Smith v. Ind. Dep't of State Revenue, Cause No. 49T10-1605-TA-00013

122 N.E.3d 489

Tony W. SMITH and Shirlena Smith, Petitioners,

v.INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

Cause No. 49T10-1605-TA-00013

Tax Court of Indiana.

FILED April 12, 2019

ATTORNEY FOR PETITIONERS: JAMES K. GILDAY, GILDAY & ASSOCIATES, P.C., Indianapolis, IN

ATTORNEYS FOR RESPONDENT: CURTIS T. HILL, JR., ATTORNEY GENERAL OF INDIANA, WINSTON LIN, DEPUTY ATTORNEY GENERAL, Indianapolis, IN

ORDER ON RESPONDENT'S MOTION FOR PARTIAL SUMMARY JUDGMENT

WENTWORTH, J.

Tony W. Smith and Shirlena Smith have appealed the Indiana Department of State Revenue's assessments of Indiana adjusted gross income tax (AGIT) for 2005 through 2007 and 2009 through 2014. The Smiths also appeal the Department's denial of their refund claim for 2014. The matter, currently before the Court on the Department's Motion for Partial Summary Judgment ("Motion"), questions whether the Department's AGIT assessments for 2005 through 2007 and 2009 through 2011 (the "years at issue") were timely as a matter of law.¹ Upon review, the Court finds in favor of the Department in part and against it in part.²

FACTS AND PROCEDURAL HISTORY

The following facts are not in dispute. The Smiths, a married couple, are residents of the State of Ohio. (See Resp't Mem. Supp. Mot. Partial Summ. J. ("Resp't Br.") at 5 (citing Pet'rs' Am. Pet. Original Tax Appeal, Denied Claim Refund & Final Determination Ind. Dep't State Revenue, & Req. Inj. Collection Tax ("Pet'rs' Am. Pet.") ¶ 1), Confd'l Ex. E.) During the years at issue, the Smiths visited Indiana to gamble at approximately five different casinos. (See Resp't Br., Ex. B at 19-20, Confd'l Ex. D ¶ 4, Confd'l Ex. D-2 at 233.)

The Smiths timely filed their 2005 through 2007 federal income tax returns, reporting that they were professional gamblers with income and deductions associated with that trade. (See Pet'rs' Resp. Opp'n Resp't Mot. Partial Summ. J. ("Pet'rs' Resp. Br.") at 4 (citing First Jt. Stip. Facts ("Stip.") ¶¶ 3-5), Confd'l Ex. A ¶ 5, Confd'l Exs. A-1 to A-3.) The Smiths also filed Indiana nonresident income tax returns for the 2005 through 2007 tax years. (Pet'rs' Resp. Br. at 4 (citing Stip. ¶¶ 3-5), Confd'l Ex. A ¶ 6, Confd'l Exs. A-4 to A-6.)

At some point in 2008, the Internal Revenue Service (the "IRS") audited the Smiths' 2005 through 2007 federal income tax returns to examine their status as professional gamblers. (See Resp't Br., Ex. C at 50; Pet'rs' Resp. Br., Confd'l Ex. B ¶ 7, Confd'l Ex. B-2.) The IRS subsequently reported its audit findings to the Smiths by issuing a Revenue Agent Report ("RAR") for 2005 and 2006 on November 19, 2008, and an RAR for 2007 on September 15, 2009. (See Resp't Br., Confd'l Ex. D ¶ 3, Confd'l Ex. D-1 at 1359.) The Smiths disagreed with the audit findings reflected in the RARs and, as a result, filed an appeal with the IRS. (See Resp't Br., Ex. C at 50-51, 58.) The IRS and the Smiths ultimately settled the matter on January 21, 2011. (See Resp't Br., Ex. C at 51, 54; Pet'rs' Resp. Br., Confd'l Ex. A ¶¶ 11(b), 12(b).)

In the meantime, the Smiths timely filed their 2009 through 2011 federal income tax returns, which also reported income and deductions associated with their gambling activities. (See Pet'rs' Resp. Br. at 7 (citing Stip. ¶¶ 6-8); Resp't Br., Confd'l Ex. D ¶ 4, Confd'l Ex. D-2 at 204-17, 233-34.) Also, the Smiths filed Indiana nonresident income tax returns for those years. (Pet'rs' Resp. Br. at 7 (citing Stip. ¶¶ 6-8).)

In 2015, the Smiths filed their 2014 nonresident Indiana income tax return requesting a refund of over $ 300,000. (See Pet'rs' Des'g Evid. Supp. Resp. Opp'n Resp't Mot. Partial Summ. J. ("Pet'rs' Des'g Evid.") ¶ 2, Pet'rs' Am. Pet. ¶¶ 9-11.) The Department then opened a desk audit to examine the Smiths' refund claim. (See Resp't Br., Confd'l Ex. D ¶ 4, Confd'l Ex. D-2 at 264.) By September of 2015, the Department had expanded the desk audit to include all the years at issue. (See Resp't Br., Confd'l Ex. D ¶ 4, Confd'l Ex. D-2 at 264.) On September 26, 2015, the Department issued an Important Taxpayer Notification to the Smiths that granted in part and denied in part their refund claim. (See Pet'rs' Des'g Evid. ¶ 2, Pet'rs' Am. Pet. at Confd'l Ex. A.) On May 10, 2016, the Smiths filed an appeal in the Tax Court challenging the Department's denial of their 2014 refund claim. (See Pet'rs' Des'g Evid. ¶ 1, Pet'rs' Am. Pet. ¶¶ 14-17.) The Court stayed those proceedings, awaiting the completion of the Department's audit for all the years at issue. (Pet'rs' Resp. Br. at 2.)

