SAC Fin., Inc. v. Ind. Dep't of State Revenue

• Decision Date: 24 December 2014
• Docket Number: Nos. 49T10–1007–TA–34,49T10–1102–TA–11.,s. 49T10–1007–TA–34
• Citation: 24 N.E.3d 541
• Parties: SAC FINANCE, INC., Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.
• Court: Indiana Tax Court

24 N.E.3d 541

SAC FINANCE, INC., Petitioner

v.INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

Nos. 49T10–1007–TA–34

49T10–1102–TA–11.

Tax Court of Indiana.

Dec. 24, 2014.

Mark J. Richards, Matthew J. Ehinger, James R. Betley, Ice Miller LLP, Indianapolis, IN, Attorneys for Petitioner.

Gregory F. Zoeller, Attorney General of Indiana, John P. Lowrey, Deputy Attorney General, Indianapolis, IN, Attorneys for Respondent.

ORDER ON PARTIES' CROSS–MOTIONS FOR SUMMARY JUDGMENT

WENTWORTH, J.

This matter is before the Court on the parties' cross-motions for summary judgment regarding whether the calculation of Indiana's bad debt deduction excludes market discount income.¹ The Court finds that it does not.

FACTS AND PROCEDURAL HISTORY

The following facts are not in dispute. During the 2007, 2008, and 2009 tax years, Superior Auto, Inc., an automobile dealership with locations in Indiana, Ohio, and Michigan, sold cars to customers with poor or limited credit on a “buy here pay here” basis. (See Pet'r Des'g Evid., Aff. Walter W. Nims (“Nims Aff.”) ¶¶ 5–6; Resp't Des'g Evid., Confd'l Ex. 2 (“Resp't Confd'l Ex. 2”) at 3.) Superior Auto financed its customers' purchase prices of the cars as well as the applicable sales tax due pursuant to installment sale contracts. (See Nims Aff. ¶ 6; Pet'r Des'g Evid., Confd'l Aff. Steven L. Goldberg (“Goldberg Aff.”) at Ex. C.) Superior Auto then remitted sales tax on the full price of the car to the Department. (See Nims Aff. ¶ 6; Resp't Confd'l Ex. 2 at 4.)

Shortly after these sales, Superior Auto sold its installment sale contracts and assigned all its rights and obligations thereunder to SAC Finance, Inc., a related entity² with its principal place of business in Fort Wayne, Indiana. (See, e.g., Nims Aff. ¶ 6; Pet'r Confd'l Ex. 1, Ex. C at 3; Reply Supp. Resp't Cross–Mot. Summ. J. (“Resp't Reply Br.”) at 1–2; Resp't Confd'l Ex. 2 at 3.) SAC purchased the installment sale contracts without recourse for 70% of the amount originally financed. (See Nims Aff. ¶ 6; Resp't Confd'l Ex. 2 at 3.) In other words, SAC purchased the installment sale contracts at a 30% market discount from their face value. (See Nims Aff. ¶ 7; Resp't Confd'l Ex. 2 at 3.) Some of the installment sale customers subsequently defaulted on their contracts. (See Nims Aff. ¶ 12; Goldberg Aff. ¶ 7.)

SAC filed three claims with the Department seeking a refund of the Indiana sales tax that Superior Auto paid, but that upon default became an uncollectible receivable to SAC. (See Nims Aff. ¶¶ 13, 18.) After holding an administrative hearing, the Department issued a Letter of Findings that denied SAC 30% of each refund claim. (See Resp't Confd'l Ex. 2 at 4; Pet'r Am. Supp'l Pet. Original Tax Appeal, Exs. A–C.)

On July 16, 2010, SAC initiated an original tax appeal challenging the Department's partial denial of its 2007 and 2008 refund claims. On February 11, 2011, SAC initiated another appeal challenging the Department's partial denial of its 2009 refund claim. The Court subsequently consolidated the two appeals. On June 15, 2011, SAC filed a motion for summary judgment. The Department filed a cross-motion for summary judgment on November 3, 2011.³ The Court conducted a hearing on the parties' motions on January 13, 2012. Additional facts will be supplied as necessary.

STANDARD OF REVIEW

Summary judgment is proper when the designated evidence demonstrates that no genuine issues of material fact exist and the moving party is entitled to judgment as a matter of law. Ind. Trial Rule 56(C). “Cross-motions for summary judgment do not alter this standard.” SAC Fin., Inc. v. Indiana Dep't of State Revenue (SAC I), 894 N.E.2d 1116, 1118 (Ind. Tax Ct.2008) (citation omitted), review denied. The resolution of a case by summary judgment is particularly appropriate when, as here, the relevant facts are undisputed and only questions of statutory interpretation are at issue. See Whetzel v. Dep't of Local Gov't Fin., 761 N.E.2d 904, 908 (Ind. Tax Ct.2002).

