Iowa Tax Research Library

Print Document
Welcome to the Iowa Tax Research Library

ERLING, AUGUST J.& MARILYN B. (1979)(O)(IND)

Topic Code: A027Accumulated Distributions - Trusts (I), I041Income - Determination of (I)          Document Reference:

IN THE MATTER OF AUGUST ERLING, JR. & MARILYN B. ERLING P.O. Box 397 Princeton, Iowa 52768

Department of Revenue and Finance

iowadrf

77-237-2C-A

AUGUST ERLING, JR. & MARILYN B. ERLING P.O. Box 397 Princeton, Iowa 52768

GERALD A. KUEHN, Assistant Attorney General Counsel for G. D. Bair, Director of Revenue Iowa Department of Revenue Hoover State Office Building Des Moines, Iowa 50319

ORDER OF DIRECTOR UPON REVIEW OF HEARING OFFICER's PROPOSED DECISION

Pursuant to an Appeal to Director of Revenue filed on July 13, 1979, the Director issued a Notice of Director's Intent to Review Hearing Officer's Proposed Decision and the above entitled matter came on for review at an adjourned hearing on August 20, 1979 at 10:00 a.m. The Director hereby issues this Order.

FINDINGS OF FACT

1.          On November 29, 1978, a Notice of Time, Place and Nature of Hearing was sent by certified mail to the parties by the Hearings Division of the Department scheduling an evidentiary hearing for April 3, 1979 at 1:00 p.m. in Conference Room B, fourth floor, Hoover State Office Building, Des Moines, Iowa. The Notice was mailed to each party at its last known address as indicated by the records of the Department and as required by section 17A.12, The Code 1979, and rule 730-7.14(17A) IAC. Notice of hearing sent to the Protestors was claimed by Marilyn Erling. At the hearing, Joseph W. Weigel and William R. Bailey, attorneys at law, appeared on behalf of the Protestors. Mrs. Sandra B. Ludwigson, Assistant Attorney General, appeared as authorized representative for the Director of the Department. The Protestors' representative, Mr. Weigel, tendered Exhibits 1 through 45 for admission into evidence. These Exhibits were admitted into evidence without objection from the Director's representative. The Protestors testified on their own behalf and Mr. Darwin Nordquist was called as a witness for the Department. The parties were allowed by the Officer to file posthearing briefs. The parties were given until May 14, 1979 to file their briefs. On that latter date, briefs were filed by both parties.

2.          The protest under consideration in the instant proceeding arose out of the Department's assessment on October 12, 1977 of additional individual income tax against the Protestors for the calendar years 1975 and 1976. The Tax Review Committee met to make its initial review of the issues raised in the protest and the Committee met with Protestors and their representative, Pipp M. Boyls, at an informal conference in Des Moines. Thereafter, the Committee waived the issuance of its Findings and proceeded to file its Answer to the protest with the Hearing Officer, which procedure is authorized by rule 730-7.11(1) IAC. At the hearing, one issue considered was whether certain income was to be taxed to purported trust established by the Protestor, August Erling, Jr., or to the Protestors as individual taxpayers. A second issue involved the deductibility, or lack thereof, of certain expenses.

3.          The Protestors are and were husband and wife and residents of the state of Iowa during the period of the assessment under protest, which is the calendar years 1975 and 1976.

4.          On August 21, 1975, the Protestor, August Erling, Jr., created the August Erling, Jr. trust (hereinafter referred to as "the Trust"). The basic provisions of the Trust, the identity of the grantor, trustees, beneficiaries and a description of the Trust property and the powers of the trustees will be set out in the following paragraphs.

5.          It was stated in a "Trustees' Declaration of Purpose" that the creator of the Trust, August Erling, Jr., had established the Trust for the following purposes: to "maximize his lifetime efforts through the utilization of his Constitutional Rights; for the protection of his family in the pursuit of his happiness through his desire to promote the general welfare, all of which August Erling, Jr. feels he will achieve because they are substained in his RELIGIOUS BELIEFS." [emphasis in instrument]

6.          Various property was transferred to the Trust on August 25, 1975 to form the corpus or body of property owned by the Trust. It is stated in the "Declaration of Trust" (Exhibit 1) that August Erling, Jr. is the Grantor, or previous owner, of all property conveyed to the corpus of the Trust.

