ATTORNEY FOR PETITIONERS:                       ATTORNEYS FOR RESPONDENT:
JAMES K. GILDAY                                 CURTIS T. HILL, JR.
GILDAY & ASSOCIATES, P.C.                       ATTORNEY GENERAL OF INDIANA
Indianapolis, IN                                WINSTON LIN
                                                DEPUTY ATTORNEY GENERAL
                                                Indianapolis, IN

                                                                                  FILED
                               IN THE                                         Apr 10 2019, 3:10 pm

                                                                                  CLERK
                         INDIANA TAX COURT                                    Indiana Supreme Court
                                                                                 Court of Appeals
                                                                                   and Tax Court




TONY W. SMITH and                               )
SHIRLENA SMITH,                                 )
                                                )
      Petitioners,                              )
                                                )
             v.                                 ) Cause No. 49T10-1605-TA-00013
                                                )
INDIANA DEPARTMENT OF                           )
STATE REVENUE,                                  )
                                                )
      Respondent.                               )


                             ORDER ON PETITIONERS’
                     MOTION FOR PARTIAL SUMMARY JUDGMENT

                                  FOR PUBLICATION
                                    April 10, 2019

WENTWORTH, J.

      Tony W. Smith and Shirlena Smith have appealed, among other things, the Indiana

Department of State Revenue’s assessments of Indiana adjusted gross income tax

(AGIT) for 2005 through 2007 and 2009 through 2014. The matter, currently before the

Court on the Smiths’ Motion for Partial Summary Judgment (“Motion”), presents the

following issue of first impression: whether the Department’s modifications to the Smiths’

AGIT liabilities for 2005 through 2007 (the “years at issue”) were limited to the
modifications made by the Internal Revenue Service (the “IRS”) to resolve the federal

audit for those years.1 Upon review, the Court finds that the Department’s modifications

were limited to the final modifications made by the IRS to resolve the federal audit for

those years.2

                          FACTS AND PROCEDURAL HISTORY

       The following facts are not in dispute. The Smiths timely filed their federal income

tax returns for 2005 through 2007, reporting that they were professional gamblers with

income and deductions associated with that trade. (See Pet’rs’ Resp. Opp’n Resp’t Mot.

Partial Summ. J. (“Pet’rs’ Resp. Br.”) at 4 (citing First Jt. Stip. Facts (“Stip.”) ¶¶ 3-5),

Confd’l Ex. A ¶ 5, Confd’l Exs. A-1 to A-3.) The Smiths also filed Indiana nonresident

income tax returns for those years. (Pet’rs’ Resp. Br. at 4 (citing Stip. ¶¶ 3-5), Confd’l Ex.

A ¶ 6, Confd’l Exs. A-4 to A-6.)

       The IRS subsequently audited the Smiths’ federal income tax returns for the years

at issue, examining their status as professional gamblers. (See Resp’t Mem. Supp. Mot.

Partial Summ. J. (“Resp’t Br.”), Ex. C at 50; Pet’rs’ Resp. Br., Confd’l Ex. B ¶ 7, Confd’l

Ex. B-2.) The IRS reported its audit findings to the Smiths by issuing a Revenue Agent

Report (“RAR”) for 2005 and 2006 on November 19, 2008, and an RAR for 2007 on

September 15, 2009. (See Resp’t Br., Ex. C at 50, Confd’l Ex. D ¶ 3, Confd’l Ex. D-1 at

1359.) The Smiths’ RARs were accompanied by a “30-Day Letter” that provided the time

and manner for the Smiths to indicate to the IRS whether they agreed or disagreed with


1
  Issues regarding the correctness of all the Department’s assessments, however, have been
reserved for trial. (See, e.g., Hr’g Tr. at 5.)
2
  The parties have 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
the      adjustments.              (See          Resp’t     Br.         at       6      (citing

https://taxclinic.law.gsu.edu/files/2013/IRS_30_day_letter-1.pdf    (        “Sample   30-Day

Letter”)), Ex. C at 58.)   The Smiths disagreed with the adjustments on the RARs and

initiated an appeal with the IRS. (See Resp’t Br., Ex. C at 50-51, 58.)

