State v. Sproles, 47S00-9512-CV-1348

Citation672 N.E.2d 1353
Decision Date08 November 1996
Docket NumberNo. 47S00-9512-CV-1348,47S00-9512-CV-1348
PartiesSTATE of Indiana, Appellant (Cross-Defendant Below), v. Stephen Alan SPROLES, Appellee (Cross-Plaintiff Below). Linda Lee Connors and Jo Ellen Roach, Appellees (Plaintiffs Below).
CourtSupreme Court of Indiana

Pamela Carter, Attorney General of Indiana, David A. Arthur, Deputy Attorney General, Office Of Attorney General, Indianapolis, for Appellant.

Nick J. Herthel, Bedford, for Appellee.

BOEHM, Justice.

This case presents the question whether courts of general jurisdiction may entertain a claim that a tax administered by the Department of State Revenue is unconstitutional. 1 No case has considered this question since the creation of the Indiana Tax Court in 1986. We hold that taxpayers must invoke administrative remedies to bring such challenges, and that once these remedies have been pursued judicial review may be sought only in the Tax Court.

I. Factual & Procedural Background

Generally, this case involves a fact pattern becoming familiar to this Court: arrest and prosecution of the taxpayer under the criminal laws for illegal possession of a controlled substance, and taxation of the controlled substance by the Department, followed by a constitutional challenge to one or both of the penalties on double jeopardy grounds. See, e.g., Bryant v. State, 660 N.E.2d 290 (Ind.1995). 2

In this case, the Department of State Revenue served cross-plaintiff Stephen A. Sproles, an Indiana resident, with a Record of Jeopardy Finding, Jeopardy Assessment Notice and Demand on April 12, 1993. 3 R. at 15. Acting under the CSET, the Department sought to collect unpaid taxes and penalties in the amount of $154,996 for Sproles' possession of a controlled substance. R. at 15. Two days later, on April 14, 1993, the State charged Sproles in Lawrence Circuit Court with two counts of possessing marijuana 4 and one count of maintaining a common nuisance, 5 in this case both Class D felonies. R. at 17. Sproles pleaded guilty on August 16, 1993 to one count of marijuana possession and was later sentenced to 18 months in jail with all but 180 days suspended. R. at 19-21.

The tax code outlines the administrative steps taxpayers can take to protest a listed tax assessment. IND.CODE § 6-8.1-5-1 (1993). In accordance with these procedures, on May 13, 1993 Sproles filed a timely protest of the CSET assessment and requested an administrative hearing. R. at 55-61. As of May 11, 1994, Sproles still had not received a hearing on his protest. 6 R. at 55-56. Meanwhile, the Department recorded a judgment lien against Sproles on April 14, 1993 in the Lawrence Circuit Court Clerk's Office, which clouded title to all of Sproles' real estate interests. R. at 18. At the time the CSET was levied against him, Sproles owned property as tenant in common with plaintiffs Jo Ellen Roach and Linda Lee Connors. 7 R. at 5.

On September 29, 1993 Connors and Roach filed an action in the Lawrence Circuit Court to partition this property. R. at 5. The State, through the Department, became a defendant by virtue of the Department's tax lien against Sproles. R. at 1-5. Apparently impatient with the Department's delay in responding to his protest, on April 4, 1994 Sproles filed a cross-claim against the State in the partition action seeking declaratory relief based on several state and federal constitutional violations. R. at 11-14. On October 21, 1994, the Lawrence Circuit Court issued a declaratory judgment that the CSET, as applied to Sproles, violated the Double Jeopardy Clause of the Fifth Amendment to the U.S. Constitution. R. at 115-16. No ruling was made on the other constitutional claims. The State asserted in its briefs opposing Sproles' motion that the trial court lacked jurisdiction to hear the constitutional claims, but the trial court did not address this contention in its order or otherwise explain the basis of its jurisdiction. R. at 8-9, 115-16. The State timely appealed this judgment to the Court of Appeals, which transferred the case to this Court under Indiana Appellate Rule 15(M). We have exclusive jurisdiction to adjudicate this appeal because a state statute has been declared unconstitutional. App.R. 4(A)(8).