7.          This is in a technical sense true; however, Marilyn B. Erling transferred property owned by her to the Trust under the following conditions. She transferred ownership in most of her personal property to August Erling, Jr. Included in this transfer was the conveyance from Marilyn Erling to August Erling of the right to exclusive use of Marilyn Erling's services for her entire life, and the right to any remuneration earned for those services. Marilyn Erling also conveyed to August Erling, Jr. her interest in certain real property which consisted of a parcel of land located in Minnesota and her interest in the home in which she and August Erling, Jr. reside, the mailing address of which is Box 397, Princeton, Iowa. Transfer of the interest in land was by quit-claim deeds, dated August 22, 1975. (See Exhibits 18 and 21).

8.          Marilyn Erling's transfer of her interest in real and personal property was made for the express purpose of facilitating the future transfer of that property to the Trust. (See Exhibit 16).

9.          August Erling, Jr. transferred ownership of most of his personal property and all of his interest in real property to the Trust on August 25, 1975. This transfer included the property previously conveyed to him by Marilyn Erling. Also transferred was August Erling, Jr.'s interest in the real property described in paragraph 7. The transfer of the real property to the Trust was effected by quit-claim deeds. Additionally, August Erling, Jr. transferred to the Trust the right to the exclusive use of his services for his entire life and the right to any remuneration earned for those services.

10.          The real and personal property transferred from Marilyn Erling to August Erling, Jr. and thence to the Trust and the property directly conveyed from August Erling, Jr. to the Trust formed the initial corpus of the Trust. As of August 25, 1975, the Trust was the legal owner of the following property: exclusive right to utilize the services of the Protestors for their entire lives, real estate located in Iowa and Minnesota, all buildings located on that real estate, furnishings in houses located on the real estate, 386 shares of common stock, 3 U.S. Series E Savings Bonds, 9 life insurance policies, 6 on the life of August Erling, Jr. and 3 on the life of Marilyn Erling, a savings account, and a membership in the Lost Mountain Wilderness Club in the state of Arkansas. Schedule A of Exhibit 19 is an inventory of the Trust property owned on August 25, 1975.

11.          The Trust later acquired a legal interest in an apartment house located in Davenport, Iowa. This interest was secured by the Trust in a contract for deed entered into on August 2, 1976. A second, later acquisition was a stock trading account with Merill, Lynch, Pierce, Fenner & Smith, Inc.

12.          Certain property, owned by the Protestors and consisting mainly of sporting goods, was not transferred to the Trust.

13.          As of the date of the Trust's creation, August Erling, Jr. was employed as a salesman by Economics Laboratory, Inc. He was so employed as of the date of hearing. He is paid what is basically a straight commission. On the date of the Trust's creation, Marilyn Erling was employed as a bookkeeper by Shorey, Plath & Caroll. The Protestors, subsequent to the Trust's creation, attempted to secure from their employers agreements to pay the Trust for services rendered by the Protestors. The employers refused to do this, and continued to pay the Protestors directly for their services. During the period covered by the assessment, the Protestors endorsed the checks which they received from their employers to the Trust and deposited money earned in return for their personal services in an account maintained by the Trust. At some time subsequent to August, 1975, Marilyn Erling was no longer employed by Shorey, Plath & Caroll. In September, 1976, the Protestors set up an independent bookkeeping service. Marilyn Erling performs bookkeeping services for approximately eight customers. The service is known as the MBE Bookkeeping Service. This service has contracted with the Trust for the use of Marilyn Erling's services as a bookkeeper. No evidence regarding the specific provisions of the contract between MBE Bookkeeping Service and the Trust was introduced at the April 3, 1979 hearing.

14.          Various persons have been trustees of the Trust during its existence. Initially, the trustees were Marilyn Erling and Anna Schmidt, her mother. On August 25, 1975, Marilyn Erling and Anna Schmidt appointed August Erling, Jr. as a fellow trustee. On August 27, 1975, Anna Schmidt resigned her position as a trustee. Subsequent to that latter date, the trustees have been August Erling, Jr. and Marilyn Erling.

15.          The "Declaration of Trust" and "Trustee's Declaration of Purpose" give various powers to the trustees. The trustees possess the following powers relevant to a decision in this matter. They may:

a.          make distribution of the "proceeds and income" of the Trust in their discretion.

b.          do anything any individual may legally do in any state or country subject to certain "restrictions" which are not named.

c.          engage in business or invest funds on behalf of the Trust.

d.          invest money on behalf of the Trust, using Trust property as collateral.

e.          the "Declaration of Purpose" states that, "A Minute of Resolutions of the Board of Trustees authorizing what it is they determine to do or have done shall be evidence that such an act is within their power."

f.          it is also stated in the "Trustee's Declaration of Purpose" that trustees are not personally liable when dealing with the affairs of the Trust or its properties.