       On January 21, 2011, the IRS executed the Smiths’ Form 870-AD “Offer to Waive

Restrictions on Assessment and Collection of Tax Deficiency and to Accept

Overassessment,” which settled the matter. (See Resp’t Br., Ex. C at 51, 54; Pet’rs’ Resp.

Br., Confd’l Ex. A ¶¶ 11(b), 12(b), Confd’l Ex. A-10.) The settlement reflected adjustments

to the Smiths’ federal tax liabilities for 2005 through 2007 that were contained on separate

tax forms that accompanied the Form 870-AD. (See Pet’rs’ Resp. Br., Confd’l Ex. A ¶

12(c)-(d), Confd’l Exs. A-11 to A-12.)

       Several years later, while investigating the Smiths’ Indiana AGIT liability for a

different tax period, the Department learned of the Smiths’ federal audit for the years at

issue. (See Resp’t Br., Confd’l Ex. D ¶ 3, Confd’l Ex. D-1 at 1359.) The Department

expanded its audit to include the years at issue and ultimately adjusted the Smiths’

Indiana AGIT liabilities for 2005 through 2007 based on the federal adjustments in the

RARs. (See Resp’t Br., Confd’l Ex. D ¶ 3, Confd’l Ex. D-1.) On August 8, 2016, the

Department issued Proposed Assessments against the Smiths for the years at issue.

(Resp’t Br., Confd’l Ex. A at 168-73.)

       The Smiths, believing that the Department’s adjustments should have reflected

their Form 870-AD adjustments rather than the adjustments in their RARs, amended their

Indiana income tax returns for the years at issue on September 12, 2016. (See Pet’rs’

Des’g Evid. Supp. Resp. Opp’n Resp’t Mot. Partial Summ. J. (“Pet’rs’ Des’g Evid.”) ¶ 4,



                                             3
Stip. ¶¶ 3-4; Pet’rs’ Resp. Br., Confd’l Ex. A ¶ 19, Confd’l Ex. B ¶ 15.) On October 7,

2016, the Smiths protested the Department’s Proposed Assessments, and on November

29, 2017, the Department issued a Letter of Findings denying their protest. (Pet’rs’ Des’g

Evid. ¶ 4, Stip. ¶¶ 18, 22.)

       On January 8, 2018, the Smiths incorporated their claims regarding the years at

issue in a pending original tax appeal.3 On January 11, 2019, the Smiths moved for partial

summary judgment. On February 20, 2019, the Court held a hearing on the Smiths’

Motion. Additional facts will be supplied as necessary.

                                  STANDARD OF REVIEW

       Summary judgment is proper only when the designated evidence demonstrates

that no genuine issue of material fact exists and the moving party is entitled to judgment

as a matter of law. Ind. Trial Rule 56(C). A genuine issue of material fact exists when

facts concerning an issue that would dispose of the case are disputed or when undisputed

facts support conflicting inferences as to the resolution of an issue. Popovich v. Indiana

Dep’t of State Revenue, 52 N.E.3d 73, 76 (Ind. Tax Ct. 2016).

                                          ANALYSIS

       The Smiths contend that they are entitled to partial summary judgment because

Indiana Code sections 6-3-4-6 and 6-8.1-5-2 mandate that the Department’s

modifications to their Indiana AGIT liabilities for the years at issue must be consistent with

their Form 870-AD adjustments. (See Pet’rs’ Resp. Br. at 11-21; Hr’g Tr. at 42-43, 57-


3
  On May 10, 2016, the Smiths initiated an original tax appeal that challenged the Department’s
denial of their 2014 refund claim. (See Pet’rs’ Des’g Evid. Supp. Resp. Opp’n Resp’t Mot. Partial
Summ. J. ¶ 1, Pet’rs’ Am. Pet. Original Tax Appeal, Denied Claim Refund & Final Determination
Ind. Dep’t State Revenue, & Req. Inj. Collection Tax ¶¶ 14-17.) The Court subsequently stayed
those proceedings for completion of the Department’s audit and the resulting administrative
appeal proceedings. (Pet’rs’ Resp. Opp’n Resp’t Mot. Partial Summ. J. at 2.)
                                               4
59.) During the relevant period, Indiana Code § 6-3-4-6, which imposed certain duties

upon taxpayers, provided that:

          (b) Each taxpayer shall notify the department of any modification of:

             (1) a federal income tax return filed by the taxpayer after January
                 1, 1978; or

             (2) the taxpayer’s federal income tax liability for a taxable year
                 which begins after December 31, 1977.

