Wednesday, July 13, 2011
Indiana Blows It But Taxpayer Has To Give Back Refund
Our ongoing search for bad state tax laws and policies takes us this time to Indiana, which is almost next door to our offices. Generally Indiana is a solid, common-sense Midwest state, but they dived into the pool of bad tax administration with Zoeller v Aisin USA Manufacturing.
Aisin filed its 2001 corporate income tax return in October, 2002. It showed the following:
Tax due $1,300,367
Applied $ 156,633
The Indiana Department of Revenue (“Department”) worked its voodoo and in September, 2003 issued Aisin a refund of $1,146,062.
Aisin cashed the check.
Two more years go by. In October, 2005 Aisin amends its 2001 return to show the following:
Tax due $1,051,099
Applied $ 156,633
Refund $ 249,268
Whoa Nellie!! This is different. Normally when an accountant prepares an amended return – and there was a refund on the original return – the accountant adjusts something to show the refund. Aisin is not associating the $1,146,062 refund with its 2001 payments at all. That is aggressive.
The Department starts taking a look at Aisin’s file. Good idea. In April, 2006 the Department wanted to issue a Proposed Assessment to Aisin. It wants its money back.
Question: Can you see the problem a tax person would have?
I’ll give you a hint. Under Indiana Code 6-8.1-5-1(b) “… the department may not issue a proposed assessment … more than three (3) years after the latest of the date the return is filed, or … the due date of the return.”
OK, when was the return filed? That was in October, 2002. Three years from that is … October, 2005. Can the Department even issue this Proposed Assessment? But first …
Question: Does filing an amended return affect the 3-year Indiana statute?
Here is something that will surprise you; The filing of an amended return in Indiana does not restart the limitations period (UACC Midwest, Inc n v Indiana Department State Revenue). Aisin was very slick by filing the amended within days of the statute expiring.
Back to our question. Indiana could not issue the Proposed Assessment. Indiana recognized this and pulled the assessment before it could be mailed.
Seems to me that Aisin is up by $1,146,062. It is oily, I grant you, but it is the technical reading of the law. Indiana just blew it. Or did they?
The Department next files a nontax claim against Aisin on grounds of unjust enrichment. The trial court dismisses the case and the Court of Appeals affirms. Why? Because this was a tax case, and in Indiana tax cases are heard in the Indiana Tax Court, not in Superior (that is, trial) Court.
But the Department will not be deterred. It files an appeal to the Indiana Supreme Court … which decides to hear the case! There is only one issue before the Indiana Supreme Court: is this a tax case or not?
The Court states:
“Had Aisin neither paid nor owed any income taxes but still received the check because of clerical error, the State’s action to recover would not be an action to recover any unpaid “tax” because Aisin would not have owed any tax.”
To hold that this “refund,” issued solely because of accounting or clerical errors, represents part of a tax would not serve the legislative purpose of ensuring the uniform interpretation and application of the tax laws because the tax laws are not implicated.”
Am I to believe that Aisin left the west side of Cincinnati for a leisurely two-hour drive to Indianapolis where – like a gift from the heavens - a check in the amount of $1,146,062 floated in through an open car window? Were these the winnings from a fantasy football league? Did Aisin discover the long-lost Harry Potter manuscript at a Saturday morning yard sale? Of course this money was tax-related. The only reason that the Department even knew that Aisin existed is because Aisin was filing its taxes.
I agree with the Justices Rucker and Dickson in the dissent:
What is really at stake in this case is that the State apparently acted under the assumption that it missed a statute of limitations deadline in a tax proceeding. The State does not contest Aisin’s assertion. Instead it is reasonable to conclude that acting under the assumption that it could obtain no relief in the Tax Court by reason of a statute of limitation, the State attempted an end-run and filed this action in Superior Court. Given the lengths to which the majority was required to analyze Aisin’s various tax filings and the resultant repercussions, I agree that this a tax case and would affirm the judgment of the trial court.
It is difficult to side with Aisin, but they were right and Indiana was wrong. We all lose something when a judge or court unilaterally decides to trump the law. What we lose is predictability and the right to rely on the law.