Source: http://www.in.gov/legislative/iac/20120229-IR-045120088NRA.xml.html
Timestamp: 2014-07-29 23:56:06
Document Index: 156599044

Matched Legal Cases: ['§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 1', '§ 6', '§ 6', '§ 6']

04-20110504.LOF
Letter of Findings: 04-20110504
Authority: IC § 6-2.5-1-2; IC § 6-2.5-2-1; IC § 6-2.5-3-2(a); IC § 6-2.5-4-1(b), (c); IC § 6-8.1-5-1(c); 45 IAC 2.2-3-4; Gregory v. Helvering, 293 U.S. 465 (1935); Lee v. Comm'r, 155 F.3d 584 (2d Cir. 1998); Horn v. Comm'r, 968 F.2d 1229, (D.C. Cir. 1992); Comm'r v. Transp. Trading & Terminal Corp., 176 F.2d 570 (2d Cir. 1949); Helvering v. Gregory, 69 F.2d 809 (2nd Cir.1934); Rhoade v. Ind. Dep't of State Revenue, 774 N.E.2d 1044 (Ind. Tax Ct. 2002); USAir, Inc. v. Ind. Dep't of State Revenue, 623 N.E.2d 466 (Ind. Tax. Ct. 1993); Fell v. West, 73 N.E. 719 (Ind. App. 1905); Dept. of Treasury v. Dietzen's Estate, 21 N.E.2d 137 (Ind. 1939); Letter of Findings 04-20100111 (March 29, 2010); Letter of Findings 04-20100299 (July 28, 2010); Letter of Findings 04-20100175 (August 23, 2010).
Taxpayer purchased a recreational vehicle from a Florida dealership. No sales tax was paid to Florida at the time of the transaction. Taxpayer arranged for a Montana attorney to establish an LLC to hold title to the vehicle. The only member of the LLC is Taxpayer's Indiana farming business. Taxpayer is the president of the Indiana farming business. The Indiana Department of Revenue ("Department") issued a proposed assessment for sales/use tax. Taxpayer disagreed with the proposed assessment and submitted a protest to that effect. An administrative hearing was conducted during which Taxpayer and Taxpayer's representative explained the basis for the protest. This Letter of Findings results.
Along with challenging the underlying assessment of sales/use tax on the purchase of a vehicle, Taxpayer also challenges the assessment of the fraud penalty which had the effect of doubling the underlying assessment. Taxpayer states that the fraud penalty is "slanderous and wholly improper."
Taxpayer conferred with a Montana lawyer to establish the LLC to hold title to the vehicle. A cursory search of publicly available information reveals that Taxpayer's attorney offers various services to its clients stating that, "Register your vehicle in Montana. Avoid sales tax and licensing fees. Forming a Montana business entity (Montana LLC or Corporation) may allow you to avoid sales tax and lower your licensing fees on your automobile, recreational vehicle, trailer, boat or airplane."
The Montana Secretary of State duly "approved the filing of the documents" for the LLC. Purportedly acting as an "agent" for the LLC, Taxpayer proceeded to purchase the recreational vehicle. The LLC then "took possession" of the recreational vehicles. Taxpayer notes that both recreational vehicles were "titled to the Montana LLC a fact which was duly recorded and recognized by the state of Montana."
Taxpayer disagrees relying partly on the proposition that no sales tax was owed to Florida or Montana and that the Department is required to defer to those states under the Full Faith and Credit Clause of the United States Constitution. (U.S. Const. art. IV § 1). Taxpayer protests that the recreational vehicles were titled by a Montana LLC and that all legal documents establishing the existence of the LLC were properly filed in Montana. Taxpayer additionally maintains that the Montana LLC had a legitimate purpose, the Taxpayer used the recreational vehicle for purposes related to its farming operation, and that the vehicle was used primarily outside Indiana.
The use tax is functionally equivalent to the sales tax. See Rhoade v. Ind. Dep't of State Revenue, 774 N.E.2d 1044, 1047 (Ind. Tax Ct. 2002). By complementing the sales tax, the use tax ensures that non-exempt retail transactions (particularly out-of-state retail transactions) that escape sales tax liability are nevertheless taxed. Id.; USAir, Inc. v. Ind. Dep't of State Revenue, 623 N.E.2d 466, 468–69 (Ind. Tax. Ct. 1993). The use tax ensures that, after such goods arrive in Indiana, the retail purchasers of the goods bear their fair share of the tax burden. To trigger imposition of Indiana's use tax, tangible personal property must (as a threshold matter) be acquired in a retail transaction. Rhoade, 774 N.E.2d at 1048. A taxable retail transaction occurs when; (1) a party acquires tangible personal property as part of its ordinary business for the purpose of reselling the property; (2) that property is then exchanged between parties for consideration; and (3) the property is used in Indiana. See IC § 6-2.5-1-2; IC § 6-2.5-4-1(b), (c); IC § 6-2.5-3-2(a).
In its contact letter to the Taxpayer, the Department explained that use tax was being assessed because "sales tax was not paid to the vendor." The Department recognized that the vehicle(s) "was titled in the state of Montana in the name of a LLC" but that the Department "believed the RV is the only asset of the LLC and the LLC serves no other purpose but to avoid Indiana sales/use taxes due for vehicles that are otherwise garaged, serviced, and/or drive in Indiana by you as Indiana residents."
However it should also be pointed out that in the Supreme Court decision Gregory v. Helvering, 293 U.S. 465 (1935), challenging the previously cited decision, the Court stated that in order to qualify for favorable tax treatment, a business reorganization must be motivated by the furtherance of a legitimate corporate business purpose. Id. at 469. A business activity undertaken merely for the purpose of avoiding taxes was without substance and "to hold otherwise would be to exalt artifice upon reality and to deprive the statutory provision in question of all serious purpose." Id. at 470.
Taxpayer sets out putative reasons for titling a recreational vehicle in Montana but also points out that Montana does not require a "business purpose to create or organize a Limited Liability Company" and that the Department is constitutionally required to extend "full faith and credit" to Montana's decision that the recreational vehicles are not subject to sales and use tax. In addition, Taxpayer explains that the LLC was formed to insulate Taxpayer's Indiana business from any potential liability attributable to the recreational vehicle. In addition, Taxpayer explains that he Taxpayer uses the recreational vehicle to travel from state to state in order to examine farming practices in other states and the recreational vehicle is only "temporarily stored in Indiana."
The Department does not deny that the LLC may have been formed for a purpose other than avoiding the tax. However, in determining that Taxpayer was entitled to rely on the representations of the Montana attorney to the extent that Taxpayer did not knowingly commit fraud, the Department also reasonably notes the attorney's own representations that the purpose of establishing a Montana LLC is to "save a great deal of money on taxes and licensing fees...."
Unfortunately, the Department is unable to accept the proposition that Indiana residents may avoid paying sales and use tax on tangible personal property simply by titling that property outside the state. In this particular case, the Department is unable to agree that either the law, the facts presented by Taxpayer, or simple common sense compel the conclusion that Taxpayer should not be responsible for paying use tax on this vehicle. Department has consistently determined as much. See Letter of Findings 04-20100111 (March 29, 2010) 20100526 Ind. Reg. 045100324NRA; Letter of Findings 04-20100299 (July 28, 2010) 20100929 Ind. Reg. 045100591NRA; Letter of Findings 04-20100175 (August 23, 2010) 20101027 Ind. Reg. 045100650NRA.
DIN: 20120229-IR-045120088NRA
Composed: Jul 29,2014 7:56:06PM EDT