Michael W. Gates and Susan J. Gates v. Larry Walther, Secretary, Department of Finance and Administration of the State of Arkansas , 2023 Ark. 74 ( 2023 )

Cite as 2023 Ark. 74SUPREME COURT OF ARKANSAS
No. CV-22-690
Opinion Delivered: May 4, 2023
MICHAEL W. GATES AND SUSAN J.
GATES APPEAL FROM THE GARLAND
APPELLANTS COUNTY CIRCUIT COURT
[NO. 26CV-21-100]
V.
HONORABLE GARY M. ARNOLD,
LARRY WALTHER, SECRETARY, JUDGE
DEPARTMENT OF FINANCE AND
ADMINISTRATION OF THE STATE REVERSED AND REMANDED.
OF ARKANSAS
APPELLEE
RHONDA K. WOOD, Associate Justice
Michael and Susan Gates appeal the circuit court’s order granting summary judgment
to the Department of Finance and Administration. The order upheld DFA’s amended and
corrected notices of final assessment of the Gateses’ tax burden for 2015, 2016, and 2017.
The Gateses argue that DFA failed to provide sufficient evidence to meet its prima facie
burden of proof for summary judgment. We agree and reverse and remand.
I. Relevant Facts
The Gateses failed to file tax returns or pay individual and corporate state taxes for
years 2012–2017. Mr. Gates pleaded no contest to one criminal count for failure to file a
tax return or pay taxes. As a condition of his plea, he was sentenced to six years’ probation,
ordered to pay $74,789.80 in restitution, and ordered to file tax returns for the years 2015–
2017. DFA audited those returns to determine the Gateses’ tax liability, penalty, and interest
for those years. DFA’s audit initially assessed the Gateses’ tax liability at $50,519, plus
penalties and interest.1 The Gateses protested this initial assessment, claiming that DFA
incorrectly taxed legitimate business expenses associated with their S corporation,
Stonebridge Collection, Inc. In response to the Gateses’ request, DFA provided them with
a copy of the schedule of adjustments prepared during the audit.
After this initial production, the parties communicated poorly. The Gateses
continued to claim DFA was not recognizing some legitimate business expenses, but they
conceded that some deducted expenses were personal. For example, the Gateses admited to
thousands of dollars in personal expenses to Amway, Cranford’s Village Supermarket,
restaurants, Wal-Mart, and Entergy. These admitted personal expenses were listed on the
profit-and-loss statement of the Gateses’ business. DFA, on the other hand, in deposition
testimony, could not define what constituted a legitimate business expense when asked to
explain why it had excluded some seemingly business-related expenses.
DFA continued to send the Gateses a series of tax-assessment letters reflecting
differing amounts of their tax liability. For example, the following chart shows four written
communications from DFA2 to the Gateses in August 2020 regarding DFA’s fluctuating
calculation of the Gateses’ tax liability:
1
The tax-liability amounts referred to throughout this opinion do not include
penalties and interest. The Gateses do not contest that, once their tax liability is determined,
statutory penalties and interest will apply.
2
DFA titled each document differently; therefore, the date best identifies each
document.
2
2015 2016 2017 Total Tax Liability
August 13, 2020 Summary Letter $8,916 $6,477 $6,284 $21,677
August 14, 2020 Assessment $14,948 $10,785 $6,284 $32,017
August 24, 2020 Notice of Final $23,864 $17,262 $13,061 $54,187
Assessment
August 27, 2020 Letter $21,826 $14,951 $10,544 $47,321
When the parties reached an impasse, the Gateses sued DFA in circuit court. They
challenged the amended and corrected notices of final assessment. After discovery, DFA
moved for summary judgment, and in response, the Gateses filed a cross-motion for
summary judgment. After hearing these motions, the circuit court entered an order striking
several of the Gateses’ exhibits to their cross-motion for summary judgment, granting DFA’s
summary-judgment motion, and finding that the amended and corrected notices of final
assessment were sustained. The Gateses appealed.
II. Analysis
Summary judgment is proper when a claiming party fails to show that there is a
genuine issue as to material fact. Ark. R. Civ. P. 56(c); Flentje v. First Nat’l Bank of Wynne,
340 Ark. 563, 569, 11 S.W.3d 531, 535–36 (2000) (citing Mashburn v. Meeker Sharkey Fin.
Grp., 339 Ark. 411, 5 S.W.3d 469 (1999)). The burden is on the moving party—here, DFA.
