford, on this allowance, the estimated $1,000 needed to get their 1986 Jeep running again. They may have to consider giving up automobile transportation and/or the job at Dayton's.

14. The Department Staff guidelines allow deductions of the full amounts paid by taxpayers for FICA and State and Federal Income Taxes as legitimate expenses. The parties disputed however what a fair allowance should be for those taxes. Mr. Wyatt had seen a check stub from the third quarter of 1995 which led him to conclude that this allowance should be $91.54 per month. However, the $405 per month reported by Respondents appears closer to the minimum (15%) they should have been setting aside for taxes on an annual taxable income in 1995 of $27,000 in wages and life insurance.

15. Department guidelines allow full deduction for monthly student loan payment expenses, which Respondents' reported as $210 per month. However, Mr. Wyatt assumed in his analysis that this category in Respondents expense report was a falsification. Based on his past experiences with other taxpayers, he presumed that the student loan payments must actually have been a responsibility of one of Respondents' children. It is clear from post hearing submissions that this loan payment is Mrs. Everson's obligation and that after July 1, 1996 the monthly payments will be between $230 and $250. For purposes of this report, based on the evidence in this record, they are estimated to be $240.

16. Department Staff also approved Respondents' claimed expenses of $100 per month for the category of "medical and other". It is clear from hearing documentation that monthly medical expenses alone (Medicare supplements of $74.95 and $98.50 plus $17 a month for Mrs. Everson's hearing aid) require an increase in this allowance of another $90.

17. Respondents have no pensions or annuities or other sources of regular retirement income beyond their monthly social security insurance payments.

18. Mr. Everson had a part-time job with a magazine delivery company which paid him roughly $8,000 in 1995. He has been unemployed since that position was eliminated in July of this year. Given his age, he is treated in this report in formulating legal conclusions, as likely to remain unemployed.

19. Mrs. Everson has a part-time position with Dayton's which paid roughly $14,000 in 1995. It is undisputed that her average monthly income from this position this year will be reduced, because the commissions she receives from new accounts have been reduced by 80% and because of her medical problems. She is treated in this report in formulating legal conclusions, as likely to remain employed at a yearly wage of $12,000 or $1,000 per month.

20. Respondents' social security (decreased by $144 a month because of Mrs. Everson's gainful employment) is $19,200 per year. Combined with her $12,000 wages, they have a current income of $31,200 or $2,600 per month.

21. Applying the uniform allowances in the departmental guidelines discussed above (assuming that FICA plus State and Federal Taxes on Mrs. Everson's $1,000 per month income are at least 20% or $200) Respondents' allowable expenses are $2,370:

$1,000 Rent

300 Groceries

80 Electricity

50 Telephone

160 Transportation

200 FICA and taxes

240 Student Loan

190 Medical and other

150 Auto insurance

$2,370

It is important to understand that the "other" category has been used up for medical expenses so that there is no room in this austere budget for items many would consider necessary, such as: shoes, clothes, Christmas and birthday presents, newspapers, magazines, fixing or replacing household items such as a broken television set or radio, vacations or entertainment of any sort whatsoever.

22. Deducting allowable expenses of $2,370 from their monthly income of $2,600, Respondents' would have $230 per month to make payments on the tax delinquency. If that entire amount were devoted to payments, it would not appear to be enough to keep up with the compounding interest.

23. It also appears likely that this $230 is already being collected by the Department. In their last post-hearing submission, Respondents indicate that Mr. Wyatt has begun garnisheeing Mrs. Everson's wages at Dayton's. Assuming the State is legally permitted to collect 30% of her after-tax monthly income, Respondents may already be making involuntary payments of $240 per month towards the compounding liability, for as long as Mrs. Everson chooses to remain employed.

24. Department Staff has not introduced any evidence contradicting Respondents' assertion that they have not made any substantial income in recent years from the licenses which the Staff seeks to revoke. Mr. Everson made some minimal commission from some insurance he sold to his son and daughter-in-law back in 1994 and Mrs. Everson used her real estate license in the sale of their home in 1992, but realized no commission from the transaction, because it produced no income.

25. Mr. Everson is particularly proud of his record of professional competence as a licensed insurance broker over the last 45 years. Both Respondents would like to hold on to their licenses.

Based upon the foregoing Findings of Fact, the Administrative Law Judge makes the following:

CONCLUSIONS

1. That the Department of Revenue and the Administrative Law Judge have jurisdiction in this case under Minn. Stat. §§ 14.50 and 270.72.

