Blalock v. Miss. Dep't of Revenue (In re Blalock)

• Decision Date: 14 September 2015
• Docket Number: ADV. PROC. NO. 15–00029–NPO,CASE NO. 15–01281–NPO
• Citation: 537 B.R. 284
• Parties: In re: Anthony Wayne Blalock, Debtor. Anthony Wayne Blalock, Plaintiff v. Mississippi Department of Revenue, Defendant
• Court: U.S. Bankruptcy Court — Southern District of Mississippi

537 B.R. 284

In re: Anthony Wayne Blalock, Debtor.Anthony Wayne Blalock, Plaintiff

v.Mississippi Department of Revenue, Defendant

CASE NO. 15–01281–NPO

ADV. PROC. NO. 15–00029–NPO

United States Bankruptcy Court, S.D. Mississippi.

Signed September 14, 2015

James G. McGee, Jr., Law Office of James G. McGee, Jr. PLLC, Jackson, MS, for Plaintiff.

Lara E. Gill, Mississippi Department of Revenue, Jackson, MS, for Defendant.

MEMORANDUM OPINION AND ORDER GRANTING MISSISSIPPI DEPARTMENT OF REVENUE'S MOTION TO DISMISS ADVERSARY COMPLAINT, OR, IN THE ALTERNATIVE MOTION FOR SUMMARY JUDGMENT

Judge Neil P. Olack, United States Bankruptcy Judge

This matter came before the Court at a hearing held on July 15, 2015 (the “Hearing”) on the Mississippi Department of Revenue's Motion to Dismiss Adversary Complaint, or, in the Alternative, Motion for Summary Judgment (the “Motion”) (Adv.Dkt. No. 6)¹ filed by the Mississippi Department of Revenue (the “MDOR”); Mississippi Department of Revenue's Memorandum of Authorities in Support of Motion to Dismiss (the “MDOR's Brief”) (Adv. Dkt. No. 7) filed by the MDOR; Debtor/Plaintiff's Response in Opposition to Mississippi Department of Revenue's Motion to Dismiss, or, in the Alternative, Motion for Summary Judgment (the “Response”) (Adv.Dkt. No. 38) filed by the debtor, Anthony Wayne Blalock (the “Debtor”); Debtor/Plaintiff's Brief in Opposition to Mississippi Department of Revenue's Motion to Dismiss, or, in the Alternative, Motion for Summary Judgment (the “Debtor's Brief”) (Adv.Dkt. No. 44) filed by the Debtor; and Mississippi Department of Revenue's Reply to Debtor's Response in Opposition to Motion to Dismiss or, in the Alternative, Motion for Summary Judgment (the “MDOR's Reply Brief”) (Adv.Dkt. No. 45) filed by the MDOR in the Adversary.

At the Hearing, the MDOR was represented by Lara E. Gill, and the Debtor was represented by James G. McGee, Jr. At the conclusion of the Hearing, counsel for the Debtor asked the Court's permission to submit additional legal authorities addressing an alleged ambiguity in Mississippi law regarding the Debtor's obligation to file individual income tax returns. The Court granted his request, and the Debtor's counsel submitted a letter brief (the “Debtor's Letter Brief”) (Adv.Dkt. No. 48) on July 17, 2015. Having considered the matter and being fully advised in the premises, the Court finds as follows:²

Jurisdiction

This Court has jurisdiction over the parties to and the subject matter of the Adversary pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) and (b)(2)(K). Moreover, 11 U.S.C. § 505(a) confers jurisdiction on this Court to determine the tax disputes in the Adversary. See Fugitt v. Miss. Dep't of Revenue (In re Fugitt) (Fugitt I), No. 13–00098–NPO, 2014 WL 3888281, at *8–12 (Bankr.S.D.Miss. Aug. 8, 2014). Notice of the Motion was proper under the circumstances.

Facts

For purposes of the Motion, the Court reviews the facts and inferences to be drawn from them in the light most favorable to the nonmoving party. See Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co., 336 F.3d 410, 412 (5th Cir.2003).

1. The Debtor owns and operates Blalock's Refrigeration in Liberty, Mississippi. The Debtor services and installs air conditioning and refrigeration units (Debtor Ex. A). He operates Blalock's Refrigeration as a sole proprietorship, and the business is located at his personal residence.

2. The Debtor has never filed a state sales tax return with the MDOR³ or paid state sales taxes. Since 2004, he has not filed a state income tax return or paid state income taxes. (MDOR Ex. 3).

3. The Debtor pays sales taxes to the suppliers of any parts and units that he purchases at retail, but he does not charge customers sales taxes for parts or services.

4. The Debtor testified by affidavit that as a routine business practice, he borrowed money from his father, Aubrey Blalock, to pay his suppliers for air conditioning and refrigerator parts and units. (Debtor Ex. A). The loans purportedly were the result of an informal agreement between the Debtor and his father, and there are no documents or other paperwork evidencing their existence. The MDOR produced the Debtor's testimony at the meeting of creditors held pursuant to 11 U.S.C. § 341 to show that his father paid the Debtor for parts and services that he provided to his father. Thus, the deposits in his bank account from his father were either loans or payments for parts and services.

