Csb Investors v. Department of Treasury ( 2015 )

STATE OF MICHIGAN
COURT OF APPEALS
CSB INVESTORS, STUART URBAN, and JOHN UNPUBLISHED
KIRKPATRICK, December 22, 2015
Petitioners-Appellants,
v No. 322897
Tax Tribunal
DEPARTMENT OF TREASURY, LC No. 00-441057
Respondent-Appellee.
Before: SAAD, P.J., and STEPHENS and O’BRIEN, JJ.
PER CURIAM.
In this action, petitioners appeal the final opinion and judgment of the Tax Tribunal,
which affirmed respondent Department of Treasury’s revised assessment of use tax owed by
petitioners for the audit period of March 1, 2005, through February 28, 2009. For the reasons
provided below, we affirm.
CSB Investors (CSB) is a Michigan partnership that was originally formed by John
Kirkpatrick and Stuart Urban to hold the assets of a Smith Barney investment account. CSB,
which has no employees, invested in stocks and bonds and was also the funding agent for two car
dealerships—Dave Smith Pontiac, which was a retail car dealership located in Sturgis, Michigan
and Buck Truck & Auto, which was a retail car dealership located in Wisconsin—neither of
which are still in business. Petitioners provided the funds by sending checks to the dealerships,
who would then use the money to acquire vehicles for resale at auctions. Petitioners did not
register the title with the Secretary of State; rather, CSB would “hold” the title until the
purchased vehicle was sold by the specific dealership, at which time the dealership would repay
petitioners and the dealership would turn the title over for registration by the new owner.
The Department of Treasury notified petitioners in 2009 of its intent to conduct a tax
compliance audit for the period of March 1, 2005, through February 28, 2009. Petitioners did
not initially cooperate with the department’s requests for documentation, and after a lengthy
audit, the department filed a final notice of assessment in June 2012, which petitioners
challenged. Ultimately, the Tax Tribunal upheld a reduced assessment.
Our review of tribunal decisions in nonproperty tax cases is limited to determining
whether the decision was authorized by law and whether any factual findings were supported by
competent, material, and substantial evidence on the whole record. Toaz v Dep’t of Treasury,
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280 Mich. App. 457, 459; 760 NW2d 325 (2008). “Substantial evidence must be more than a
scintilla of evidence, although it may be substantially less than a preponderance of the evidence.”
Jones & Laughlin Steel Corp v City of Warren, 193 Mich. App. 348, 352-353; 483 NW2d 416
(1992). The weight to be accorded to evidence is within the tribunal’s discretion. Great Lakes
Div of Nat’l Steel Corp v City of Ecorse, 227 Mich. App. 379, 404; 576 NW2d 667 (1998).
The Use Tax Act, MCL 205.91, et seq., “imposes a 6% tax on the use, storage, and
consumption of all tangible personal property.” Andrie Inc v Dep’t of Treasury, 496 Mich. 161,
168; 853 NW2d 310 (2014); see also MCL 205.93(1). However, MCL 205.94 provides that
certain property is exempt from the use tax.
Petitioners argue that the Tax Tribunal erred by applying the “resale’ exemption, MCL
205.94(1)(c)(i)—which prohibits the state from imposing use tax on property purchased for
resale—when it should have applied the “double taxation” exemption, MCL 205.94(1)(b)—
which prohibits the state from imposing use tax on property that it is prohibited from taxing, i.e.,
property that is already taxed by another state. Although the tribunal referenced the resale
exemption in relation to both Dave Smith Pontiac and Buck Truck, it is irrelevant under which
statutory subsection the exemption was sought. As recognized by the tribunal, the issue in this
case was not whether petitioners could prove that their purported sales to Buck Truck were
exempt from taxation but, rather, whether petitioners could prove that they sold the vehicles at
all. See Andrie Inc, 496 Mich. at 168 (stating that “[t]he exemption statute unambiguously
requires payment of the sales tax before it exempts the taxpayer from the use tax”). Contrary to
petitioners’ argument, the tribunal rejected their challenge on the basis that there was insufficient
evidence to establish that the sales to Buck Truck occurred; the tribunal did not apply the wrong
exemption because it did not reach that question.