16.          As of August 25, 1975, August Erling, Jr. was the sole beneficiary of the Trust. The evidence does not indicate and the Director finds as a fact that there were no beneficiaries of the Trust prior to August 25, 1975. On the previously mentioned date, at an undetermined time, Marilyn Erling also became a beneficiary of the Trust. On August 26, a charitable fund, known as the AE & MBE Fund, also became a beneficiary of the Trust. Since that date, the Protestors and the Fund have been the only beneficiaries of the Trust. In the "Trustee's Declaration of Purpose", it is stated that beneficial interest in the Trust will be divided into 100 units, evidence of the number of units of beneficial interest to be indicated on certificates. Evidence from the certificates issued indicates that as of the date of hearing, August Erling, Jr. owns 45 units of beneficial interest and Marilyn Erling 50 units and the AE & MBE Fund 5 units.

17.          Beneficiaries are entitled to a proportional share of income distributed from the Trust, based on a percentage of the beneficial units owned. All Trust income distributed has been distributed to the Protestors or the AE & MBE Fund.

18.          The Trust holds the Minnesota land as an investment; it is anticipated that property will be sold when its value rises sufficiently. The Trust, in its own name, collects rents and pays expenses of the apartments in Davenport, Iowa.

19.          The Protestors established the Trust with the aid of an organization called Educational Scientific Publishers. The Protestors paid this organization $2,000 for various materials and instructions. In return for the $2,000, the Protestors received written materials explaining how to establish a trust, and an undetermined amount of instruction from a Mr. Martin regarding establishment of a trust and estate planning. Educational Scientific Publishers also provided the Protestors with a number of forms helpful to the establishment and ongoing operation of the trust. Exhibits 1, 3, 4, 5, 6, 10, 11, 12, 13, 14, 26, 27, 28, 33, 34, 37, 39 and 41 are forms received from Educational Scientific Publishers. Educational Scientific Publishers also sponsors yearly seminars concerned with trust fund management which the Protestors have attended.

20.          For the years 1976, the Trust received income from the following sources: dividends - $171.54; interest - $32.07; rents - $11,521.13; capital gains - $834.02; and "other income" - $27,597.22. Approximately $18,000 of the "other income" was received by the Protestors from Economics Laboratory, Inc. and Shorey, Plath & Caroll.

CONCLUSIONS OF LAW

1.          The Department has jurisdiction of this matter pursuant to section 422.28, The Code 1979.

2.          The first issue in the instant proceeding concerns the question of whether income for the years 1975 and 1976 generated by the Protestors' personal services and from rents, dividends, interest and sale of property is taxable to the individual Protestors or to the Trust established by August Erling, Jr. The second issue concerns the deductibility of the $2,000 payment to Educational Scientific Publishers.

3.          The problem presented by the first issue is not new, and frequently has been encountered in tax law. The question whether income is attributable to one individual or to a legal entity for tax purposes has often presented itself because it is often the case that a savings in taxes can result.

4.          The law applicable to the question posed includes section 422.7, Code of Iowa, 1979, which provides in pertinent part: "422.7 'Net income' - how computed. The term 'net income' means the adjusted gross income as properly computed for federal income tax purposes. ..." The federal courts have evolved a common law doctrine to deal with part of the question raised by the issue under consideration. The Congress has promulgated statutes which deal with other questions raised by the issue, specifically sections 671, 672, 674 and 677 of the Internal Revenue Code.

5.          The common law doctrine may best be described as "the assignment of income" doctrine, which holds that no transfer of income for personal services rendered will be recognized for federal income tax purposes if the transfer is from an individual who earns the income to another individual or legal entity which does not.

6.          The basics of the doctrine were established in the case of Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241 (1930). In that case a husband and wife entered into a contract in which each agreed that all property which either acquired would be owned by them as joint tenants. The contract was valid under the law of the state of California and all property placed in joint tenancy became the joint property of the spouses.

