EDWARD J. KOVARIK, Plaintiff-Appellant,
IOWA DEPARTMENT OF REVENUE, Defendant-Appellee.
from the Iowa District Court for Howard County, Margaret L.
taxpayer challenges orders by the Iowa Department of Revenue
denying him relief under the Iowa Tax Amnesty Act of 2007 and
disallowing business losses claimed in four tax years.
E. Schoeberl of Story Schoeberl & Seebach, LLP, Cresco,
J. Miller, Attorney General, and Hristo Chaprazov, Assistant
Attorney General, for appellee.
by Tabor, P.J., and Mullins and Bower, JJ.
tax amnesty was a costly move for Edward Kovarik. He
petitioned under the Iowa Tax Amnesty Act of 2007 and
attached his state returns for 2003 through 2006. The Iowa
Department of Revenue (the department) not only denied
amnesty but disallowed deductions claimed for business
expenses on the attached returns. Kovarik unsuccessfully
pursued an administrative remedy and judicial review. He
continues to challenge the revenue department decisions in
the district court, we conclude the department correctly
denied amnesty, finding Kovarik failed to file his 2002
return and owed outstanding obligations from the four
following years. We also agree Kovarik must repay amounts he
improperly deducted as "hobby losses" in those tax
Facts and Prior Proceedings
grew up on an eighty-acre farm near Elma, Iowa. In his youth,
Kovarik helped out on the acreage and joined clubs such as
4-H and Future Farmers of America. But after high school he
left rural Iowa. He attended college in Washington, D.C. and
served in the United States Navy from 1956 to 1960.
spent his career in the railway industry. Because his work
involved transfers around the country, Kovarik ended up
owning two condominiums-one in Forest Park, Georgia, and one
in Roanoke, Virginia. Kovarik retired in 1990 and returned to
Iowa. In his retirement, Kovarik continued to do consulting
as a freight car inspector. At first, he lived with his
sister and her husband in Marion. When his brother who stayed
on the farm died in 2003, Kovarik stepped in to manage the
family's land. Kovarik moved back to Howard County in
year later, our legislature enacted the Iowa Tax Amnesty Act
of 2007. 2007 Iowa Acts ch. 177. The program opened a narrow
window for taxpayers to meet delinquent liabilities with
fifty-percent less interest and no penalties. The program was
available to taxpayers who had "tax liabilities
delinquent as of December 31, 2006, including tax due on
returns not filed, tax liabilities owed to the department as
of December 31, 2006, or tax liabilities not reported nor
established but delinquent as of December 31, 2006."
Id. § 3. Taxpayers could apply for amnesty from
September 4 through October 31, 2007. Id.
applied on the last day. In his October 31 application, he
checked a box stating: "Return has not been filed."
Kovarik attached his unfiled return for tax year 2006 and the
amount due of $299.15 (including $293 in taxes and $6.15
representing "one-half interest"). He also attached
copies of his filed tax returns for 2003, 2004, and
2005-stating he owed no additional tax for those years.
November 9, the revenue department notified Kovarik his
amnesty request was under review. For its review, the
department needed information about his failure to file a
2002 Iowa tax return. The department also sought documentation
to verify the expenses Kovarik claimed on his filed tax
returns. The department set a fifteen-day deadline for
Kovarik to respond.
department awaited Kovarik's response to its inquiry
about the unfiled 2002 return, it began scrutinizing his 2003
through 2006 filed returns. There, the department
"discovered a pattern of substantial losses and little
or no income being reported on them," according to
investigator Schutt. Kovarik had reported losses for his
railway consulting business, condominium rentals, and the
some back and forth with Kovarik, the department denied his
request for tax amnesty in late November 2007. The department
reasoned Kovarik did not qualify for amnesty because he did
not file a 2002 Iowa individual income tax return. The
department also disallowed Kovarik's claimed business
losses for 2003 through 2006. As a result, the department
assessed Kovarik additional income tax, penalty, and interest
for those four years totaling $13, 182.98.
filed an unsuccessful protest. An administrative law judge
(ALJ) affirmed the denial of amnesty and found the additional
assessment to be "essentially correct." The ALJ
noted the "unpaid tax liability" from 2003 through
2007 provided the department "an additional basis for
denial of Kovarik's application for amnesty." The
ALJ's proposed order directed the department to revise
the assessment to allow Kovarik to deduct expenses related to
his rental of the tillable farmland. The department's
director affirmed the ALJ's proposed order. Kovarik
sought judicial review. The district court affirmed the
director's final order. Kovarik now appeals the judicial
Scope and Standards of Review
Iowa Administrative Procedure Act governs our review. Iowa
Code § 17A.19(10) (2017); Nance v. Iowa Dep't of
Revenue, 908 N.W.2d 261, 267 (Iowa 2018) (citing
Lange v. Iowa Dep't of Revenue, 710 N.W.2d 242,
246 (Iowa 2006)). In reviewing the judicial review order, we
act in the same appellate capacity as the district court.
Nance, 908 N.W.2d at 267. If we reach the same
conclusions as the district court did about the agency action
under the administrative standards, we affirm. Id.
Otherwise we reverse. Id.
different standards are at play here. The first question is
whether substantial evidence supported the department's
action. See Iowa Code § 17A.19(10)(f). Evidence
is substantial if its quantity and quality "would be
deemed sufficient by a neutral, detached, and reasonable
person, to establish the fact at issue when the consequences
resulting from the establishment of that fact are understood
to be serious and of great importance." Id.
§ 17A.19(10)(f)(1). When we assess the evidentiary
support for the agency's fact findings, we consider proof
detracting from those findings, as well as evidence in
support of them. Nance, 908 N.W.2d at 267 (citing
Lange, 710 N.W.2d at 247). We defer to credibility
determinations by the "presiding officer" who had
an opportunity to observe the demeanor of the witnesses.
Id. (citing Lange, 710 N.W.2d at 247);
see also Iowa Code § 17A.19(10)(f)(3).
second question is whether the department properly applied
the law to the facts-an application vested in the
department's discretion. See Nance, 908 N.W.2d
at 267. So we only reverse the department's application
of the law to the facts if we determine the application was
"irrational, illogical, or wholly unjustifiable."
See id. (citing Iowa Ag Constr. Co. v. Iowa
State Bd. of Tax Review, 723 N.W.2d 167, 174 (Iowa
2006)); see also Iowa Code § 17A.19(10)(m).
third question involves a constitutional challenge. We review
de novo the taxpayer's claim the department violated his
right to due process by not allowing him enough time to show
he was eligible for tax amnesty. See ABC Disposal Sys.,
Inc. v. Dep't of Nat. Res., 681 N.W.2d 596, 605
first contests the denial of his application for tax amnesty.
Before addressing his points of contention, we pause to
consider the purpose ...