Paul J. Elmer and Carol A. N. Elmer v. Indiana Department of Revenue

ATTORNEYS FOR PETITIONERS: ATTORNEYS FOR RESPONDENT:
DAVID F. MCNAMAR GREGORY F. ZOELLER
MCNAMAR & ASSOCIATES, P.C. ATTORNEY GENERAL OF INDIANA
Indianapolis, IN JOHN P. LOWREY
DEPUTY ATTORNEY GENERAL
F. PEN COSBY Indianapolis, IN
CREMER & CREMER
Indianapolis, IN
JAMES K. GILDAY
GILDAY & ASSOCIATES, P.C.
Indianapolis, IN
_____________________________________________________________________
IN THE
INDIANA TAX COURT
_____________________________________________________________________
PAUL J. ELMER and CAROL A. N. ELMER, )
)
Petitioners, )
)
v. ) Cause No. 49T10-1110-TA-00064
)
INDIANA DEPARTMENT OF STATE )
REVENUE, )
)
Respondent. ) Sep 01 2015, 2:43 pm
_____________________________________________________________________
ORDER ON RESPONDENT’S
MOTION FOR SUMMARY JUDGMENT
FOR PUBLICATION
September 1, 2015
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.
1
The Department has designated evidence that contains confidential information. Accordingly,
the Court will provide only that information necessary for the reader to understand its disposition
of the issues presented. See generally Ind. Administrative Rule 9.
2
(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
2
The Department’s LOF provided that the Elmers’ claim regarding the uncollectible debt could
be sustained if they provided sufficient documentation to substantiate the deduction. (See Br.
Supp. Resp’t Mot. Summ. J. (“Resp’t Br.”), Ex. 3 at 14.) The Department subsequently
determined that the documentation the Elmers provided was insufficient. (See, e.g., Pet’rs’
Original Tax Appeal Pet. to Set Aside a Final Determination of [Resp’t] ¶ 6(c) (alleging that the
Department erred in disallowing the uncollectible debt deduction).)
3
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 Corp. v. Indiana Dep’t of State Revenue, 995 N.E.2d 733,
734 n.1 (Ind. Tax Ct. 2013).
3
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
4
Proposed assessments typically provide a breakdown of the actual tax owed, penalties,
interest, and credits due; they do not, however, provide any explanation as to why the tax is
owed. (See, e.g., Resp’t Br., Ex. 1.)
5
Although the Department included certified copies of the missing proposed assessments in
another exhibit, it never specifically referred to that exhibit in its written brief. (Compare Resp’t
Br., Ex. 23 at 3, 5 with Resp’t Br. at 1-14.) Thus, the Court declines to incorporate the proposed
assessments in that other exhibit into Exhibit 1. See Filip v. Block, 879 N.E.2d 1076, 1081 (Ind.
2008) (stating that when “a party designates both specific lines or text and [a] more general
identification of the document containing the specified lines, the court may limit that party to the
more specific designation”).
4
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).
5
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,
6
While Mr. Elmer’s affidavit was not notarized, it contained an affirmation. (See Pet’rs’ Resp.
Resp’t Summ. J. Mot., Aff. Paul Elmer (“Elmer Aff.”).) Consequently, the Court can consider his
affidavit. See, e.g., State v. Hahn, 660 N.E.2d 606, 608 (Ind. Ct. App. 1996) (finding that a non-
notarized affidavit was still an affidavit because an affirmation subjected the affiant to a perjury
prosecution in the event her statements were false), trans. denied.
6
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 (1971).
In its Motion, the Department has claimed that it is entitled to judgment as a
matter of law for three alternative reasons. First, the Department claims that it correctly
disallowed the Elmers’ business expense deductions because the Pharmakon and
Hamilton transactions that generated the business expenses lacked economic
substance. (See Resp’t Br. at 6-12.) Alternatively, the Department claims that the
Elmers erred in taking the deductions because the expenses were not ordinary and
7
Because the Elmers took the uncollectible debt deduction in 2008, the Court will address the
Department’s claim with respect to that deduction when it determines whether the Department
made its requisite prima facie showing for the 2006 and 2008 tax years.