7.          The court first stated what has become a general proposition, that simply because the contract was valid under state law that this did not render it valid for the purposes of the federal income tax law. Lucas v. Earl, at 50 S.Ct. 241. The Supreme Court decided against the taxpayer stating that income was to be taxed to the person earning it and that the "fruits" of one person's labor would not be "attributed to a different tree from that on which they grew." Lucas v. Earl, supra.

8.          Later cases develop and elucidate the proposition that income must be taxed to the one who earns it. The proposition is further expanded to provide that the individual or entity who earns income is the one who controls the earning of it, American Savings Bank v. Comm'r, 56 T.C. 828, 839 (1971) and cases cited therein. It has been further stated that the one who controls the earning of income is the one who controls the amount of income earned and the manner in which it is earned, Damm v. Comm'r, 36 T.C.M. 793, 796 (1977).Control over the amount of income earned involves the right to demand that a minimum amount of income be earned, and control over the manner in which income is earned involves the right to demand that particular services be performed in a particular manner, e.g., it involves the right to demand that a specific sort of work be performed, such as clerical or sales work, and that it be performed at a specified time and in a specified place. Morgan v. Comm'r, 37 T.C.M. 1661, 1665 (1978).

9.          Protestors purport to have conveyed to the Trust the right to the "exclusive use of the lifetime services" of the Protestors and "all...earned remuneration accruing therefrom." The Director expressly does not rule as to whether such purported conveyance is valid under the laws of the state of Iowa. That issue was not raised. Suffice it to say that even if such conveyance were valid and enforceable as between Protestors and the Trust, that it constitutes an unlawful assignment of income for federal income tax purposes and therefore, cannot be recognized for Iowa income tax purposes.

10.          Assignment to trusts of income earned by individuals was not recognized and income was found taxable to the individual taxpayers in the following cases which involve factual circumstances similar to these proceedings: See Morgan v. Comm'r, 37 T.C.M. 1661, 1665 (1979); Johnson v. Comm'r, 37 T.C.M. 544, 554 (1978); Trousdale v. Comm'r, 16 T.C. 1056, 1065 (1951), aff'd 219 F.2d 563 (9th Cir. 1955).

11.          The "assignment of income" doctrine deals only with a portion of the income with which this case is concerned. That doctrine is applicable only to income earned for personal services rendered. Thus, it is not applicable to income from the stock dividends, bond interest and apartment rental.

12.          The law which is applicable to the stock, bond interest and apartment rental belonging to the purported Trust is found in subpart E of the Internal Revenue Code. The statutes found in that subpart are commonly called the "grantor trust statutes", and deal with the consequences of the grantor's retaining certain administrative powers over a trust which he or she has established.

13.          The consequences of the retention of certain forbidden administrative powers is that all or part of the distribution of corpus or income from the trust is taxable to the grantor or to another person other than the Trust. This is established by section 671, I.R.C. which reads in relevant part:

Where it is specified in this subpart [E] that the grantor or another person shall be treated as the owner of any portion of a trust, there shall then be included in computing the taxable income and credits of the grantor or the other person those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under this chapter in computing taxable income or credits against the tax of an individual.

14.          To properly apply the grantor trust statutes, the identities of certain parties must be known. One must know who is the grantor of the Trust, who are the trustees and who are the beneficiaries. The identities of those parties have been stated in the Findings of Fact. Because of the particular circumstances of this case, it is not necessary to consider the question of whether Marilyn Erling is a grantor of the Trust. In addition to the identities previously established, it is also necessary to know what persons, if any, connected with the Trust are "adverse parties" and which are "non- adverse parties". The definitions of adverse and non-adverse parties are stated in section 672 I.R.C. which provides in pertinent part:

(a)          Adverse party. For purposes of this subpart, the term "adverse party" means any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or non-exercise of the power which he possessed respecting the trust. A person having a general power of appointment over the trust property shall be deemed to have a beneficial interest in the trust.

(b)          Non-adverse party. For purposes of this subpart, the term "non- adverse party" means any person who is not an adverse party.

15.          There are three persons connected with the establishment of the Trust on its on-going operation. There is August Erling, Jr., the grantor. There is Marilyn Erling, his wife; is she an "adverse party" as that term is defined in section 672? There is Anna Schmidt, her mother; is she an "adverse party" under the terms of section 672? Anna Schmidt has never had any beneficial interest in the Trust. Therefore, she is not an adverse party. Marilyn Erling holds fifty percent of the beneficial interest in the Trust; neither party argues that this is anything other than a "substantial beneficial interest". If Marilyn Erling is an "adverse party", nonetheless, because the Trust instrument does not require her consent or approval prior to the exercise of any powers granted under the Trust, none of the powers vested in August Erling or Marilyn Erling require, as a precondition to its exercise, the consent or approval of an adverse party.