          The taxpayer shall file the notice on the form prescribed by the
          department within one hundred twenty (120) days after the
          modification is made if the modification was made before January 1,
          2011, and one hundred eighty (180) days after the modification is
          made if the modification is made after December 31, 2010.

          (c) If the federal modification results in a change in the taxpayer’s
              federal or Indiana adjusted gross income, the taxpayer shall file
              an Indiana amended return within one hundred twenty (120) days
              after the modification is made if the modification was made before
              January 1, 2011, and one hundred eighty (180) days after the
              modification is made if the modification is made after December
              31, 2010.

IND. CODE § 6-3-4-6(b)-(c) (2011) (amended 2015) (emphasis added). In turn, Indiana

Code § 6-8.1-5-2, which imposed certain duties upon the Department, provided:

          If a taxpayer’s federal income tax liability for a taxable year is
          modified due to the assessment of a federal deficiency or the filing
          of an amended federal income tax return, then the date by which the
          department must issue a proposed assessment under section 1 of
          this chapter for tax imposed under IC 6-3 is extended to six (6)
          months after the date on which the notice of modification is filed with
          the department by the taxpayer.

IND. CODE § 6-8.1-5-2(i) (2011) (amended 2015).

      Neither statute defines what constitutes a “federal modification” or when “the

modification is made.” See generally I.C. §§ 6-3-4-6, -8.1-5-2. Nonetheless, the plain

language of each statute indicates that the respective duties of a taxpayer and the



                                            5
Department arise only after any federal modification is made that “results in a change in

the taxpayer’s federal or Indiana adjusted gross income” and the “taxpayer’s federal

income tax liability . . . is modified due to the assessment of a federal deficiency or the

filing of an amended income tax return[.]”       See I.C. §§ 6-3-4-6(b), (c), -8.1-5-2(i).

Therefore, the plain statutory language requires a federal modification to be the proximate

source of the actual change to a federal return or federal tax liability. In this case, the

Court must determine whether the Smiths’ Form 870-AD or their RARs constitute the

federal modification because it is the proximate source of the change to their federal

returns or tax liabilities.

        The Department initially claims that the Smiths’ RARs constitute their federal

modification for purposes of these statutes. (See Resp’t Reply Supp. Partial Summ. J.

(“Resp’t Reply Br.”) at 5-7.)    A federal RAR, however, is never, without more, the

proximate source of a change in a taxpayer’s federal return, federal tax liability, or state

tax liability because additional steps must take place to result in the final federal

modification. (See, e.g., Resp’t Reply Br., Ex. I-1 at Final Order Denying Refund 09-

0678R at 5.) This conclusion is supported by the language in the federal “30-Day Letter,”

which typically accompanies an RAR, indicating that additional steps will always occur

after the RAR is issued based on whether a taxpayer agrees, disagrees, or takes no

action with respect to the RAR. (See Resp’t Br. at 6 (citing Sample 30-Day Letter).) Thus,

if a taxpayer challenges adjustments prescribed in an RAR, as here, the RAR cannot

constitute a “federal modification” as the term is used in these Indiana statutes because

it would not be the proximate source of the actual changes to the Smiths’ federal returns

or tax liabilities.



                                             6
       The Department argues nonetheless that it has consistently interpreted the term

“federal modification” to mean a federal RAR and cites as illustrations several Letters of

Findings, Final Orders Denying Refunds, and Audit-grams. (See Resp’t Reply Br. at 5-6,

Ex. I-1.) The Department asks the Court to defer to its “reasonable interpretation” of this

statutory language. (See Resp’t Reply Br. at 6-7 (citing Moriarity v. Indiana Dep’t of Nat’l

Res., 113 N.E.3d 614, 621 (Ind. 2019)).) The Court, however, declines because 1) the

Department’s evidence provides insufficient authority of a generally applicable

interpretation and 2) the Department’s interpretation is unreasonable.