7
necessary business expenses. (See, e.g., Resp’t Br. at 9-10.) Finally, the Department
contends that the Elmers have not presented sufficient written documentation to
substantiate their business expense deductions.8 (See Resp’t Br. at 5-12.)
1. Economic substance
The “economic substance doctrine” is a federal common law doctrine that
disallows certain tax benefits when a taxpayer’s transactions do not have a business
purpose or economic substance. I.R.C. § 7701(o)(5)(A) (2015). The determination of
whether a taxpayer’s transactions lack economic substance for federal tax purposes
requires the application of a two-prong test: (1) was the taxpayer motivated by any
business purpose other than obtaining a tax benefit (the business purpose test); and (2)
did the transactions lack economic substance because no reasonable possibility of a
profit existed (the economic substance test). See Rice’s Toyota World, Inc. v. C.I.R.,
752 F.2d 89, 91 (4th Cir. 1985).
The Department claims that Pharmakon and Hamilton’s transactions were shams
devoid of all economic substance because: (1) the two S-corporations were closely
related given that Mr. Elmer was the sole shareholder and president of both, (2) Mr.
Elmer performed the same duties for each and failed to distinguish between either when
8
The Department also claims that Indiana Code § 6-8.1-3-1(a) allowed it to increase the
Elmers’ Indiana adjusted gross income by using, among other things, federal common law
doctrines to recalculate their federal taxable income through its disallowance of their federal
deductions. (See Hr’g Tr. at 6-7.) The Court will presume, without deciding, that the statute
conferred that authority to the Department.
8
working with a third party, Augusta Corporation,9 and (3) Hamilton had no employees.
(See Resp’t Br. at 9-12 (citing Resp’t Br., Ex. 8 at 51, 57-58, Ex. 11 at 21-22).) The
Department further claims that Pharmakon and Hamilton’s transactions were shams
without economic substance because they were insufficiently documented and largely
consisted of nothing more than Mr. Reed and Mr. Elmer’s conversations about the
pharmaceutical and long-term care industries.10 (See Resp’t Br. at 9-12 (citing Resp’t
Br., Ex. 11 at 17-19, Ex. 15 at Nos. 1, 12; Ex. 17 at No. 15).)
In response, the Elmers explain that Mr. Elmer had been doing business with Mr.
Reed, the sole owner of Augusta and the primary owner of Magnolia Health Systems,11
since he created Pharmakon in 2003. (See Pet’rs’ Br. at 4-5 (citing Elmer’s Aff. ¶¶ 2,
9
Augusta provided management/marketing services to Hamilton regarding, for example, the
operations of institutional pharmacies, Medicare Part D reimbursements, and the potential
effects of newly enacted legislation. (See Pet’rs’ Br. at 5 (citing Resp’t Br., Ex. 20 ¶ 3).)
Augusta also provided a variety of respiratory services to long-term care facilities on behalf of
Hamilton. (See Pet’rs’ Br. at 1-2, 5 (citing Resp’t Br., Ex. 8 at 62-70, Ex. 20 ¶ 3).)
10
The Department has also argued that several other factors showed that Pharmakon and
Hamilton’s transactions lacked economic substance. (See Resp’t Br. at 2-12 (citing Resp’t Br.,
Ex. 2 (the Elmers’ Protest Letter), Ex. 4 (a Memo), Ex. 5 (the Elmers’ Audit Summary), Ex. 7
(Hamilton’s Audit Summary), Ex. 9 (Pharmakon’s Audit Summary), Ex. 12 (E-mails), Ex. 18 (an
IRS Letter), Ex. 19 (Invoices), and Exs. 21-22 (Vehicle Logs)).) The Court, however, will not
consider those arguments because the designated evidence upon which the Department has
relied is inadmissible for one or more of the following reasons: it is unauthenticated, it is
unverified, it contains hearsay, or it is not supported by an affidavit. See, e.g., Miller Pipeline,
995 N.E.2d at 736 (stating the Court will only consider properly designated evidence that would
be admissible at trial); Pavlovich v. State, 6 N.E.3d 969, 975-80 (Ind. Ct. App. 2014) (requiring
the authentication of e-mail messages), trans. denied; Lee v. Schroeder, 529 N.E.2d 349, 352
(Ind. Ct. App. 1988) (stating that a court may disregard an affidavit on its own motion when it
does not meet the requirements of Trial Rule 56(E)), trans. denied; Wilson v. Jenga Corp., 490
N.E.2d 375, 376-77 (Ind. Ct. App. 1986) (indicating that invoices are hearsay and a foundation
must be laid for their admittance); 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); Ind. Evidence Rule 803(8)(B)(ii) (regarding the admissibility of “investigative
reports prepared by or for a public office, when offered by it in a case in which it is a party”).