LAW & ANALYSIS

Indiana allows a retail merchant to adjust the amount of sales tax it must remit to the Department on receivables that have been written off as uncollectible debt for federal income tax purposes under IRC § 166. See Ind.Code § 6–2.5–6–9 (2007). See also Ind.Code § 6–2.5–2–1 (2007). The issue before the Court is whether the calculation of a bad debt deduction under Indiana Code § 6–2.5–6–9 (the Indiana Bad Debt Statute) excludes market discount income, i.e. income accounted for under IRC §§ 1276 and 1278 (the Market Discount Rules).⁴ The resolution of this issue depends on: (1) whether SAC's use of the Market Discount Rules to calculate its adjusted basis in its uncollectible installment sale contracts under IRC § 166 was proper; and if so, (2) whether SAC's market discount income must be excluded under Indiana Code § 6–2.5–6–9.

(1)

SAC claims it is entitled to judgment as a matter of law because its use of the Market Discount Rules was proper. (See Pet'r Br. Supp. Pet'r Mot. Summ. J. (“Pet'r Br.”) at 9–18.) The Department contends, however, that SAC incorrectly used the Market Discount Rules because those Rules bypassed the mathematics of IRC § 166, were inapplicable according to IRC § 453B, and were unavailable because SAC failed to designate evidence to show that it complied with certain procedural prerequisites. (See Resp't Resp. Opp'n Per Mot. Summ. J. (“Resp't Resp. Br.”) at 9–18; Resp't Reply Br. at 2–3.)

IRC § 166

The Department first claims that SAC improperly calculated its Indiana bad debt deduction by using the Market Discount Rules instead of using the mathematics of IRC § 166. (See Resp't Reply Br. at 2–3.) As explained below, however, the Market Discount Rules are part of the mathematics of IRC § 166.

The Indiana Supreme Court has stated that the mathematics of IRC § 166 must be used when calculating an Indiana bad debt deduction under the Indiana Bad Debt Statute. Indiana Dep't of State Revenue v. 1 Stop Auto Sales, Inc., 810 N.E.2d 686, 689 (Ind.2004). IRC § 166 provides that “the basis for determining the amount of the deduction for any bad debt shall be the adjusted basis provided in [IRC] section 1011 for determining the loss from the sale or other disposition of property.” I.R.C. § 166(b) (2007). Thus, the mathematics of IRC § 166 depend on the content of other sections of the Internal Revenue Code.

IRC § 1011, in turn, refers to other sections of the Internal Revenue Code:

The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis (determined under section 1012 or other applicable sections of this subchapter [O] and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses)), adjusted as provided in section 1016.

I.R.C. § 1011(a) (2007) ; see also, e.g., Federal Home Loan Mortg. Corp. v. C.I.R., 121 T.C. 129, 135–36, 2003 WL 22053841 (2003) (explaining that IRC § 1011 generally requires the use of cost as the basis under IRC § 1012 unless an alternative basis rule under subchapter O, C, K, or P applies). The Market Discount Rules are contained in Subchapter P. See I.R.C. §§ 1276, 1278 (2007). Accordingly, SAC's use of the Market Discount Rules did not bypass the mathematics of IRC § 166, but was part of it.

The Department's Remaining Claims

The Department also claims that even if the mathematics of IRC § 166 includes the Market Discount Rules, SAC cannot properly use them to calculate its federal bad debt deduction for three alternative reasons. First, the Department claims that SAC may not use the Market Discount Rules because they apply only to “market discount bonds,” not installment sale contracts.⁵ (See Resp't Resp. Br. at 9–11.) Next, the Department claims that SAC cannot use the Market Discount Rules because IRC § 1278 excludes from the term “market discount bond” “[a]ny installment obligation⁶ to which [IRC] section 453B applies.”⁷ (See Resp't Resp. Br. at 12–13); I.R.C. § 1278(a)(1)(B)(iii) (footnotes added). Finally, the Department claims that SAC cannot use the Market Discount Rules because it failed to designate evidence showing that it made the required election on its federal tax returns to enable it to use them in calculating its adjusted basis for federal income tax purposes. (See Resp't Resp. Br. at 13–15.)

These arguments all require a determination of the validity of the federal bad debt calculation under IRC § 166. Nonetheless, the Court has previously stated that “[w]ith regard to federal income taxes, [the Indiana Bad Debt Statute] only requires that the bad debt be deducted for federal income tax purposes, not that the taxpayer demonstrate the validity of the deduction.” Chrysler Fin. Co. v. Indiana Dep't of State Revenue, 761 N.E.2d 909, 916 n. 17 (Ind. Tax Ct.2002) (emphasis and citation omitted), review denied. Therefore, the Court will not determine whether the federal bad debt calculation is correct.

(2)

Having decided that SAC's use of the Market Discount Rules to calculate its federal bad debt deduction under IRC § 166 was proper, the Court turns to whether the Indiana Bad Debt Statute excludes SAC's market discount income from the Indiana bad debt calculation. The Indiana Bad Debt Statute, in relevant part, states

(a) In determining the amount of [sales] and use taxes to which a retail merchant must remit under [Indiana Code § 6–2.5–6–7 ], the retail merchant shall, subject to subsections (c)⁸ and (d), deduct from the retail merchant's gross income from retail transactions made during a particular reporting period, an amount equal to the retail merchant's receivables which ... were written off as uncollectible debt for federal tax purposes under [IRC § 166 ] during the particular reporting period.

* * * * *

(d) The following provisions apply to a deduction for a receivable treated as uncollectible debt under subsection (a):

(1) The deduction does not include interest.

(2)

...