Petitioners assert that the tribunal’s assessment was not supported by competent,
material, and substantial evidence on the record and maintain that the evidence they provided
established that they were entitled to an exemption, which shifted the burden to treasury to
support the assessment. For the entire audit period, with regard to the burden of proof of refuting
an assessment, MCL 205.104a(4) provided:1
If the taxpayer fails to file a return or to maintain or preserve proper records as
prescribed in this section, or the department has reason to believe that any records
maintained or returns filed are inaccurate or incomplete and that additional taxes
are due, the department may assess the amount of the tax due from the taxpayer
based on information that is available or that may become available to the
department. That assessment shall be considered prima facie correct for the
purpose of this act and the burden of proof of refuting the assessment shall be
upon the taxpayer.
1
The statute was later amended by 2008 PA 439, effective January 9, 2009, but the wording of
MCL 205.104a(4) was unaffected.
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Therefore, for purposes of the entire audit period, the department’s assessment was “considered
prima facie correct,” and “the burden of proof of refuting the assessment [was] upon the
taxpayer.” MCL 205.104a(4). The burden shifts to the department to support its claim when the
petitioner introduces credible evidence with respect to factual issues that are relevant to the issue
of tax liability. See Holy Spirit Ass’n for Unification of World Christianity v Dep’t of Treasury,
131 Mich. App. 743, 752-755; 347 NW2d 707 (1984) (noting that the burden of going forward
with evidence related to tax liability may be shifted to the opposing party and concluding that the
petitioner met that burden by presenting direct testimony by church members involved in the
disputed transactions as well as documentary evidence).
We conclude that petitioners failed to shift the burden to the department because their
evidence was not credible. It is undisputed that petitioners were not responsive initially to the
department’s request for validating documentation. Petitioners ultimately submitted exhibit P-
30—which contained listings of vehicles purportedly sold for each of the audit years, including
the VIN, make, model, year, and sale price, and was on Buck Truck stationary—to support their
claim that the vehicles were sold to Buck Truck. This evidence was not persuasive because the
exhibit merely listed the vehicles, with no exact date of sale to Buck Truck and no cancelled
checks or bank statements for verification; the department was not required to accept the
purported figures “at face value.” Only two witnesses testified at the hearing—petitioners’
certified public accountant, David Locey, and the Department of Treasury’s auditor, Erica
Tucker. We hold that the tribunal’s acceptance of the auditor’s testimony and resulting
conclusion is supported by competent, substantial, and material evidence on the record and that it
was within the tribunal’s discretion to determine what weight to accord all the evidence
presented. See Great Lakes Div, 227 Mich. App. at 404. Petitioners simply did not maintain
proper records from which treasury could confirm the purported sales to Buck Truck. While
Locey testified that he thought P-30 was compiled from information contained in Buck Truck
files, he had no personal knowledge of the transactions. With no direct testimony, documents, or
cancelled checks confirming the purported transactions, the tribunal properly concluded that the
evidence was not sufficient to refute the prima-facie-accurate assessment.
Further, to the extent petitioners argue that the tax imposed was unconstitutional because
sales tax was already paid in Wisconsin for the purported vehicle sales, we note that this Court
does not reach constitutional issues that are not necessary to resolve a case. Booth Newspapers,
Inc v Univ of Mich Bd of Regents, 444 Mich. 211, 234-235; 507 NW2d 422 (1993). Petitioners
funded the purchase of certain vehicles and claimed the sale of those vehicles to Buck Truck as
gross receipts on its federal tax returns. This issue can be resolved on state grounds—
specifically that petitioners failed to rebut the presumption that the assessment was accurate.
Thus, we do not have to reach the constitutional issue. Id.
We note that petitioners’ reliance on Anderson v Dep’t of Treasury, (MTT Docket No.
