Elmer v. Ind. Dep't of State Revenue

42 N.E.3d 185

Paul J. ELMER and Carol A.N. Elmer, Petitioners

v.INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

No. 49T10–1110–TA–00064.

Tax Court of Indiana.

Sept. 1, 2015.

David F. McNamar, McNamar & Associates, P.C., F. Pen Cosby, Cremer & Cremer, James K. Gilday, Gilday & Associates, P.C., Indianapolis, IN, Attorneys for Petitioners.

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

ORDER ON RESPONDENT'S MOTION FOR SUMMARY JUDGMENT

FISHER, Senior Judge.

Paul J. Elmer and Carol A.N. Elmer have appealed the Indiana Department of State Revenue's assessments of Indiana adjusted gross income tax (AGIT) for the 2005, 2006, 2007, and 2008 tax years (the years at issue). The matter is currently before the Court on the Department's Motion for Summary Judgment. While the Department's Motion presents three issues, the Court consolidates and restates them as: whether the Department, in determining the Elmers' Indiana AGIT liability, erred in disallowing their business expense and uncollectible debt deductions.¹

FACTS AND PROCEDURAL HISTORY

During the years at issue, Mr. Elmer was the sole shareholder and president of two S–Corporations: Pharmakon Long Term Care Pharmacy, Inc., an institutional pharmacy, and Hamilton Consulting Group, Inc. (See Br. Supp. Resp't Mot. Summ. J. (“Resp't Br.”), Ex. 3 at 4; Pet'rs' Resp. Resp't Summ. J. Mot. (“Pet'rs' Br.”) at 5 (citing Aff. Paul Elmer (“Elmer Aff.”) ¶¶ 2–3; Resp't Br., Ex. 8 at 10–11).) As a result, the Elmers' Indiana income tax returns reported their income and losses as well as those of Pharmakon and Hamilton. (See Resp't Br., Ex. 3 at 4.) See also Riverboat Dev., Inc. v. Indiana Dep't of State Revenue, 881 N.E.2d 107, 109 n. 4 (Ind. Tax Ct.2008) (explaining that the income and losses of an S–Corporation are passed through to its owners (i.e., shareholders) who, in turn, report their pro-rata shares on their individual tax returns), review denied.

The Department subsequently determined that the deductions taken by the Elmers for vehicle, contract labor, operating, and management/marketing expenses were not valid business expense deductions. (See Resp't Br., Ex. 3 at 4–13.) The Department also determined that the Elmers had improperly taken a deduction for an uncollectible debt in 2008. (See Resp't Br., Ex. 3 at 13–14.) Consequently, the Department disallowed all of the Elmers' deductions, recalculated their AGIT liability, and assessed them with additional AGIT, interest, and penalties for the years at issue. (See Resp't Br., Ex. 1, Ex. 3 at 4.)

The Elmers protested the Department's assessments. (See Resp't Br., Ex. 3 at 4.) On August 31, 2011, the Department issued a Letter of Findings (LOF) that ultimately upheld the assessments.² (See generally Resp't Br., Ex. 3.)

On October 25, 2011, the Elmers initiated this original tax appeal. On September 13, 2013, the Department filed its Motion. On April 7, 2014, the Court held a hearing on the Motion. Additional facts will be supplied as necessary.

STANDARD OF REVIEW

This Court reviews the Department's final determinations regarding proposed assessments de novo. Ind. Code § 6–8.1–5–1(i) (2015). Accordingly, the Court is not bound by the evidence or the issues presented at the administrative level. See Horseshoe Hammond, LLC v. Indiana Dep't of State Revenue, 865 N.E.2d 725, 727 (Ind. Tax Ct.2007), review denied.

Summary judgment is proper only when the designated evidence demonstrates that no genuine issues of material fact³ exist and the moving party is entitled to judgment as a matter of law. Ind. Trial Rule 56(C). When the Department moves for summary judgment, it may make a prima facie showing that there is no genuine issue of material fact as to the validity of an unpaid tax by properly designating its proposed assessments.⁴ Indiana Dep't of State Revenue v. Rent–A–Center E., Inc. (RAC II), 963 N.E.2d 463, 466–67 (Ind.2012). See also Filip v. Block, 879 N.E.2d 1076, 1080–82 (Ind.2008) (discussing the designation of evidence requirements of Trial Rule 56 ). “The burden then shifts to the taxpayer to come forward with sufficient evidence demonstrating that there is, in actuality, a genuine issue of material fact with respect to the unpaid tax.” RAC II, 963 N.E.2d at 467.

LAW AND ANALYSIS

The Department claims that it has made a prima facie case for summary judgment because its designated evidence (i.e., Exhibit 1) includes the proposed assessments for each of the years at issue. (See Reply Br. Supp. Resp't Mot. Summ. J. (“Resp't Reply Br.”) at 3 (citing Resp't Br., Ex. 1).) The Department is incorrect.