11
Magnolia Health Systems, a manager of long-term care facilities, was owned by Mr. Reed
and his brother. (See Resp’t Br. at 3 (citing Resp’t Br., Ex 11 at 8).) Pharmakon provided
medications to Magnolia’s facilities. (See Pet’rs’ Br. at 2, 4 (citing Elmer’s Aff. ¶ 4; Resp’t Br.,
Ex. 8 at 10-11).)
9
4).) In turn, Mr. Elmer explained that he created Hamilton in 2004 because he wanted
to expand his pharmaceutical business and use a different business entity to create new
business relationships with, and provide innovative services to, Pharmakon’s
competitors. (See Pet’rs’ Br. at 2, 4-6 (citing Resp’t Br., Ex. 8 at 57-59, Ex. 11 at 17-18,
21; Elmer’s Aff. ¶¶ 3, 7).) Mr. Elmer also explained that he and Mr. Reed have never
co-owned any businesses or recorded any of their business arrangements in writing.
(See Pet’rs’ Br. at 3-7 (citing Elmer’s Aff. ¶¶ 5-6, 8).) In fact, Mr. Elmer averred that it
was customary to have oral agreements in his industry, explaining that when a local
hospital requested that Pharmakon provide it with medications, the medications were
immediately provided without a written contract. (See Pet’rs’ Br. at 5 (citing Resp’t Br.,
Ex. 8 at 29-30).)
“The legal right of a taxpayer to decrease the amount of what otherwise would be
his taxes, or altogether avoid them, by means which the law permits, cannot be
doubted.” Gregory v. Helvering, 293 U.S. 465, 469 (1935) (citations omitted). As a
result, “‘a taxpayer may adopt any form he desires for the conduct of his business, and
. . . the chosen form cannot be ignored merely because it results in a tax saving.’” N.
Ind. Pub. Serv. Co. v. C.I.R., 115 F.3d 506, 511 (7th Cir. 1997) (citation omitted).
Nonetheless, courts may disallow statutorily conferred tax advantages when the facts
indicate that a business was not formed for substantial business purposes or that it
does not engage in substantial business activity. See id. Whether a transaction is a
sham for purposes of the economic substance doctrine, therefore, is an issue of fact.
See, e.g., Rice’s Toyota, 752 F.2d at 92.
Here, the Department’s designated evidence indicates that Pharmakon and
10
Hamilton’s transactions may have lacked economic substance. In contrast, the Elmers’
designated evidence indicates that Mr. Elmer was guided by valid business purposes
when he created Hamilton and when he conducted Pharmakon and Hamilton’s
transactions. Accordingly, the Court having construed all properly asserted facts and
the reasonable inferences drawn therefrom in favor of the Elmers, finds that there is a
genuine issue of material fact as to whether Pharmakon and Hamilton’s transactions
lacked economic substance. See Scott Oil Co. v. Indiana Dep’t of State Revenue, 584
N.E.2d 1127, 1128-29 (Ind. Tax Ct. 1992). Thus, neither the Department nor the
Elmers are entitled to summary judgment on this basis.