5. With respect to the purported loans, the Debtor testified in his affidavit that the suppliers of the air conditioning and refrigerator parts and units required him to pay on a “COD” or “cash on delivery” account basis. (Debtor Ex. A). As he further explained in his affidavit, upon delivery of a part or unit, the Debtor wrote a check to the supplier on his account that included payment of a sales tax. According to the Debtor, he then charged the customer for repair and/or installation services and the cost of the part or unit purchased from the supplier, but he did not charge or collect any sales tax. If the customer had not yet paid the Debtor when the supplier delivered the part or unit, the Debtor testified that his father loaned him the funds necessary to cover the amount of the check written to the supplier. The Debtor maintained that he, in turn, wrote a check made payable to his father in the amount of the loan, but his father would not deposit the check immediately. Instead, his father waited to deposit the check until the customer him, according to the Debtor. The Debtor further testified by affidavit that “this process ... created the illusion that there were more taxable deposits than actually received by Blalock's Refrigeration.” (Debtor Ex. A). His father submitted an affidavit that supported the Debtor's testimony regarding the purported loans. (Debtor Ex. B).

6. The MDOR disputes the Debtor's affidavit testimony that he received any loans from his father. According to the MDOR, out of all of the transactional items introduced into evidence by the Debtor, there is no check made payable to the Debtor's father that would indicate repayment of a loan. (Debtors Exs. P–T).

7. The Debtor applied for a Mississippi sales tax permit (the “Sales Tax Permit”) (MDOR Ex. 1) on May 14, 2009. See Miss. Code Ann. § 27–65–27 (requiring any person who engages in any business that will subject such person to a privilege tax to apply for a permit). In the application, the Debtor certified that:

I hereby apply for the appropriate permit(s) to engage in business. I agree to pay any and all taxes due the State of Mississippi and to comply fully in all respects with the applicable Mississippi Tax Laws and any corresponding rules and regulations.

(MDOR Ex. 1). The Debtor's stated purpose for applying for the Sales Tax Permit was to enable him to purchase air conditioning and refrigerator parts and units at wholesale without having to pay sales taxes to suppliers. (Debtor Ex. A). He never fulfilled this purpose. Although he was issued a Sales Tax Permit, he did not begin charging his customers a sales tax, with limited exceptions, but he did continue paying a sales tax on purchases from suppliers. There is a remark in the audit and work papers of Stephanie Parks (“Parks”), an accountant employed by the MDOR, that the Debtor never registered for the Sales Tax Permit. (MDOR Ex. 3). Considering that both the application for the Sales Tax Permit (MDOR Ex. 1) and the Notice of Intent to Revoke Sales Tax Permit (MDOR Ex. 17) issued by the MDOR appear in the record, the Court finds in favor of the Debtor that he did apply for and obtain a Sales Tax Permit.

8. The MDOR began its first audit of the Debtor for sales taxes and individual income taxes on July 14, 2009. (MDOR Exs. 3 & 4).

Sales Taxes

9. The Debtor was audited by the MDOR for sales taxes for the periods of January 1, 2005 through December 31, 2008; January 1, 2009 through July 31, 2009; and August 1, 2009 through December 31, 2011. (MDOR Exs. 2–8, 10–13, 15–16, 18–25 & 27). These audits were conducted in conjunction with the individual income tax audits, and some of the correspondence to the Debtor pertains to both audits. (MDOR Exs. 2, 10–11, 13, 18, 21 & 22).

10. MDOR's auditors used the cash flow method⁴ for the Debtor's sales tax assessments. (MDOR Exs. 2–8, 12, 19–24); Miss. Code Ann. § 27–65–23.

11. As a result of the audits, the MDOR determined that the Debtor had failed to report taxable sales during the period of January 1, 2005 through December 31, 2011.

12. For the periods of January 1, 2005 through December 31, 2008, and January 1, 2009 through July 31, 2009, Parks conducted the sales tax audit of the Debtor (MDOR Exs. 4–10 & 12), and for the period of August 1, 2009 through December 31, 2011, Keri Davis (“Davis”), an accountant employed by the MDOR, conducted the audit. (MDOR Exs. 18 & 19).

Sales Tax Audit: Jan. 1, 2005–Dec. 31, 2008 & Jan. 1, 2009–July 31, 2009

13. Parks notified the Debtor in a letter dated June 9, 2009 that a sales tax examination had been initiated for the period beginning January 1, 2005. (MDOR Ex. 2).

14. Parks met in person with the Debtor's accountant, John H. Steele (“Steele”), on July 14, 2009. At that meeting, Steele gave Parks copies of bank statements, purchase invoices, and sales invoices, but did not provide all of these documents for the audit period. Afterwards, Parks contacted Steele requesting the remaining records. (MDOR Ex. 3).

15. When she did not receive the additional information, Parks sent a letter dated September 3, 2009 to the Debtor and Steele with an attached copy of the Sales Tax Audit of Blalock's Refrigeration (MDOR Exs. 10 & 11). Parks explained in her letters that “[e]stimates have been made due to the lack of records provided by the taxpayer” and that she was sending them the Sales Tax Audit “since there has been no response to my telephone calls or emails requesting the remaining records.” (Id. ). She...