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
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.
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.
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 fact
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.
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
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;
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.
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 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.
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 working with a third party, Augusta Corporation,
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,
"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, 55 S.Ct. 266, 79 L.Ed. 596 (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
Here, the Department's designated evidence indicates that Pharmakon and 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, ¶28-29 (Ind. Tax Ct.1992). Thus, neither the Department nor the Elmers are entitled to summary judgment on this basis.
"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 (citing C.I.R. v. Heininger, 320 U.S. 467, 470, 64 S.Ct. 249, 88 L.Ed. 171 (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, 144 Ind.App. 111, 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
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 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
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.
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 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:
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 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:
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 summary judgment. In response, the Elmers designated evidence that ultimately established that
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. 189-90. 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 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).
(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; Hr'g 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., 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.
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.
SO ORDERED.