359228), issued March 28, 2012, is misplaced. In Anderson, id. at 1-3, the petitioners sold
tangible property through its retail store located in the Upper Peninsula close to the Wisconsin
border, as well as at various events throughout other states (so-called “gypsy selling” at fairs,
flea markets, etc.). On the basis of advice from the Secretary of State’s office, the petitioners did
not collect sales tax on horse trailers that they sold but instead gave the customer a bill of sale
and left the customer to pay tax, title, and registration fees to settle with the Secretary of State
when the customer purchased the license plate. When the petitioners later started selling used
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pickup trucks, they used the same system of not collecting and remitting sales tax on these
transactions as well. The petitioner also did not remit sales tax for horses it sold both in-state
and out-of-state. The petitioners’ lack of detailed records was complicated by loss due to a fire
that occurred during the relevant audit period. The tribunal noted that while an organization may
not be liable for a tax merely because it failed to keep accurate and complete records, the
petitioners “failed to comply with substantiation requirements of the General Sales Tax Act,”
which could have satisfied their burden of proof. Id. at 3-4. The tribunal concluded that the
petitioners’ testimony at the hearing was insufficient to substantiate their claim as to their
nontaxable sales because they were unable to recall any of the pertinent transactional details
from which the tribunal could reconstruct the transactions or from which the petitioners’ claims
could be substantiated. Id. at 4-5. The tribunal reasoned that the treasury “acted reasonably in
its audit methodology basing its assessment upon the information that was available and
obtainable from [the] Petitioners and after meeting with [the] Petitioners and their CPA.” Id. at
5.
We conclude that Anderson does not support petitioners’ position. Like the petitioners in
Anderson, petitioners here failed to maintain detailed records of its business transactions with
Buck Truck. The tribunal clearly gave little weight to Locey’s testimony at the hearing, which
was within the tribunal’s discretion. Great Lakes Div, 227 Mich. App. at 404. Locey was not
directly involved in the transactions, and his testimony was not supported by cancelled checks
from which the auditor could have verified sales. If such testimony and lack of verification were
allowed to substantiate sales, it would eviscerate the MCL 205.104a requirement that petitioners
maintain “proper records” and would basically allow substantiation on the basis of a “trust me”
declaration.
Petitioners also argue that the tribunal committed an error of law by applying the
recordkeeping requirement set forth in MCL 205.104(1)—which required a party seeking an
exemption to keep a record of the name and address of the person to whom the sale was made,
rather than MCL 205.104a(1)—which required a party seeking an exemption for a sale for resale
at retail to keep a record of the sales tax license number if the person has a sales tax license.
However, the tribunal acknowledged and corrected the mistake in its final opinion and judgment,
a fact that petitioners do not address in their brief. Petitioners also fail to address the tribunal’s
conclusion that the error was de minimis; in other words, it had no impact on the outcome of the
case regardless of which recordkeeping statute was applied. We consider this issue abandoned
because petitioners have not fully addressed its merits. See Barrow v Detroit Election Comm,
301 Mich. App. 404, 418 n 6; 836 NW2d 498 (2013) (recognizing that an appellant abandons an
issue on appeal when it gives it cursory treatment).
Petitioners further aver that the tribunal erred by excluding purported exemption
certificates, titled “Michigan Sales and Use Tax Certificates of Exemption,” at the hearing.
Petitioners claim that the exhibits were admissible pursuant to MCL 205.104b(7)(e). MCL
205.104b(7) provides:
If the seller has not obtained an exemption form or all relevant data elements, the
seller may either prove that the transaction was not subject to the tax under this
act by other means or obtain a fully completed exemption form from the
purchaser, by the later of the following:
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(a) 120 days after a request by the department.
(b) The date an assessment becomes final.
(c) The denial of a claim for refund.
(d) In the instance of a credit audit, the issuance of an audit determination letter or
informal conference decision and order or determination.
