Von Erdmannsdorff v. Ind. Dep't of State Revenue
| Decision Date | 03 June 2016 |
| Docket Number | No. 49T10–1112–TA–00093.,49T10–1112–TA–00093. |
| Parties | John and Sylvia VON ERDMANNSDORFF, Petitioners, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent. |
| Court | Indiana Tax Court |
Randal J. Kaltenmark, Ziaaddin Mollabashy, Barnes & Thornburg LLP, Indianapolis, IN, Attorneys for Petitioners.
Gregory F. Zoeller, Indiana Attorney General, Jessica R. Gastineau, Andrew T. Grein, Kyle C. Fletcher, Deputy Attorneys General, Indianapolis, IN, Attorneys for Respondent.
, J.
John and Sylvia von Erdmannsdorff challenge the Indiana Department of State Revenue's assessments of adjusted gross income tax (AGIT) for the 2000 through 2009 tax years (“years at issue”). The matter is currently before the Court on the Department's Motion for Summary Judgment and the von Erdmannsdorffs' Counter–Motion for Partial Summary Judgment.2 The Court consolidates and restates the issues as follows:
Upon review, the Court finds in favor of the von Erdmannsdorffs.
During the years at issue, the von Erdmannsdorffs were Indiana residents and thus were required to report their annual incomes and losses on Indiana income tax returns. Mrs. von Erdmannsdorff did not work outside of the couple's home. (Pet'rs' Des'g Evid., App. 6, Ex. 4–P ¶ 5.) Mr. von Erdmannsdorff, however, owned and operated a sole proprietorship, known as “Von's Shops,” and a real property rental business.
Between 2000 and 2006, Von's Shops conducted its business from two separate sites that were located on the same street in West Lafayette, Indiana. (See Pet'rs' Des'g Evid., App. 6, Ex. 4–P ¶ 6.) One site, which was comprised of a single building, sold comic books and rented VHS movies. (See Pet'rs' Des'g Evid., App. 6, Ex. 4–P ¶¶ 6, 9, 11.) The other site, which consisted of the first floor, basement, and attic of four interconnected buildings, sold new and used books, music in vinyl and CD formats, VHS and DVD movies, beads, greeting cards, and a variety of other items. This site also offered VHS and DVD movies for rent from 2006 to 2009.
Mr. von Erdmannsdorff's rental business was comprised of a single commercial building and one or more buildings that contained four residential apartment units. (See Pet'rs' Des'g Evid., App. 6, Ex. 4–P ¶ 7.) In operating this business, Mr. von Erdmannsdorff leased the properties to his tenants, but did not provide any additional services in connection with those leases. (Pet'rs' Des'g Evid., App. 6, Ex. 4–P ¶ 7.)
In January of 2010, the Department informed the von Erdmannsdorffs that it intended to conduct an income tax audit of Von's Shops for the 2007 and 2008 tax years. (See Resp't Des'g Evid., Ex. C, Stip. Facts ¶ 3, Ex. 1–J.) The Department discovered that the von Erdmannsdorffs had not filed any federal or state income tax returns and expanded its audit to include all of the years at issue. (See Resp't Des'g Evid., Ex. C, Stip. Facts ¶ 7, Ex. 11–J at 45–46.) Subsequently, the Department issued an Investigation Summary to the von Erdmannsdorffs explaining that it had used the best information available to calculate their Indiana AGIT liabilities because the von Erdmannsdorffs had not completed their federal income tax returns nor provided any inventories of Von Shop's for the years at issue. (See Resp't Des'g Evid., Ex. C, Stip. Facts ¶ 16, Ex. 12–J at 66–72.) To determine the annual profit of Von's Shops the Department used, among other things, a sporting goods-hobby-book-music store's sales financial ratio of 56.48% that it derived from BizStats3 as an estimate of Von's Shops' cost of goods sold. (See Resp't Des'g Evid., Ex. C, Stip. Facts ¶¶ 9, 16, Ex. 3–J at 4, Ex. 12–J at 69.) Then, on October 26, 2010, the Department issued BIA Assessments to the von Erdmannsdorffs in the amount of $244,686.87 for additional AGIT, interest, and penalties. (See Resp't Des'g Evid., Ex. C, Stip. Facts ¶ 17, Ex. 13–J.)
On December 9, 2010, the von Erdmannsdorffs filed a protest and provided the Department with copies of 1) their 2000 through 2009 federal and state income tax returns and supporting workpapers prepared by a Lafayette, Indiana CPA firm, 2) two inventories of Von's Shops, and 3) several credit card statements. The von Erdmannsdorffs asserted that their own estimates of the cost of goods sold for Von's Shops, which were derived from a reconciliation of their inventories of Von's Shops as of January 1, 2000,4 and January 1, 2010,5 demonstrated that they did not owe the tax, interest, or penalties assessed. (See Pet'rs' Des'g Evid., Stip. Facts ¶ 18, Ex. 14–J at 96–97.) On July 20, 2011, after conducting a hearing, the Department issued a Letter of Findings upholding the BIA Assessments in their entirety. (See Resp't Des'g Evid., Ex. C, Stip. Facts ¶¶ 21, 23, Ex. 18–J at 517–22.) The von Erdmannsdorffs subsequently requested a rehearing, which the Department denied on October 20, 2011.