2. Ordinary and Necessary Business Expenses
“An ‘ordinary’ expense is one that is ‘normal, usual, or customary in the type of
business involved.’” Curcio v. C.I.R., 689 F.3d 217, 223 (2d. Cir. 2012) (citations
omitted). An expense, however, need not be habitual to be “ordinary;” instead, “the
transaction ‘must be of common or frequent occurrence in the type of business
involved[.]’” Id. (citation omitted). A “necessary” expense, in turn, “is one that is
‘appropriate and helpful’ for the development of the taxpayer’s business.” Id. (citations
omitted).
The Department claims that the Elmers improperly took business expense
deductions under IRC § 162 because the expenses cannot be characterized as the
ordinary and necessary business expenses of either Pharmakon or Hamilton. (See,
e.g., Resp’t Br. at 9-10.) As acknowledged by the Department, for federal tax purposes
“[t]he determination of whether an expense is ‘ordinary’ and ‘necessary’ is primarily a
factual one based upon the substance of the underlying transaction.” (Resp’t Br. at 7
11
(citing C.I.R. v. Heininger, 320 U.S. 467, 470 (1943)).) As just explained, the Elmers’
designated evidence indicates that Hamilton was formed for valid business purposes
and that the conversations between Mr. Elmer and Mr. Reed were related to, and may
have benefited, Pharmakon and Hamilton’s businesses. Furthermore, the Elmers’
designated evidence shows that Pharmakon and Hamilton’s transactions were
conducted at arm’s-length rates. (See Pet’rs’ Br. at 10-13 (citing Resp’t Br., Ex. 20 ¶¶ 3,
7).) Nevertheless, the Department’s designated evidence establishes that Mr. Elmer
and Mr. Reed simply could not recall the specific details of those transactions. (See,
e.g., Resp’t Br. at 9-10 (citing Resp’t Br., Ex. 8 at 34, 49-50 (where Mr. Elmer states that
he could not recall whether he required employees to complete vehicle travel logs or
kept his own contemporaneous vehicle usage records), Ex. 11 at 21-22 (where Mr.
Reed states that he could not recall the details of the agreement regarding Hamilton’s
payment of management/marketing fees to Augusta)).) When questions regarding the
credibility of witnesses or the weight of testimony arise, as is the case here, summary
judgment should be denied. See Mayhew v. Deister, 244 N.E.2d 448, 452 (Ind. Ct.
App. 1969), trans. denied. Accordingly, the Court finds that neither party is entitled to
summary judgment on this basis because there is a genuine issue of material fact as to
whether the expenses that the Elmers deducted can be characterized as the ordinary
and necessary business expenses of either Pharmakon or Hamilton.
3. Substantiating Documentation
IRC § 6001 provides that “[e]very person liable for any tax imposed by this title,
or for the collection thereof, shall keep such records, render such statements, make
such returns, and comply with such rules and regulations as the Secretary may from
12
time to time prescribe.” I.R.C. § 6001 (2005). In addition, IRC § 274, in relevant part,
states that no deduction for traveling expenses under IRC § 162 shall be allowed
unless [a] taxpayer substantiates by adequate records or by
sufficient evidence corroborating the taxpayer’s own statement (A)
the amount of such expense or other item, (B) the time and place of
the travel, entertainment, amusement, recreation, or use of the
facility or property, or the date and description of the gift, (C) the
business purpose of the expense or other item, and (D) the business
relationship to the taxpayer of the persons entertained, using the
facility or property, or receiving the gift.
I.R.C. § 274(d) (2005). The Department has claimed that these authorities establish
that it is entitled to judgment as a matter of law because the Elmers have not offered
sufficient written documentation to substantiate their business expense deductions.12
(See Resp’t Br. at 5-12.) The Court, however, must disagree.