       First, the Department provides a variety of its own rulings as its authoritative

interpretation of a listed tax. The Department cites Letters of Finding as its authority of

its generally applicable interpretation, but its own regulation states that a Letter of Finding

is not a generally applicable interpretation, but is “based on a particular fact situation

which may affect the tax liability of the taxpayer[, and therefore,] only the taxpayer to

whom it was issued is entitled to rely on it.” 45 IND. ADMIN. CODE 15-3-2(d)(3) (2011). The

Department also offers several Final Orders Denying Refund as evidence of its generally

applicable interpretation, but they contain express disclaimers that: “The document has

no precedential value, is not published in the Indiana Register, and is not intended for

further dissemination. Only the taxpayer to whom this final determination is issued may

rely on its contents.” (See, e.g., Resp’t Reply Br., Ex. I-1 at Final Order Denying Refund

02-20080694R at 1.) Accordingly, the Court is not convinced that the Department’s

evidence indicates its generally applicable interpretation of the term “federal modification,”

particularly because the Department has not exercised its authority to interpret the term

in a duly promulgated regulation as required by statute.          See IND. CODE § 6-8.1-3-



                                              7
3(a)(2)(3) (2011).

       Second, the Department offers two 1994 Audit-grams as further evidence of its

long-held interpretation, (see Resp’t Reply Br. at 5-6, Ex. I-1 at Audit-Grams 2-031, 2-

032), but even if the Department’s evidence were authoritative, the Department’s

interpretation is not reasonable because it conflicts with the plain language of Indiana

Code § 6-3-4-6. The plain language of Indiana Code § 6-3-4-6(c) provides that the federal

modification refers to any modification that “results in a change in the taxpayer’s federal

or Indiana adjusted gross income,” a requirement imbued with finality. See I.C. § 6-3-4-

6(b), (c). As the Department itself explains in its designated evidence, an RAR is but one

of several different documents the IRS uses as a taxpayer proceeds through a variety of

available steps to bring finality to a federal audit. (See Resp’t Reply Br., Ex. I-1 at Final

Order Denying Refund 09-0678R at 5.) Thus, an RAR alone lacks the finality required by

Indiana Code § 6-3-4-6(c). If a federal RAR constituted a “federal modification” for

purposes of Indiana Code § 6-3-4-6(c), as the Department urges, a taxpayer may have

to notify the Department of each sequential federal step on the path to concluding the

federal audit, which would result in unnecessary and overly burdensome compliance and

administration for both the Department and the taxpayer. See, e.g., Columbia Sportswear

USA Corp. v. Indiana Dep’t of State Revenue, 45 N.E.3d 888, 896 (Ind. Tax Ct. 2015)

(explaining that the Legislature intends statutes to applied logically to prevent absurd

results), review denied. Accordingly, it is unreasonable to interpret that an interlocutory

RAR has the necessary finality to comport with the statutory language requiring final

changes to trigger a taxpayer’s 120- or 180-day time limit.

       Determining which federal document provides the finality required under Indiana



                                             8
Code § 6-3-4-6(c) is a fact sensitive inquiry. Here, the execution of the Form 870-AD

proves the Smiths’ RARs lack the finality that results in the actual changes to their federal

or Indiana adjusted gross income. Moreover, the Smiths have taken no steps to further

challenge the Form 870-AD. (See generally Pet’rs’ Des’g Evid.; Pet’rs’ Resp. Br.; Resp’t

Br.) Indeed, the parties agree that the Smiths’ Form 870-AD reflects the final resolution

of their federal audit adjustments for the years at issue. (Compare, e.g., Pet’rs’ Resp. Br.

at 11-21 with Resp’t Reply Br. at 4-7.) Consequently, as a matter of law, the Department’s

modifications to the Smiths’ Indiana AGIT liabilities for the years at issue must be confined

to the modifications made by the IRS reflected on the Form 870-AD.

                                      CONCLUSION

       For the above-stated reasons, the Court GRANTS the Smiths’ Motion for Partial

Summary Judgment. The Court will, by separate order, schedule a case management

conference with the parties to discuss pre-trial matters and scheduling.

       SO ORDERED this 10th day of April 2019.




                                                         Martha Blood Wentworth, Judge
                                                         Indiana Tax Court




DISTRIBUTION:
James K. Gilday, Winston Lin




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