On December 16, 2011, the von Erdmannsdorffs initiated an original tax appeal. On September 14, 2015, the Department filed its Motion and designated, among other things, the BIA Assessments as evidence. The von Erdmannsdorffs filed their Counter–Motion and designated evidence on October 29, 2015. The Court held a hearing on March 16, 2016, during which it granted the von Erdmannsdorffs' request to take judicial notice of several items that included a C–Span video profiling Von's Shops and the case of United States v. Montgomery, 747 F.3d 303 (5th Cir.2014)
. (See Hr'g Tr. at 3 –4, Mar. 16, 2016; Pet'rs' Des'g Evid., App. 13, Exs. 11–P to 11–P(Z).) The Court also heard argument on the von Erdmannsdorffs' motions to strike, which ultimately were resolved in a separate order. (See, e.g., Hr'g Tr. at 4 –23.) Additional facts will be supplied as necessary.
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)
. A genuine issue of material fact exists when a fact concerning an issue that would dispose of the case is in dispute or when the undisputed facts support conflicting inferences as to the resolution of an issue. Miller Pipeline v. Indiana Dep't of State Revenue, 995 N.E.2d 733, 734 n. 1 (Ind.Tax Ct.2013).
During the years at issue, Indiana imposed a tax at the rate of 3.4% on the adjusted gross income of residents like the von Erdmannsdorffs. See Ind.Code § 6–3–2–1(a) (2000)
. In so doing, Indiana incorporated by specific reference certain provisions of the Internal Revenue Code and its related regulations by defining adjusted gross income under IRC § 62 as the starting point for calculating an individual's Indiana adjusted gross income. See Ind.Code § 6–3–1–3.5(a) (2000) (amended 2002). IRC § 62 provides that the term “adjusted gross income” means gross income minus certain “above-the-line deductions.” See I.R.C. § 62(a)(1), (3), (4) (2000). The Internal Revenue Code further provides that “gross income” includes “all income from whatever source derived [,]” unless the income is expressly excluded. See I.R.C. § 61(a) (2000) ; Subaru–Isuzu Auto., Inc. v. Indiana Dep't of State Revenue, 782 N.E.2d 1071, 1075 (Ind. Tax Ct.2003) ().
When, as here, the Department has moved for summary judgment and properly designated its BIA Assessments as evidence, it has made a prima facie case that there is no genuine issue of material fact regarding the validity of the assessed tax. See Indiana Dep't of State Revenue v. Rent–A–Center E., Inc., (RAC II), 963 N.E.2d 463, 466–67 (Ind.2012)
. Consequently, the burden to produce evidence that demonstrates that there is, in actuality, a genuine issue of material fact with respect to the assessed tax has shifted to the von Erdmannsdorffs. See
id. at 467. To that end, the von Erdmannsdorffs contend that their estimates for the cost of goods sold of Von's Shops successfully rebut the statutorily prescribed presumption of correctness afforded to the Department's BIA Assessments. (See Pet'rs' Br. Opp'n Resp't Mot. Summ. J. & Supp. Pet'rs' [Counter-]Mot. Partial Summ. J. (“Pet'rs' Br.”) at 21–28, 31–36.)
The Department, on the other hand, maintains that because Indiana Code § 6–8.1–5–4(a)
requires taxpayers to contemporaneously prepare and maintain accurate books and records, the von Erdmannsdorffs' estimates, which were generated after the years at issue, are unsubstantiated and are based “on guesses originating from decade-old memories[,]” which simply cannot rebut its BIA Assessments. (See Resp't Br. Supp. Resp't Mot. Summ. J. (“Resp't Br.”) at 6–9, 11–13; Resp't Reply Br. at 3–5; Hr'g Tr. at 90–93.) The Department also claims that Allied Collection Service, Inc. v. Indiana Department of State Revenue, 899 N.E.2d 69 (Ind.Tax Ct.2008) supports its position by indicating that the Court may disregard untrustworthy estimates, like the von Erdmannsdorffs', in their entirety. (See Hr'g Tr. at 37 –42.)
provides that taxpayers “must...
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Von Erdmannsdorff v. Indiana Department of State Revenue, 49T10-1112-TA-00093
...inventories, and thus their COGS estimates, lacked probative value. See von Erdmannsdorff v. Indiana Dep't of State Revenue, 53 N.E.3d 621, 625 (Ind. Tax Ct. 2016). The von Erdmannsdorffs filed a counter-motion for partial summary judgment, asserting that the Department made certain errors ......
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Von Erdmannsdorff v. Ind. Dep't of State Revenue
...reconstructed inventories, and thus their COGS estimates, lacked probative value. See von Erdmannsdorff v. Indiana Dep't of State Revenue, 53 N.E.3d 621, 625 (Ind. Tax Ct. 2016). The von Erdmannsdorffs filed a counter-motion for partial summary judgment, asserting that the Department made c......