16.          Next, it must be determined whether the powers held by August Erling, Jr., the grantor, are proscribed by the grantor-trust statutes. Depending on who the trustees were at any one time, differing sections of the grantor-trust statutes are applicable to differing periods of the Trust's existence. The Director accepts the Department's argument that the period of August 21 through 25, 1975, need not be considered, and the grantor-trust statutes do not need to be applied to that period. During that short time, the Trust possessed no corpus and there were no beneficiaries; no distribution of non-existent corpus or income could be made to non-existent beneficiaries.

17.          From August 25 to August 27, 1975, the trustees were the Protestors and Anna Schmidt. The section of law applicable to this paragraph is 674(a) I.R.C. which reads in relevant part:

The grantor shall be treated as the owner of any portion of the trust in respect to which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable by the grantor or a non-adverse party, or both, without the approval or consent of any adverse party.

August Erling is the grantor of the Trust and a trustee. The provisions of the Trust, in essence, give the trustees the power to dispose of all of the income of the Trust as they see fit or "in their discretion". The trustees therefore possess power of distribution over the beneficial enjoyment of the income. This power of distribution may be exercised by a majority of the trustees, who would, obviously, be two. During this period, the grantor August Erling would, in conjunction with the non-adverse party Anna Schmidt, exercise a power of disposition over the beneficial enjoyment of all income from the Trust. This would be done without the approval or consent of Marilyn Erling. Because he could exercise his power over all income of the Trust, all disposition from the Trust during this period is taxable to him under section 671. Because section 674(a) answers the question of whom the trust disbursements are taxable to during this short period, the Director does not consider whether section 676(a) is applicable to the same period.

18.          As of August 27, 1975, Anna Schmidt resigned her position as trustee. From that date to the date of the hearing there were two trustees only, the Protestors. The section of subpart E applicable to this situation is section 677(a) which reads in relevant part:

Income for benefit of grantor.

(a) General rule. The grantor shall be treated as the owner of any portion of a trust...whose income without the approval or consent of any adverse party is, or, in the discretion of the grantor or a non- adverse party, or both, may be -

(1)          distributed to the grantor or the grantor's spouse; (2)          held or accumulated for future distribution to the grantor or the grantor's spouse; or (3)          applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor's spouse. ...

Also applicable to this period of time is Treas. Reg. 1.677(a)-1-(b) (2) which reads in relevant part:

(2) Property transferred in trust after October 9, 1969. With respect to property transferred in trust after October 9, 1969, the grantor is treated, under section 677, in any taxable year as the owner...of a portion of a trust of which the income for the taxable year or for a period not within the exception described in paragraph

(e) of this section is, or in the discretion of the grantor, or his spouse, or a non-adverse party, or any combination thereof (without the approval or consent of any adverse party other than the grantor's spouse) may be:

(i)          distributed to the grantor or the grantor's spouse; (ii)          held or accumulated for future distribution to the grantor or the grantor's spouse; or (iii)          applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor's spouse....

19.          The grantor, August Erling, and his wife were the sole trustees during the period under consideration. The trustees could only take actions agreed to by a majority. Neither party questions the statement that a majority of two trustees is two, and the Director accepts this as a fact. During this period, did August Erling, Jr. retain administrative powers over the Trust which were such that the possession of those powers requires that under section 677 and the Treasury rule previously quoted, the Protestors be taxed upon distributions from the Trust? The Director reasoned that he retained such powers. The grantor, August Erling, could, without the approval or consent of any adverse party, distribute income to himself and his wife, hold or accumulate that income for future distribution to himself or his wife, or apply the Trust income to the payment of premiums on policies of insurance on himself and his wife. The Director reasons that he could do this because, effectively speaking, as was previously mentioned, the powers of the trustees to dispose of Trust income are unlimited. It is not necessary that August Erling had made use of his powers to distribute such income in the manner previously mentioned. Under section 677, it is only necessary that he possess the power for section 671 to be applicable. However, it is a logical inference that the premiums on the policies which were transferred to the Trust were subsequently paid by proceeds from the Trust.