A taxpayer’s failure to produce corroborating written documentation at the
federal level may entitle a federal taxing official to summary judgment. See, e.g., In re
Settles, 452 B.R. 637, 660 (Bankr. E.D. Tenn. 2011) (providing that a debtor’s promise
that evidence substantiating his claimed business expense deductions would be
produced at trial was insufficient to preclude entry of summary judgment in favor of a
taxing official on the issue of whether the debtor was entitled to the deductions). The
same does not hold true for purposes of Indiana law. Indeed, the Indiana Supreme
12
The Department also claims that the Court should grant its Motion because Indiana’s case
law and Indiana Code § 6-8.1-5-4 require a taxpayer to substantiate its federal deductions and
Indiana tax liability with written documentation. (See Resp’t Br. at 7-8 (citing Lafayette Square
Amoco, Inc. v. Indiana Dep’t of State Revenue, 867 N.E.2d 289, 292-93 (Ind. Tax Ct. 2007);
IND. CODE § 6-8.1-5-4(a) (2005)).) Neither of these authorities, however, stands for the
proposition that the Department claims. Indeed, the Court arrived at its holding in Lafayette
Square Amoco post trial, not after a party moved for summary judgment. See Lafayette Square
Amoco, 867 N.E.2d at 290. In turn, Indiana Code § 6-8.1-5-4 merely requires a taxpayer to
maintain certain records to enable the Department to determine its actual tax liability, and when
the taxpayer fails to do so, the Department may determine the taxpayer’s tax liability based on
the best information available to the Department. See I.C. § 6-8.1-5-4(a); IND. CODE § 6-8.1-5-
1(b) (2005) (amended 2006); see also, e.g., Keller Oil Co. v. Indiana Dep’t of State Revenue,
512 N.E.2d 501, 504 (Ind. Tax Ct. 1987).
13
Court has explained that Indiana’s summary judgment procedure differs from that
employed at the federal level because Indiana does not adhere to the federal
methodology:
The burden imposed at trial upon the party with the burden of
proof on an issue is significantly different from that required of a
non-movant in an Indiana summary judgment proceeding. Under
Indiana’s standard, the party seeking summary judgment must
demonstrate the absence of any genuine issue of fact as to a
determinative issue, and only then is the non-movant required to
come forward with contrary evidence . . . . Under the federal rule,
[however,] the party seeking summary judgment is not required to
negate an opponent’s claim. [Instead, t]he movant need only
inform the court of the basis of the motion and identify relevant
portions of the record “which it believes demonstrate the absence
of genuine issue of material fact.” The burden then rests upon the
non-moving party to make a showing sufficient to establish the
existence of each challenged element upon which the non-
movant has the burden of proof.
Jarboe v. Landmark Cmty. Newspapers of Ind., Inc., 644 N.E.2d 118, 123 (Ind. 1994)
(citations omitted). The case of Lenhardt Tool & Die Company, Inc. v. Lumpe, 703
N.E.2d 1079 (Ind. Ct. App. 1998), trans. denied exemplifies the lessons of Jarboe in
practice and is of particular relevance here.
In Lenhardt, the plaintiff filed a complaint for negligence and strict liability against
the defendant, a manufacturer of molds. Lenhardt Tool & Die Co. v. Lumpe, 703 N.E.2d
1079, 1081 (Ind. Ct. App. 1998), trans. denied. The defendant, after unsuccessfully
moving for summary judgment, claimed that the trial court had erred in denying its
motion because the plaintiff’s designated evidence did not prove that the defendant had
manufactured the molds that caused the plaintiff’s injuries. Id. In resolving the
defendant’s appeal, the Indiana Court of Appeals explained that it must determine
whether “a defendant [may] succeed in a motion for summary judgment by showing the
14
plaintiff lacks sufficient proof to establish an essential element of the plaintiff’s claim on
which the plaintiff bears the burden of proof.” Id. The Court of Appeals explained that
the trial court had not erred given the defendant’s failure to designate sufficient
evidence in support of its motion and the Indiana Supreme Court’s decision in Jarboe:
It is clear that under the Jarboe analysis, [the defendant] would
have had to designate some evidence that the mold was not
manufactured by [the defendant] in order to require [the plaintiff]
to come forward with evidence that the mold was manufactured
by [the defendant]. Simply demonstrating that [the plaintiff] does
not have sufficient evidence to prove the mold was manufactured
by [the plaintiff] is not enough.