Flentje, 340 Ark. at 568, 11 S.W.3d at 535. In summary-judgment cases, we decide whether
the evidentiary items presented by the moving party left a material question of fact
unanswered. Id. Once the moving party establishes a prima facie entitlement to summary
3
judgment, the burden shifts to the defendant to meet proof with proof and demonstrate the
existence of a material issue of fact. Flentje, 340 Ark. at 569, 11 S.W.3d at 536.
Summary judgment is not proper “where evidence although not in material dispute
as to actuality, reveals aspects from which inconsistent hypothes[e]s might reasonably be
drawn and reasonable minds might differ.” Id. On review of a grant of summary judgment,
we examine the evidentiary items presented and determine whether the circuit court
correctly ruled that those items left all material facts undisputed. Wright v. Compton, Prewett,
Thomas & Hickey, P.A., 315 Ark. 213, 866 S.W.2d 387 (1993).
In tax cases, DFA carries the initial burden of proving the imposition of the tax by a
preponderance of the evidence. “The agency claiming the right to collect a tax bears the
burden of proving that the tax law applied to the item sought to be taxed.” Leathers v. A&B
Dirt Movers, Inc., 311 Ark. 320, 844 S.W.2d 314 (1992). Thus, to meet its prima facie
burden, DFA must prove the Gateses’ net taxable income and resulting tax liability for
2015–2017. Once that occurs, the Gateses will have the burden of proving any deductions.
Id.The circuit court found that DFA met its burden of proving “earned income subject
to Arkansas income tax.” The circuit court supported this based on: (1) the Gateses’ filed
tax returns; (2) DFA’s tax assessments arising from disallowed income tax deductions; and
(3) income showed on the Gateses’ 1099 forms, which showed payments to Mr. Gates and
Stonebridge by sources other than an employer.
On appeal, the Gateses argue that the income tax returns and 1099s were not prima
facie proof of DFA’s calculation of the Gateses’ net taxable income. We agree because the
4
math in the record does not add up. It is undisputed that the Gateses had some taxable
income based on their filed tax returns. But we hold that a material dispute of fact exists
regarding the amounts of their taxable income for 2015–2017.
After reviewing the Gateses’ income tax returns and 1099s, DFA computed net
taxable incomes that were greater than what the Gateses had reported. DFA could be
correct, but its figures throughout the audit were moving targets, and it never revealed its
math to the Gateses, the circuit court, or this court on appeal. While DFA continues to
argue that it met its burden of proving “that the income attributed to the Gates[es], both
according to their income tax returns and the 1099s, was correct,” the record does not
reflect this. Based on the record before us, the net taxable income DFA calculated was
greater than the amounts the Gateses reported, plus their 1099 income. DFA offered no
other evidentiary support regarding how it calculated the increase in taxable income. While
DFA argued that its adjustments were “the result of disallowed business deductions and the
addition of some income shown on 1099 forms,” it did not show which 1099 income it
included or which business deductions it excluded. (Emphasis added.) The Gateses
admittedly ran many personal expenses through their business, but the burden falls first on
DFA to prove the initial taxable income amount and show how it arrived at that number.
The circuit court’s order supports that material-fact issues existed. The circuit court
sustained DFA’s “amended and corrected notice of final assessment.” One would have to
assume that the order is referencing the August 24, 2020 letter titled “notice of final
assessment.” But that letter wasn’t attached to DFA’s motion for summary judgment, and it
does not contain the net taxable income DFA calculated, which is DFA’s burden. It only
5
reported the Gateses’ tax liabilities. And after that “final” letter was sent, an assistant revenue
commissioner sent another letter with different figures that “reflected the corrected amounts
due.” Consequently, even after the circuit court’s order, we are left to wonder: how much
money did the circuit court conclude the Gateses owed DFA?
Considering this evidence, DFA did not meet its prima facie burden of proving the
total amounts of taxable income that it had calculated for 2015, 2016, and 2017. Because
DFA’s motion for summary judgment lacked this prima facie evidence, we conclude that
DFA did not meet its burden of proof at the summary-judgment stage of the proceedings.
Therefore, the circuit court erred in granting DFA’s motion for summary judgment.
The Gateses also appeal the circuit court’s exclusion of four exhibits they attached to
their cross-motion for summary judgment. The circuit court struck three exhibits because
they contained hearsay, were not properly authenticated, and contained information Mr.
Gates declined to provide at his deposition when he asserted his Fifth Amendment right not
to self-incriminate. It refused to consider another exhibit because it was not included in the
record. Because the Gateses do not argue on appeal that the circuit court should have
granted their summary-judgment motion, we do not decide the issues involving their
exhibits.