The Department's Exhibit 1 contains: (1) copies of the 2005 and 2007 proposed AGIT assessments, including interest, and penalties, and (2) a 2008 proposed assessment for a penalty only. (Resp't Br., Ex. 1.) As a result, the Department has made a prima facie showing that there is no genuine issue of material fact as to the validity of the unpaid tax for the 2005 and 2007 tax years, but it has not done so for the 2006 and 2008 tax years.⁵ This is not, however, necessarily fatal to the Department's claims for the 2006 and 2008 tax years because the Department has presented other designated evidence to support its Motion. (See, e.g., Resp't Mot. Summ. J. at 1–3.) Nonetheless, before the Court evaluates that other evidence to determine whether the Department has made the requisite prima facie showing for the 2006 and 2008 tax years, the Court will determine whether the Elmers' designated evidence shows that there is a genuine issue of material fact with respect to the validity of the unpaid tax for the 2005 and 2007 tax years.

I. The 2005 and 2007 Tax Years

A. The Elmer's designated evidence

The Elmers' designation of evidence is contained in their response brief. (See generally Pet'rs' Br.) See also Filip, 879 N.E.2d at 1081 (explaining that a party's designation of evidence may appear in its brief so long as the party clearly identifies the listed materials as designated evidence). The Elmers' designated evidence consists of Mr. Elmer's affidavit, the deposition testimony of a Ms. Brockley, and a portion of the Department's designated evidence (i.e., the Elmers' Protest Letter (Exhibit 2), Mr. Elmer's Deposition Testimony (Exhibit 8), and Mr. Reed's Deposition Testimony and Affidavit (Exhibits 11 and 20)). (See Pet'rs' Br. at 1–6.)

The Department claims that the Court must disregard Ms. Brockley's deposition testimony, the Elmers' Protest Letter (Exhibit 2), and portions of the Elmers' brief (including Mr. Elmer's affidavit) because each is inadmissible. (See Resp't Reply Br. at 3–4.) As an initial matter, therefore, the Court must determine whether it may consider the Elmers' designated evidence. See Miller Pipeline Corp. v. Indiana Dep't of State Revenue, 995 N.E.2d 733, 736 (Ind. Tax Ct.2013) (stating that the Court will only consider properly designated evidence that would be admissible at trial).

Having reviewed the Elmers' designated evidence, the Court will not consider Ms. Brockley's deposition testimony because the Elmers have not filed any portion of her deposition with the Court. See, e.g., Thomas v. N. Cent. Roofing, 795 N.E.2d 1068, 1071–72 (Ind.Ct.App.2003) (finding that a trial court erred in granting partial summary judgment to a party that did not actually file its designated evidence with the trial court). In addition, the Court will not consider the Elmers' Protest Letter (Exhibit 2), which was prepared by their attorney, because it is unverified, unsupported by an affidavit, and contains hearsay. (See Resp't Br., Ex. 2.) See also, e.g., Freson v. Combs, 433 N.E.2d 55, 59 (Ind.Ct.App.1982) (providing that the unsworn commentary of an attorney, briefs, and unsworn statements should not be considered for purposes of summary judgment); Wallace v. Indiana Ins. Co., 428 N.E.2d 1361, 1365 (Ind.Ct.App.1981) (providing that unverified exhibits that are not supported by affidavits are inadmissible).

Furthermore, the Court must disregard the factual allegations in the Elmers' brief that are not supported by any reference, or citation to, the designated evidence. (See, e.g., Pet'rs' Br. at 10 (claiming that the IRS allowed all of the Elmers' business expense and uncollectible debt deductions for the years at issue).) With respect to the Elmers' designated evidence, therefore, the Court will consider: 1) the legal propositions set forth in the Elmers' brief; 2) the properly designated parts of Mr. Elmer's affidavit;⁶ 3) Mr. Elmer's Deposition Testimony (Exhibit 8); and 4) Mr. Reed's Deposition Testimony and Affidavit (Exhibits 11 and 20). See, e.g., Vanco v. Sportsmax, Inc., 448 N.E.2d 1198, 1200 (Ind.Ct.App.1983) ; Freson, 433 N.E.2d at 59. See also Powell v. Am. Health Fitness Ctr. of Fort Wayne, Inc., 694 N.E.2d 757, 759–60 (Ind.Ct.App.1998) (stating that “[o]nce evidence has been designated to [a court] by one party, that evidence is deemed designated and the opposing party need not designate the same evidence”).

B. Whether there is a genuine issue of material fact⁷

A corporation's Indiana “adjusted gross income” is the same as its federal “taxable income” (as defined in IRC § 63 ) with certain statutorily prescribed modifications.

Ind.Code § 6–3–1–3.5(b) (2005) (amended 2006). IRC § 63 provides that “taxable income” “means gross income minus the deductions allowed by this chapter (other than the standard deduction).” I.R.C. § 63 (2005). The business expense deduction, an allowable IRC § 63 deduction, permits taxpayers to deduct “the ordinary and necessary expenses paid or incurred ... in carrying on any trade or business[.]” I.R.C. § 162(a) (2005). To qualify for a business expense deduction, an item must (1) be paid or incurred during the taxable year, (2) be for carrying on any trade or business, (3) be an expense, (4) be an ordinary expense, and (5) be a necessary expense. C.I.R. v. Lincoln Sav. & Loan Ass'n. 403 U.S. 345, 352, 91...