See id. at 1083. The Court of Appeals acknowledged that in some instances, a plaintiff
may not produce better evidence at trial and, as a result, a defendant would be granted
a motion for judgment on the evidence because the plaintiff would have failed to prove
an essential element of its case. Id. Nevertheless, the Court of Appeals determined
that Jarboe compelled it to affirm the trial court given that “summary judgment
terminates the right to trial and that summary judgment [may] be denied even though it
appears that [a] plaintiff may not succeed at trial.” Id. at 1084 (citation omitted).
The Elmers, like the plaintiff in Lenhardt, have the burden of proving that the
Department’s proposed assessments are incorrect. See RAC II, 963 N.E.2d at 466;
IND. CODE § 6-8.1-5-1(c) (2005) (amended 2006). In moving for summary judgment, the
Department designated evidence to show that there is no genuine issue of material fact
as to whether the Elmers erred in taking business expense deductions for the 2005 and
2007 tax years. In addition, the Department claimed that, like the defendant in
Lenhardt, the Elmers have not designated written documentation that substantiates their
business expense deductions and, therefore, the Department is entitled to an entry of
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summary judgment. In response, the Elmers designated evidence that ultimately
established that there is indeed a genuine issue of material fact as to whether their 2005
and 2007 business expense deductions were proper. At that point, the Department’s
remaining claim that the Elmers’ business expense deductions were improper because
the Elmers failed to provide substantiating written documentation was insufficient to
entitle it to an entry of summary judgment. See Lenhardt, 703 N.E.2d at 1083-84.
Accordingly, the Elmers, similar to the plaintiff in Lenhardt, did not need to designate
written documentation that substantiated their 2005 and 2007 business expense
deductions to defeat the Department’s Motion. Accordingly, the Department has not
shown that it is entitled to summary judgment for the 2005 and 2007 tax years on the
basis that the Elmers failed to designate written documentation that substantiated their
2005 and 2007 business expense deductions.
II. The 2006 and 2008 Tax Years
As previously explained, the Court must determine whether 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 2006 and 2008 tax years because it failed to properly
designate the 2006 and 2008 proposed AGIT assessments as evidence. See supra pp.
4-5. For the below-stated reasons, the Court finds that the Department has not made
the requisite prima facie showing with respect to the uncollectible debt deduction or the
Elmers’ other 2006 and 2008 business expense deductions.
The uncollectible or bad debt deduction is another permissible IRC § 63
deduction that allows a taxpayer to deduct either in whole or in part “any debt which
becomes worthless within [a] taxable year.” See I.R.C. § 166(a)-(b) (2005). The
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Department claims that the Elmers erred in taking an uncollectible debt deduction
because the debtor, Magnolia, continued to make payments on the purportedly
worthless debt and the Elmers have not produced written documentation to substantiate
what portion, if any, of the debt was worthless. (See Resp’t Br. at 13-14.)
The Department has designated the following admissible evidence to support its
claim: the LOF (Exhibit 3), Mr. Elmer’s Deposition Testimony (Exhibit 8), Mr. Reed’s
Deposition Testimony (Exhibit 11), the First and Second Responses to the
Department’s Request for Production of Documents (Exhibits 13 and 15), and the
Responses to the Department’s Second Set of Interrogatories (Exhibit 14).13 (See
Resp’t Br. at 3, 13-14 (citing Resp’t Br., Ex. 3 at 11, Ex. 8 at 21, 69, Ex. 11 at 8, 13-15,
Ex. 13 at No. 17, Ex. 14 at Nos. 18-19, and Ex. 15 at No. 8).) This evidence establishes
the following:
During the administrative protest phase, the Elmers explained that
they took an uncollectible debt deduction on their 2008 amended
return because the period in which Pharmakon could receive
insurance reimbursements had expired. Mr. Elmer and Mr. Reed
subsequently explained that some of Mr. Reed’s long-term care
facilities, including Magnolia, did not always have the means to pay
Pharmakon for the services it had rendered in a timely fashion. As
a result, Mr. Elmer and Mr. Reed had occasional meetings during
which they discussed “the unpaid accounts receivable that
Magnolia owed Pharmakon.” Mr. Elmer and Mr. Reed orally
agreed that Pharmakon would take “write downs on stuff” and that
Magnolia would make payments to Pharmakon at certain intervals,
but “th[o]se time frames would move depending on the stability of
the [parties’] relationship[.]” While Mr. Elmer agreed that he
created an oral contract with Mr. Reed for repayment of the
outstanding debts, he could not recall either when the contracts
were formed or what the precise terms of the agreement was, and
he conceded that he could not locate a purportedly relevant memo
13
The Department has also designated the Elmers’ Protest Letter (Exhibit 2), a Memo (Exhibit
4), Pharmakon’s Audit Summary (Exhibit 9), and certain E-mails (Exhibit 12) to supports its
claim. (See Resp’t Br. at 3, 13-14.) As previously explained, however, those exhibits are
inadmissible and the Court will therefore not consider them. See supra note 10.