Reversed and remanded.
WOMACK, J., concurs.
WYNNE, J., dissents.
6
SHAWN A. WOMACK, Justice, concurring. I agree DFA failed to establish prima
facie entitlement to summary judgment and, therefore, join the majority opinion. I write
separately to explain why sovereign immunity does not bar the Gateses’ lawsuit against the
State.
The Tax Procedure Act allows a taxpayer to appeal state-tax assessments “by filing
suit for judicial relief” in circuit court.1 Article 5, section 20 of the Arkansas Constitution,
however, prohibits the State from ever becoming a defendant in any of its courts. Absent
an express constitutional provision to the contrary, this prohibits a party from filing a lawsuit
against either the State or its entities.2
In Board of Trustees of the University of Arkansas v. Andrews, we held that “legislative
waiver[s] of sovereign immunity . . . [are] repugnant to article 5, section 20 of the Arkansas
Constitution.”3 The Tax Procedure Act’s allowance of judicial review is no different, to
the extent it permits the State to be made a defendant in its own courts.4 However, tax-
assessment appeals are essentially illegal-exaction claims.5
1
Ark. Code Ann. § 26-18-406(a)(1)(A) (Supp. 2021).
2
Thurston v. League of Women Voters of Ark., 2022 Ark. 32, at 17, 639 S.W.3d 319,
327 (Womack, J., dissenting) (rejecting judicially created exceptions to this constitutional
prohibition).
3
2018 Ark. 12, at 10, 535 S.W.3d 616, 622.
4
See id.5
See City of Jacksonville v. Smith, 2018 Ark. 87, at 6, 540 S.W.3d 661, 666 (holding
that “[a]n illegal exaction is defined as any exaction that either is not authorized by law or
is contrary to law”).
Concerning taxes, this court has recognized two species of illegal-exaction cases: first,
public funds cases, where the plaintiff contends that public funds generated from tax dollars
are being misapplied or illegally spent; and second, illegal-tax cases, where the plaintiff asserts
that the tax itself is illegal.6 A tax-assessment contest is, in effect, an illegal-tax claim. Insofar
as an Arkansas taxpayer alleges that the State has mis-assessed his tax burden, he is alleging
that the State has imposed an illegal tax because DFA may collect only those taxes authorized
by state law.7
Therefore, when the State seeks to impose a tax burden on one or more of its citizens
that exceeds the amount authorized by statute or our constitution, the State has imposed an
illegal tax, i.e., an illegal exaction.8 Because the constitution expressly authorizes illegal-
exaction claims against the State, sovereign immunity does not bar the Gateses’ tax-
assessment contest.9
6
Prince v. Ark. State Highway Comm’n, 2019 Ark. 199, at 5, 576 S.W.3d 1, 4.
7
Ark. Code Ann. § 26-18-401(b)(1); see also Ark. Const. art. 16, § 11 (“No tax shall
be levied except in pursuance of law, and every law imposing a tax shall state distinctly the
object of the same . . . .” ).
8
See City of Jacksonville, 2018 Ark. 87, at 6, 540 S.W.3d at 666.
9
Rutledge v. Remmel, 2022 Ark. 86, at 10, 643 S.W.3d 5, 11 (Womack, J., concurring)
(citing Ark. Const. art. 16, § 13).
8
ROBIN F. WYNNE, Justice, dissenting. From my de novo review of the record,
I think the trial court correctly determined that DFA was entitled to summary judgment.
Accordingly, I respectfully dissent.
A tax deduction is allowed only as a matter of legislative grace, and one claiming the
deduction bears the burden of proving that he is entitled to it. Weiss v. Am. Honda Fin.
Corp., 360 Ark. 208, 213, 200 S.W.3d 381, 384 (2004). Therefore, if the Gateses contend
that they are entitled to additional deductions beyond those allowed by DFA, they bear the
burden of proving entitlement to those deductions. When parties file cross-motions for
summary judgment, as was done here, they essentially agree that there are no material facts
remaining to be litigated and that summary judgment is an appropriate means of resolving
the case. Douglas Cos., Inc. v. Walther, 2020 Ark. 365, at 5, 609 S.W.3d 397, 400.