On August 1, 2016, the Department issued its audit report to the Smiths that increased their 2005 through 2007 Indiana AGIT liabilities based on the federal adjustments reflected in the RARs. (See Resp't Br., Confd'l Ex. D ¶ 3, Confd'l Ex. D-1.) Then, on August 8, 2016, the Department issued Proposed Assessments against the Smiths for those same tax years. (Resp't Br., Confd'l Ex. A at 168-73.) The Smiths, believing the Department's adjustments improper, filed amended Indiana income tax returns for 2005 and 2006 on September 12, 2016. (See Pet'rs' Des'g Evid. ¶ 4, Stip. ¶¶ 3-4; Pet'rs' Resp. Br., Confd'l Ex. A ¶ 19, Confd'l Ex. B ¶ 15.) The Smiths also filed an amended Indiana income tax return for 2007 on October 6, 2016. (Pet'rs' Des'g Evid. ¶ 4, Stip. ¶ 5.)

A few days later, on October 13, 2016, the Department issued a second audit report to the Smiths that indicated, among other things, that they had underreported their Indiana adjusted gross income for 2009 through 2011 by more than 25%. (See Resp't Br., Confd'l Ex. D ¶ 4, Confd'l Ex. D-2.) The Department issued Proposed Assessments against the Smiths for those years on October 18, 2016. (Resp't Br., Confd'l Ex. A at 176-81.) The Smiths protested the Proposed Assessments for all the years at issue, and the Department denied their protests on November 29, 2017, in two separate Letters of Findings. (Pet'rs' Des'g Evid. ¶ 4, Stip. ¶¶ 18, 21-23.)

On January 8, 2018, the Smiths incorporated their additional claims regarding all of the Department's Proposed Assessments into their pending original tax appeal.

(See Pet'rs' Des'g Evid. ¶ 2, Pet'rs' Am. Pet.) On December 4, 2018, the Department moved for partial summary judgment. On February 20, 2019, the Court held a hearing on the Department's Motion. 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). A genuine issue of material fact exists when facts concerning an issue that would dispose of the case are disputed or when undisputed facts support conflicting inferences as to the resolution of an issue. Popovich v. Ind. Dep't of State Revenue, 52 N.E.3d 73, 76 (Ind. Tax Ct. 2016). "When any party has moved for summary judgment, the court may grant summary judgment for any other party upon the issues raised by the motion although no motion for summary judgment is filed by such party." T.R. 56(B).

ANALYSIS

The Department's Motion asks the Court to find its Proposed Assessments for the years at issue were timely as a matter of law, presenting two separate rationales in support. First, the Department claims its 2005 through 2007 Proposed Assessments were timely because it was not constrained by a time limitation under Indiana Code § 6-8.1-5-2(f) due to the Smiths' failure to file required returns. (See Resp't Br. at 9-11.) Second, the Department claims the 2009 through 2011 Proposed Assessments were timely because they were issued prior to the expiration of the 6-year statutory deadline under Indiana Code § 6-8.1-5-2(b). (See Resp't Br. at 11-13.)

The 2005 through 2007 Proposed Assessments

The Smiths maintain that the Department's Proposed Assessments for 2005 through 2007 were not issued timely because they were issued after the 6-month window prescribed by Indiana Code § 6-8.1-5-2(i) :

If a taxpayer's federal income tax liability for a taxable year is modified due to the assessment of a federal deficiency or the filing of an amended federal income tax return, then the date by which the department must issue a proposed assessment under section 1 of this chapter for tax imposed under IC 6-3 is extended to six (6) months after the date on which the notice of modification is filed with the department by the taxpayer.

(See Pet'rs' Resp. Br. at 22-23; Hr'g Tr. at 34.) See also IND. CODE § 6-8.1-5-2(i) (2011) (amended 2015). The Smiths explain that they notified the Department both verbally and in writing of the resolution of the IRS's audit in August of 2015, and accordingly the Department was required to issue the Proposed Assessments within 6-months after receiving that notification. (See Pet'rs' Resp. Br. at 23, Pet'rs' Confd'l Ex. B ¶¶ 10-11.) Consequently, the Smiths assert that because the Department did not issue the Proposed Assessments within the 6-month window, they were untimely.³ (See Pet'rs' Resp. Br. at 23.)

The Department, however, seeks judgment as matter of law that these Proposed Assessments were timely because there was no time limitation pursuant to Indiana Code § 6-8.1-5-2 in light of Indiana Code § 6-3-4-6. (See Resp't Br. at 9-11.) Indiana Code § 6-3-4-6 provides:

Each taxpayer shall notify the department of any modification of:

(1) a federal income tax return filed by the taxpayer after January 1, 1978; or

(2) the taxpayer's federal income tax liability for a taxable year which begins after December 31, 1977.

The taxpayer shall file the notice on the form prescribed by the department within one hundred twenty (120) days after the modification is made if the modification was made before January 1, 2011, and one hundred eighty (180) days after the modification is made if the modification is made after December 31, 2010.

IND. CODE § 6-3-4-6(b) (2011) (amended 2015). See also 45 IND. ADMIN. CODE 3.1-1-94 (2011) (designating that individual taxpayers, like the...