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regarding their agreement.
(See Resp’t Br. at 3, 13-14 (citing Resp’t Br., Ex. 3 at 11, Ex. 8 at 21, Ex. 11 at 13-15,
Ex. 13 at No. 17, Ex. 14 at Nos. 18-19, Ex. 15 at No. 8).) The Department’s designated
evidence, therefore, simply provides cursory facts regarding the Elmers’ 2008
uncollectible debt deduction. As a result, the Court finds that the Department has not
made its requisite prima facie showing as to the propriety of the Elmers’ 2008
uncollectible debt deduction.
The Court similarly finds that the Department did not make its prima facie
showing as to the propriety of the Elmers’ other 2006 and 2008 business expense
deductions for three main reasons. First, the Court cannot consider the majority of the
material facts that support the Department’s claims for those years because the facts
are derived from exhibits that are unverified, unsupported by affidavits, unauthenticated,
or contain hearsay. (Compare Hr’g Tr. at 8-16 (identifying the material facts) with supra
note 10 (the Department’s inadmissible exhibits).) Second, the Department’s rationale
for disallowing the Elmers’ 2006 and 2008 business expense deductions is the same as
that presented for the 2005 and 2007 deductions, (see, e.g., Resp’t Br. at 2-5; H’rg Tr.
at 7-16), and the Court has already determined that there are genuine issues of material
fact with respect to the 2005 and 2007 tax years. Finally, the Department’s renditions of
the admissible material facts are often inconsistent with those in the designated
evidence. For instance, the Department states that Mr. Reed “did not know what
Augusta’s business purpose was[.]” (Resp’t Br. at 4 (citing Resp’t Br., Ex. 11 at 9-11).)
The designated evidence, however, indicates that Mr. Reed explained that Augusta
provided management and consulting services and held real estate. (See Resp’t Br.,
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Ex. 11 at 9-10.) Accordingly, the Court finds that the Department has not shown that it
is entitled to summary judgment as a matter of law for the 2006 and 2008 tax years
either.
CONCLUSION
In this case, the parties’ designated evidence invites the Court to resolve factual
disputes and conflicting inferences, assess the credibility of witnesses, and determine
where the preponderance of the parties’ designated evidence lies. This, however, is
improper because the summary judgment procedure is not a substitute for trial, a
means for resolving factual disputes or conflicting inferences that arise from undisputed
facts, or a tool for deciding where the preponderance of the evidence lies before the
evidence has been fully presented. See Owens Corning Fiberglass Corp. v. Cobb, 754
N.E.2d 905, 909 (Ind. 2001); Egnatz v. Med. Protective Co., 581 N.E.2d 438, 439-40
(Ind. Ct. App. 1991). The Court, finding that there are genuine issues of material fact as
to whether the Department, in determining the Elmers’ Indiana AGIT liability, erred in
disallowing the Elmers’ business expense and uncollectible debt deductions for the
years at issue, DENIES the Department’s Motion. The Court will order the parties to file
a joint status report under separate cover.
SO ORDERED this 1st day of September 2015.
Thomas G. Fisher, Senior Judge
Indiana Tax Court
DISTRIBUTION:
David F. McNamar, F. Pen Cosby, James K. Gilday, John P. Lowrey
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