As to case No. 161, the sole issue presented on this appeal is whether the tax department is entitled to the presumption of correctness of the assessment of additional taxes in 1956.
Sec. 71.11 (1), Stats., gives the department the power to assess incomes and also the power to estimate incomes. Sec. 71.11 (4) provides that when a taxpayer makes a return that does not disclose his entire taxable income, the department has the power to assess his taxable income "according to their best judgment." When the assessment is disputed, as here, the burden of proof is on the taxpayer to show error in the additional assessment because the additional assessment is presumed to be correct.
"In this state of the record the burden was upon plaintiff to isolate from the general expenses of the business such items as were properly chargeable to the development of the patent, and it cannot be said as a matter of law that plaintiff sustained this burden. The evidence is extremely unsatisfactory and inconclusive, and, having the burden of proof, plaintiff cannot now complain that the doubts were resolved against him by the trier of fact."
"... The department points out that the burden of proof is upon the taxpayer in cases of this kind to show the incorrectness of the additional assessment. Laabs v. Tax Comm. (1935), 218 Wis. 414, 424, 261 N. W. 404, and H. G. Weber & Co. v. Department of Taxation (1946), III WBTA 114. However, we fail to see how the question, of who has the burden of proof, is of any materiality on this appeal. It would only be material where either the taxpayer or the department, or both, had failed to present any evidence on the issue of reasonableness. This is because, where competent evidence is introduced by both the taxpayer and the department before the board on the issue in controversy, the reviewing court is only concerned with whether there is substantial evidence in view of the entire record to sustain the board's finding."
These cases show that the burden of showing error in an assessment is on the taxpayer. Failure to present any evidence showing error means that the case must be decided against the taxpayer.
But all of this presupposes a valid assessment. The failure of the state in the case at bar was in its failure to specify that the adjustment in taxable income and in "additional income" was because of the disallowance of deductions. The taxpayer received no notice that his income-tax return for 1956 was being questioned because of improper deductions. The assessment was incomplete and invalid. Therefore, it was not presumptively correct.
The WBTA's first premise is that the face amount of the notes was properly reported as income in the years in which the notes were received as payment for insurance premiums. In 2 Mertens, Law of Federal Income Taxation (Zimet rev.), ch. 11, p. 21, sec. 11.07, it is stated:
"Notes or other evidences of indebtedness received in payment for services also constitute income to the extent of their fair market value. That the notes were in fact paid in a subsequent year is a factor often considered in determining market value, although such fact alone is not conclusive of value at the time of receipt. It has been held that proof that the note was sold at a loss in a subsequent year does not by itself meet the burden upon the taxpayer to prove that the note had a fair market value less than its face amount when received."
Wisconsin cases hold that income is cash or its equivalent; i.e., it must be money or that which is convertible into money.
The tax department urges that the entire value of these notes is includable as income to the taxpayer because the taxpayer took these notes as part of the ordinary course of his business rather than in a single isolated transaction. The tax department argues that in the Katz, Lawrence, and Zweifel cases,
To meet his burden, appellant taxpayer contends that the fair market value of the notes in question can be established by the sale to his family trust. We have held that deductible losses under the income-tax statute must be established by closed transactions.
Appellant reported the face value of the notes as income and then attempted to deduct the difference between the face value of the notes and the amount received from the trust as unpaid commissions. Proof that appellant was entitled to these deductions must be presented. There was little proof on this issue. Appellant testified generally that the value of the notes was determined by an appraisal based on credit information and information on character and personal habits. However, this information was often unavailable and in most cases the notes were sold to the trust at a flat 45 percent of face value. Furthermore, there was no evidence presented of the value of any specific note. Appellant always dealt in generalities and never articulated why a specific note was worth 45 percent, although he was specifically questioned about many individual notes.
Appellant had an independent appraiser put on the stand, who had helped determine the value of the notes. This appraiser did not know the date the appraisals were made, was vague on how the evaluations were arrived at, and was unable to state which appraisals were based on credit reports. In short, appellant's appraiser was never able to testify what the basis was for an evaluation of any particular note, nor did he indicate the method used for evaluating the notes in general.
Many of the notes were paid in full after they had been transferred to the trust. Although no exact figure appears in the record, the trust tax returns indicate the percentage of collection was very high.
The WBTA concluded that the difference between the face amounts of the notes and the amounts for which they were sold to the trust was not deductible. Under a reasonable view of the evidence of the entire record, this conclusion is supported. Appellant was using the trust as an artifice to transfer his own income to the trust for the
By the Court.—Judgment reversed as to case No. 161; affirmed as to case No. 162.