20.          At first glance it would seem that the requirement of the Treasury rule that the powers be exercisable without the approval or consent of any adverse party other than the grantor's spouse is in conflict with the statute which requires that the powers be exercisable only without the approval or consent of any adverse party. If the rule is in conflict with the statute, of course the statute must take precedent. However, the Director's research has revealed no challenge to the rule on that basis, and a close study of the statute indicates that the words "without the approval or consent of any adverse party other than the grantor's spouse" must be read into the statute to give it meaning and coherence. Since the rule places words in the statute under circumstances in which any judge could place those same words in the statute, Crawford v. Payne, 55 P.2d 1240 (Cal.App. 1936) and Haworth v. Chapman, 152 So. 663 (Florida 1934), the Director reasons that the regulation is not in conflict with the statute and may not be disregarded on that basis.

21.          In summary, the grantor, August Erling, between the dates of August 25, 1975 and December 31, 1976, possessed powers over income from the Trust which were such that under the provisions of section 677 and 671 I.R.C. and 422.7, The Code, he is to be treated as the "owner" of that income.

22.          The remaining issue in this case involves the deductibility or lack thereof under section 212 I.R.C. of the Protestors' payment of $2,000 to Educational Scientific Publishers. The Protestors assert that the payment is deductible; the Department asserts that it is not. Section 212 I.R.C. reads as follows:

In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year -

(1)          for the production or collection of income; (2)          for the management, conservation, or maintenance of property held for the production of income; or (3)          in connection with the determination, collection, or refund of any tax.

23.          In the Notice of Time, Place and Nature of Hearing, the parties were informed only that subparagraphs (1) and (2) of section 212 would be in issue. However, in their briefs, the parties have argued that the $2,000 expense is deductible or nondeductible under subparagraph (3) of that section. Therefore, the Director will determine whether the payment was made "in connection with the determination, collection, or refund of any tax."

24.          In the previously mentioned Morgan decision, the judge gave long and exhaustive consideration to whether a payment made for aid in establishing a trust almost exactly similar to this one was deductible under the provisions of section 212, subparagraphs (1) and (2). The judge determined that the payment was not deductible under those subparagraphs. See Morgan v. Comm'r, 37 T.C.M. 1661, 1666 (1978).Accord Johnson, supra, at 545. The judge's consideration of the matter is concise and complete and need not be paraphrased in this decision, except to say that it was held that expenditures for the purpose of changing title to property were not expenditures for the production or collection of income or for the management, conservation or maintenance of property held for the production of income. They were payments which changed title to property and ownership of income only rather than payments for the activities mentioned in section 212, subparagraphs (1) and (2). Regarding subparagraph (3), it is clear that the payments were not made for the collection or refund of any tax. The taxpayer bears the burden of bringing forth facts suitable to show entitlement to a deduction, Casey v. Comm'r, 54 T.C. 1642, 1650 (1950). It may be that some of the $2,000 paid to Educational Scientific Publishers was in fact used to determine that tax was owed or not owed by the Protestors to the state of Iowa or the federal government, as opposed to simply used to change title to property. However, there was no proof that any portion of the money was in fact used for this purpose. And before the Protestors are entitled to such a deduction, they must in fact prove that the money was used for the purpose of determining what tax, if any, was owed by them. Having not proved this, the $2,000 expense is not deductible under the provisions of section 212, subparagraph (3). Not being deductible under that subsection, it is not deductible under the provisions of section 422.7, The Code, and is therefore not deductible for the purposes of Iowa tax law.

IT IS THEREFORE ORDERED, in light of the above mentioned facts, law and reasoning, that the Department did not err in its assessment of additional income tax due and owing against the Protestors for the years 1975 and 1976. With respect then to the record developed by the parties, it is the belief of the Director that the evidence is more than substantial to support a factual and legal conclusion that the Department's assessment for the years under consideration was proper.

No affidavit has been filed by the Protestors under rule 730-7.9(17A) IAC justifying deletion of any information contained in the record prior to public inspection. The record is thus completely open to public inspection in accordance with sections 17A.3(a)(d), 68A.2 and 68A.7, The Code 1979.

The Director's decision is the final Order of the Department for purposes of judicial review pursuant to sections 17A.15(2) and 17A.19, Code of Iowa.

Done at Des Moines, Iowa, this 30th day of November, 1979.

IOWA DEPARTMENT OF REVENUE

G. D. Bair Director of Revenue