2. That the Department gave proper notice of the hearing in this matter and has fulfilled all other relevant substantive and procedural requirements of law and rule.

3. That reasonable cause exists in this case for the issuance of tax clearance certificates.

4. That revocation of Respondents' occupational licenses under the circumstances detailed herein would be arbitrary, unreasonable, oppressive and contrary to the intent of the legislature in adopting Minn. Stat. § 270.72.

Based upon the foregoing Conclusions, the Administrative Law Judge makes the following:

RECOMMENDATION

IT IS HEREBY RECOMMENDED: that the Commissioner of Revenue issue tax clearance certificates to Marshall and Mary Everson.

Dated this

4th

day of

October

1996.

HOWARD L. KAIBEL, JR.

Administrative Law Judge

Reported: Taped, not transcribed.

NOTICE

Pursuant to Minn. Stat. § 14.62, subd. 1, the Agency is required to serve its final decision upon each party and the Administrative Law Judge by first class mail or as otherwise provided by law.

MEMORANDUM

The provisions of Minn. Stat. § 270.72 allowing revocation of occupational licenses are a blunt instrument which can yield severe and counterproductive consequences, even when wielded with the skill of a surgeon. The legislature obviously intended them to be used sparingly to force cooperation from unusually recalcitrant or repeatedly delinquent taxpayers. (In the Matter of the Denial of a Tax Clearance Certificate to Jack J. Welch, October 31, 1990; OAH Docket No. 5-2700-4833-2).

The purpose of this license revocation statute is to protect the state's pecuniary interest, not to revoke occupational licenses when that purpose will not be served. In RE: Blarney, Inc., 53 B.R. 162 (BKRTCY. Minn. 1985). These Respondents are not uncooperative or recalcitrant and revocation of their occupational licenses will not further any legitimate state purpose. It will not enhance cooperation from Respondents or improve the collection of taxes in any way.

The evidence in this case, including the Department's own guidelines, will not support revocation of these Respondents' occupational licenses when they have proceeded in good faith.

The Minnesota Supreme Court has on one occasion emphasized the severity of the potential impact of such proceedings on occupational licensees, by referring to them as "a drastic sanction" that was "a clear abuse of discretion" "completely uncalled for, based on the evidence" in a case where the respondent acted "in good faith." In RE: Haugen, 278 N.W.2d 75, 80 (Minn. 1979). Such state deprivation of commercial privileges is often called "regulatory capital punishment". (In the Matter of the Premises Permits of the Knights of Columbus, August 28, 1996, OAH Docket No. 5-0800-10401-2.)

The legislative intent of this statute is clear from subdivision 2 which defines tax delinquency as not including any amounts that are the subject of a payment agreement. The intent is clearly to encourage taxpayers to enter into reasonable payment agreements, wherever possible. This in turn requires some analysis of whether the taxpayer has any reasonable capacity for entering into such a payment plan. The Department has rigorous guidelines for making this determination and it is the responsibility of the Commissioner to "ensure equal and consistent application and enforcement of all tax laws administered by the Department." Minn. Stat. § 270.065. The Minnesota Supreme Court cautioned in Western Auto Supply Company v. Commissioner of Taxation, 71 N.W.2d 797 (1955) that "the Commissioner of Taxation must of course guard against being arbitrary or capricious." It pointed out that in reviewing the decisions of any administrative board or department, the Court must make several determinations upon review, including: "(3) whether its action was arbitrary, oppressive, or unreasonable and represented its will and not its judgment; and (4) whether the evidence was such that it might reasonably make the order or determination in question."

There are any number of ways in this case that the Commissioner could exercise his considerable discretion to avoid the proposed license revocation in this case. The delinquency could be eliminated entirely by accepting the offer of Respondents' children to compromise the liability on terms similar to those accepted by the Federal Tax Authorities. The Department could enter into a payment agreement with Respondents covering the liability providing for some nominal monthly payment or for some stipulated guaranteed payment from Mrs. Everson's garnisheed wages.

It is beyond the scope of this report to attempt to weigh the various considerations involved in deciding how best to resolve this dispute. Only the Commissioner can properly weigh the policy questions involved, such as the propriety of maintaining a mounting liability on the state's books of receivables which everyone concedes will never be collected.

HLK