II. Issue Presented

The question before us today is one of first impression: must a taxpayer pursue statutory remedies in order to challenge a listed tax as violating the U.S. Constitution, or may the taxpayer bypass the Tax Court and administrative remedies by filing an action in a circuit court? The threshold question is the jurisdiction of the circuit court: "When confronted with what appears to be a constitutional claim, a tribunal must first determine for itself that it has the judicial authority to litigate it." Board of Com'rs v. Kokomo City Plan Com'n, 263 Ind. 282, 330 N.E.2d 92, 95 (1975). Although circuit courts are presumed to have subject-matter jurisdiction, Mishler v. County of Elkhart, 544 N.E.2d 149, 151 (Ind.1989), "Indiana courts have only such jurisdiction as is granted to them by our Constitution and statutes." Carpenter v. State, 266 Ind. 98, 360 N.E.2d 839, 841 (1977). Circuit courts have original jurisdiction in all civil cases "except where exclusive jurisdiction is conferred by law upon other courts of the same territorial jurisdiction." IND.CODE § 33-4-4-3(a)(1993). The Tax Court's territorial jurisdiction over tax protests and appeals is statewide. IND.CODE § 33-3-5-2 (1993). Accordingly, if the Tax Court's jurisdiction over such claims is exclusive, then the Lawrence Circuit Court had no authority to entertain Sproles' declaratory relief action unless taxpayers may bypass available administrative remedies altogether.

III. Creation & Jurisdiction of the Tax Court

In an effort to channel tax disputes to a specialized tribunal, the Indiana Legislature created the Tax Court in 1986. See IND.CODE §§ 33-3-5-1 to 33-3-5-20 (1993 & Supp.1996). The Tax Court's enabling statute declares that the Tax Court "has exclusive jurisdiction over any case that arises under the tax laws of this state and that is an initial appeal of a final determination" of the Department or Board of Tax Commissioners. IND.CODE § 33-3-5-2(a)(1993). Therefore, if two prerequisites are met, the Tax Court has exclusive jurisdiction. 8 First, the case must "arise under" the tax laws. This is a term with a substantial judicial history. Federal courts have subject-matter jurisdiction over cases "arising under" the Constitution, laws, or treaties of the United States. 28 U.S.C. § 1331 (1994). We recognize that federal doctrine generally follows the well-pleaded complaint rule of Louisville & Nashville R.R. Co. v. Mottley, 211 U.S. 149, 29 S.Ct. 42, 53 L.Ed. 126 (1908), which requires that the claim be based on federal law to confer jurisdiction under § 1331. Or, as Justice Oliver Wendell Holmes concisely stated shortly after Mottley, "a suit arises under the law that creates the action." 9 Since Mottley, the U.S. Supreme Court in several decisions has wrestled with when a case arises under federal law. 10 However, as several commentators have remarked, a precise understanding of this term has eluded judicial definition. 11 Assuming the Holmes test is the jurisdictional "core" of § 1331, the penumbra of federal-question jurisdiction remains somewhat opaque.

If we were to apply the Mottley rule here, the Tax Court would not have subject-matter jurisdiction because Sproles' claim is grounded on the United States Constitution, 12 and not on an Indiana tax statute. Although some authority would arguably permit Sproles' constitutional challenge to fit into the outer contours of federal "arising under" jurisprudence, we need not undertake that exercise. We decline to adopt the more restrictive federal doctrine in construing the Tax Court's jurisdictional statute. As commentators and the Tax Court itself have noted, the policy underlying creation of the Tax Court was to consolidate tax-related litigation in one court of expertise. 13 This legislative purpose dictates a broader construction of the Tax Court's enabling statute than we would reach under federal guidelines. We believe the Legislature intended that all challenges to the tax laws--regardless of the legal theory relied on--be tried in the Tax Court. Accordingly, we hold that for purposes of § 33-3-5-2 a case "arises under" the tax laws if: 1) an Indiana tax statute creates the right of action; or 2) the case principally involves collection of a tax or defenses to that collection. Although Sproles' claim is based on the Constitution of the United States, his declaratory relief action squarely challenges the validity of an Indiana tax statute as applied.

In addition to the "arise under" test, the exclusive jurisdiction of the Tax Court under IND.CODE § 33-3-5-2(a) has a second requirement. To be governed by that section, the original tax appeal must also be from the Department's "final determination" that the listed tax is owed. A taxpayer receives a final determination in one of two ways. The taxpayer can pay the tax, request a refund, and sue in the Tax Court if the request is denied. IND.CODE § 6-8.1-9-1 (1993). Alternatively, the taxpayer can protest the listed tax at the assessment stage and appeal to the Tax Court from a letter of findings denying the protest. IND.CODE § 6-8.1-5-1 (1993). Both remedies may be pursued simultaneously. IND.CODE § 6-8.1-9-1(c)(1993). The Legislature codified the latter procedure in 1993 even though the Tax Court commonly adjudicated appeals from a letter of findings before that time. See 1996 Ind. Acts, P.L. 71, § 17, codified at IND.CODE § 6-8.1-5-1(g) & (h)(1993); GasAmerica Services, Inc. v. Dept. of Revenue, 552 N.E.2d 860 (Ind.Tax 1990)(assuming letter of findings was "final determination" but holding refund statute to be exclusive remedy where tax was already paid). In addition to administrative relief that is ultimately reviewable by the Tax Court, taxpayers who have initiated an...

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