Source: http://www.in.gov/legislative/iac/20120530-IR-045120235NRA.xml.html
Timestamp: 2016-02-07 13:31:38
Document Index: 157173734

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

04-20110563.LOF
Letter of Findings: 04-20110563
I. Recreational Vehicle – Use Tax.
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); Letter of Findings 04-20110326 (November 16, 2011); Letter of Findings 04-20110504 (December 16, 2011).
Taxpayer disagrees with the Department of Revenue's decision imposing a sales/use tax assessment on the purchase of a recreational vehicle.
II. Tax Administration – Fraud Penalty.
Taxpayer challenges the Department of Revenue's decision imposing a 100 percent fraud penalty stemming from the use tax assessment on the purchase of a recreational vehicle.
Taxpayer purchased a recreational vehicle from an Indiana dealership in June 2010. No sales tax was paid to Indiana at the time of the transaction. Taxpayer arranged for a Montana attorney to establish a Montana LLC to hold title to the vehicle. Upon investigation, the Department found that the vehicle was titled in the name of a Montana LLC for which Taxpayer and his wife are the only members/owners. The Indiana Department of Revenue ("Department") issued a proposed assessment for sales/use tax, fraud penalty, and interest. Taxpayer disagreed with the proposed assessment and submitted a protest to that effect. An administrative hearing was conducted by phone during which Taxpayer's representative explained the basis for the protest. This Letter of Findings results.
The Department assessed use tax on the purchase of a recreational vehicle in Indiana. The Department imposed use tax after determining that no sales tax had been paid on the purchase of the recreational vehicle. Taxpayer disagrees relying on the proposition that the recreational vehicle was titled in Montana, has been used "primarily outside of the State of Indiana...," and was used for charitable purposes.
Taxpayer maintains that the recreational vehicle was titled by the Montana LLC and that all legal documents establishing the existence of the LLC were properly filed in Montana. Taxpayer additionally states that the recreational vehicle was primarily used outside Indiana and was used for charitable purposes.
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 "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 driven in Indiana by you as Indiana residents."
Taxpayer states that "[Taxpayer], individually, was not involved in this transaction" and "there is no legal basis to assess or tax him individually." Taxpayer correctly points out there is nothing in the law which requires that a taxpayer maximize his or her tax liability but that "[a]nyone may so arrange his affairs that his taxes shall be low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." Helvering v. Gregory, 69 F.2d 809, 810 (2nd Cir. 1934).
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 recreational vehicles are not subject to sales and use tax. In addition, Taxpayer explains that the LLC was formed to insulate Taxpayer from any potential liability attributable to the recreational vehicle. 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 "help you eliminate all sales taxes...."
The Montana LLC has no checking account, has no money, does not claim to own any assets besides the recreational vehicle, and has no business records beyond those filed by the Montana attorney to originate the LLC. The Montana LLC has no documentation of activities. The Montana LLC does not file tax returns. The Montana LLC's owners do not have meetings to discuss business or activities of the LLC.
Moreover, Taxpayer and his spouse are Indiana residents. Taxpayer and his spouse have Indiana driver's licenses. Taxpayer has four motor vehicles and a trailer licensed and titled in Indiana. Taxpayer and his spouse filed an Indiana resident income tax return for the year in question and in every year for several years prior to the year in question. The Department also notes that it contacted the Indiana County in which Taxpayer owns a home, and the county stated that Taxpayer claimed a Homestead Exemption, which means Taxpayer made a declaration that the Indiana home is Taxpayer's residence.
Furthermore, Taxpayer stated the recreational vehicle is stored in Indiana in-between trips taken for "charitable purposes" and spent zero days in Montana. While Taxpayer stated the recreational vehicle was used for trips for "charitable purposes" by the LLC, it is significant to note that Taxpayer took a deduction on Taxpayer's individual income tax return for the mileage driven in the recreational vehicle for these trips.
Therefore, the Department is unable to agree that Taxpayer has met its burden under IC § 6-8.1-5-1(c) of demonstrating that the recreational vehicle is not used or stored in Indiana and that the Department erred in requiring an Indiana resident to pay use tax on a vehicle purchased and stored in Indiana.
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. The 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; Letter of Findings 04-20110326 (November 16, 2011) 20120125 Ind. Reg. 045120032NRA; Letter of Findings 04-20110504 (December 16, 2011) 20120229 Ind. Reg. 045120088NRA.
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 was assessed on "baseless" allegations of fraud and is "slanderous and wholly improper."
The fraud penalty is found at IC § 6-8.1-10-4, which provides:
Additionally, 45 IAC 15-5-7(f)(3) states:
As explained in Issue I, the proposed assessment of sales/use tax was correct and the Department properly assessed use tax on the recreational vehicle. The question now is, was the 100 percent penalty properly imposed?
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, "These services include the areas of tax free vehicle registration.... Forming a Montana business entity (Montana LLC or Corporation) may help you eliminate all sales taxes and minimize license fees upon the purchase and registration of a recreational vehicle or any other vehicles."
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. Taxpayer used his own money and/or took out a loan in Taxpayer's name to pay for the recreational vehicle. The LLC then "took possession" of the recreational vehicle. Taxpayer notes that the recreational vehicle was "titled to the Montana LLC a fact which was duly recorded and recognized by the state of Montana."
However unlikely the legal contortions may have been, Taxpayer apparently consulted the Montana attorney in good faith, paid that attorney to establish a Montana LLC, and believed the attorney's explanation that establishing the LLC would allow Taxpayer to avoid paying Indiana sales or use tax. As such, it is not possible to establish – by "clear and convincing evidence" – that Taxpayer possessed the requisite "degree of knowledge" or scienter sufficient to sustain the imposition of the 100 percent penalty.
The assessment of the fraud penalty is incorrect and should be abated. Taxpayer has not demonstrated that the purchase of the recreational vehicle is not subject to Indiana use tax.
DIN: 20120530-IR-045120235NRA
Composed: Feb 07,2016 8:31:39AM EST