The majority concludes that DFA did not meet its prima facie burden of proving the
total amounts of taxable income that it had calculated for 2015, 2016, and 2017. But exhibit
J to DFA’s motion for summary judgment shows the amount of net taxable income:
$357,066 for 2015; $265,982 for 2016; and $204,097 for 2017. This exhibit also shows how
DFA calculated the net taxable income: adjusted gross income as shown on the Gateses’ tax
returns, plus adjustments to the Gateses’ business income made during the audit less
deductions. To show the amount of taxable income, DFA attached to its motion for
summary judgment the Gateses’ individual tax returns; tax returns from their business, the
Stonebridge Collection; and 1099s issued to the Stonebridge Collection and to Mr. Gates
individually. At the request of counsel, DFA gave the Gateses a schedule of disallowed
business expenses, attached as exhibit C to the Gateses’ motion for summary judgment and
response to DFA’s motion for summary judgment.1 DFA did not have the burden of proving
that the Gateses were not entitled to additional deductions.
In my view, DFA met its prima facie burden of showing that the Gateses were
Arkansas residents who had income subject to Arkansas income tax. It did so through the
Gateses’ individual tax returns, business tax returns, and 1099s provided by the Gateses to
DFA during the audit. The Gateses then had the burden of proving that they were entitled
to additional deductions. Am. Honda Fin. Corp., 360 Ark. at 213, 200 S.W.3d at 384. They
failed to do so.
To support their argument that they were entitled to tax deductions, the Gateses
point to several exhibits filed with their motion for summary judgment and response to
DFA’s motion: exhibit D (a series of spreadsheets explaining business expenses, not attached
to an affidavit or otherwise authenticated), exhibit K (bank statements, canceled checks, and
receipts, not attached to an affidavit or otherwise authenticated), and exhibit L (copies of
receipts that were not served on DFA before the hearing on the summary-judgment motions
and not filed with the Gateses’ motion and response). They also rely on an electronic
QuickBooks file, which was not filed with the trial court and is not part of the record. The
trial court struck exhibits D and K because they “contain hearsay, are not properly
authenticated, and contain information Mr. Gates declined to provide at his deposition.”
On appeal, the Gateses do not explain which hearsay exception would apply to these
exhibits, and this court should not have to hunt for an exception. We will not make a party’s
1
The Gateses’ motion for summary judgment and response to DFA’s motion for
summary judgment were combined into a single filing.
10
argument for them or consider an argument that is not properly developed. Teris, LLC v.
Chandler, 375 Ark. 70, 86, 289 S.W.3d 63, 75 (2008). The trial court struck exhibit L
because it was not introduced, nor was it part of the record. Because it is not in the record,
we cannot consider it. We cannot consider the QuickBooks file either because it was not
filed with the trial court and is not part of the record. In addition, Mr. Gates asserted his
Fifth Amendment right and declined to answer questions about specific deductions, and
Mrs. Gates did not testify at all. In short, the Gateses failed to meet proof with proof that
they were entitled to additional deductions. Accordingly, the trial court did not err in
granting summary judgment to DFA.
The majority also expresses uncertainty about the amount of tax that DFA says the
Gateses owe. But the Amended and Corrected Notices of Final Assessment dated August
24, 2020, which are attached to the Gateses’ complaint, plainly show the Gateses’ tax
liability—$23,864 for 2015; $17,262 for 2016; and $13,061 for 2017, excluding penalties
and interest. How these numbers were calculated is apparent from the record. Take 2015.
The August 24 Amended and Corrected Notice of Final Assessment shows $23,864 in tax
liability. This number represents the amount of net tax shown on line 36 of the Gateses’
individual tax return, attached as exhibit D to DFA’s motion for summary judgment
($14,948—the same amount as in the August 14 Notice of Final Assessment), plus the
additional tax liability determined by the audit ($8,916—the amount shown in the August
13 Summary of Findings attached as exhibit J to DFA’s motion for summary judgment).
The amount shown in the August 27 letter ($21,826) simply represents the total tax liability
($23,864) less the amount of income tax withheld ($2,038—the amount shown on line 37
11
of the Gateses’ individual tax return).2 The same calculations can be made for 2016 and
2017.3
Because I would affirm the trial court’s order granting summary judgment to DFA,
I respectfully dissent.
DeWitt Law, PC, by: Tyler H. DeWitt and Clinton L. DeWitt, for appellants.
Keith K. Linder, Bradley B. Young, and Michelle L. Baker, Office of Revenue Legal
Counsel, for appellee.
2
These numbers also explain what the majority characterizes as “DFA’s fluctuating
calculation of the Gateses’ tax liability.”
3
There appears to be a clerical error in the August 14 Notice of Final Assessment for
2017. The amount should probably be $6,777, which is the amount listed on the Gateses’
2017 tax return, not $6,284, which is the audit adjustment reflected in the August 13
Summary of Findings.
12