(e) The date of a final order of the court of claims or the Michigan tax tribunal, as
applicable, with respect to an assessment, order, or decision of the department.[2]
Petitioners argue that the tribunal erred as a matter of law in excluding admission of the
documents because, even though admission would violate the tribunal’s order prohibiting
admission of any documents not provided before the close of discovery, subpart (e) of the statute
allows admission of the certificate at any time before the date of the tribunal’s final order.
As recognized by the tribunal, it is unnecessary to address the interplay between MCL
205.104b(7)(e), which appears to allow admission of certificates of exemption up until entry of
the final opinion and judgment, and a tribunal order prohibiting admission of such a document
after discovery has closed but before entry of a final order. The tribunal properly concluded that
even if the certificates were admitted and considered, it would not affect the assessment. The
purported exemption certificates did not address petitioners’ evidentiary problem in so far as
petitioners’ proofs failed to establish that certain vehicles were actually sold to Buck Truck. We
have already concluded that the tribunal’s order of assessment was supported by competent,
material, and substantial evidence on the record, and inclusion of the exemption certificates
would not alter the resolution of this issue.
We similarly are not persuaded by petitioners’ argument that the tribunal committed an
error of law by refusing to consider documents submitted with its exceptions to the proposed
opinion and judgment. Mich Admin Code, R 792.10257 (TTR 257) provides that the tribunal
may order “a rehearing or reconsideration of any decision or order upon its own initiative or the
motion of any party filed within 21 days of the entry of the decision or order sought to be reheard
or reconsidered.” Accordingly, because “exceptions are limited to the evidence submitted prior
to or otherwise admitted at the hearing and any matter addressed in the proposed opinion,” Mich
Admin R 792.10289 (emphasis added), the tribunal did not err as a matter of law by refusing to
consider the specified documents.
Petitioners also challenge on two grounds the tribunal’s order granting the department’s
motion to strike petitioners’ amended and supplemental petition, which was filed after the close
of discovery. This Court reviews for an abuse of discretion the tribunal’s decision to enforce its
own rules. See Perry v Vernon Twp, 158 Mich. App. 388, 392; 404 NW2d 755 (1987).
2
We note that the tribunal addressed this issue even though it recognized that MCL 205.104b(7)
was only in effect for a portion of the audit period.
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First, under Mich Admin Code R 792.10221(1), “[a] petition . . . may be amended or
supplemented by leave of the tribunal only.” Petitioners did not seek leave to file their amended
and supplemental petition. Rather, it simply filed the petition, contrary to the tribunal rule.
Further, even if petitioners had requested leave to amend, justice did not require that the
amendment be granted given petitioners’ delay in responding to the audit and lack of detailed
records. See Mich Admin Code R 792.10221(1) (stating that leave to amend “shall be freely
given when justice so requires”). The department continued to work with petitioners to verify
which sales were exempt from use and sales tax, and at the time the complex amended petition
was filed, discovery was closed. Given the history of the case, the tribunal did not abuse its
discretion by granting treasury’s motion to strike the pleading.
Second, petitioners rely on our Supreme Court’s decision in Fradco, Inc v Dep’t of
Treasury, 495 Mich. 104; 845 NW2d 81 (2014), to argue that the amended petition should have
been considered a timely original petition because it was a timely refiling under the appeal
period established in that case. Because the facts of the case are distinguishable, we disagree. In
Fradco, the Court held that, because the treasury is required to give notice of an assessment to
the appointed representative of the taxpayer, “the appeal period begins when the [treasury]
complies with MCL 205.28(1)(a) by giving the taxpayer notice of the final assessment through
personal service or certified mail and MCL 205.8 by sending a copy of the notice of the final
assessment to the representative’s address provided by the taxpayer in its written request.” Id. at
118. Unlike the circumstances in Fradco, in the instant case, a copy of the notice of the final
assessment was sent to Locey, petitioners’ representative, and the original petition was filed on
June 21, 2012, within the statutory appeal period. Thus, petitioners’ argument that the amended
petition should have been treated as an original petition for lack of notice is without merit.
Affirmed.
/s/ Henry William Saad
/s/ Cynthia Diane Stephens
/s/ Colleen A. O’Brien
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