Department of Revenue barks up the wrong tree: Indiana Supreme Court lets stand Tax Court’s order voiding Department of Revenue’s jeopardy assessments for income and sales tax in “puppy mill” case

On May 15, 2012, the Indiana Supreme Court took the unusual step of vacating its order granting review of the Tax Court’s decisions in Garwood v. Indiana Department of State Revenue.  After conducting an oral argument (see, the Supreme Court issued its order (see stating, “the Court has determined that review was improvidently granted.  Accordingly, the order granting review is VACATED.”

The Department sought appeal of two Tax Court rulings.  In the first (Garwood I, see, the Court held that it had jurisdiction over the appeal.  In the second (Garwood II, see, the Court held that the Department’s sixteen jeopardy assessments issued to the Garwoods were void as a matter of law.  

Background (or case pedigree).  Beginning in 2007, the Garwoods began breeding and selling puppies.  Following a report by local animal control officials, the hunt was on.  The Office of Indiana Attorney General (OAG) and the Department of Revenue conducted a joint investigation, sniffing out the unreported transactions.  The Garwoods dug themselves a hole.  They were not registered retail merchants and had never remitted sales tax or filed sales tax returns.

The Department and OAG left no bone buried.  In April 2009, two of the OAG’s special investigators purchased two puppies from the Garwoods for a total of $550.00 in cash. The Garwoods did not issue receipts in either transaction.  The Department issued jeopardy assessments for sales and income taxes, totaling more than $284,000.  On June 2d, the Department served its jeopardy assessment documents.  When the Garwoods could not pay, OAG and the Department seized 240 dogs.  That afternoon, the Attorney General – as leader of the pack – held a television press conference and newspaper interview, publicizing the seizure of the Garwoods’ dogs.  And the next day, OAG (on behalf of the Department) sold all of the 240 dogs seized to the Humane Society of the United States for a total of $300.00.

The Garwoods howled, protesting the assessments.  But the Department, in a letter dated June 22d, refused to hold a hearing and told the Garwoods to seek relief from the county court.  Instead, the Garwoods appealed directly to the Tax Court.  

Garwood I ruling.  The Department moved to dismiss for lack of jurisdiction.  The Department argued that its jeopardy tax warrants were the final judgments of the county court, “the day for disputing the tax [was] over,” and the matter had progressed to the “collection stage.”  In the alternative, the Department argued that the Garwoods did not exhaust their administrative remedies, which they could do by paying the taxes and then filing a claim for refund.

The Tax Court rejected the Department’s reasoning.  As to the first argument, the Court found that the Garwoods attempted to contest the validity of the jeopardy tax assessments with both the Department and the Tax Court.  See Garwood I, Slip op. at  7.  Therefore, the jeopardy tax warrants at issue in the case had not yet attained the status of judgments.  Id. at 7-8.

For the Tax Court to have jurisdiction, a case must arise under the tax laws of Indiana and must be an appeal of a final determination made by the Department.  See Garwood I, Slip op. at  8 (citing Ind. Code § 33-26-3-1).  The first requirement was easily met, the Court observed, as the Garwoods’ claims “indisputably arise under the tax laws of this state.” Id.  As to the second requirement, the Department claimed that because the Garwoods did not file a claim for refund with the Department, there was no final determination.  The Department argued that the State’s jeopardy tax assessment process was a pure “pay to play” system.  The Court disagreed, explaining:

First, Indiana Code § 6-8.1-5-3 is silent as to the manner by which a taxpayer may challenge the validity of a jeopardy assessment.  See A.I.C. § 6-8.1-5-3. Second, the claim for refund statute makes no mention of jeopardy tax assessments.  See IND. CODE ANN. § 6-8.1-9-1 (West 2007).  Third, nearly fifteen years ago, Indiana’s Supreme Court unambiguously explained that taxpayers may challenge jeopardy assessments through the administrative procedures provided under Indiana Code § 6-8.1-5-1. See Clifft, 660 N.E.2d [310,] 317-18 [(Ind. 1995)].  Fourth, the Department’s own regulation, enacted in 1987, provides that taxpayers ‘may protest [a jeopardy assessment] within twenty (20) days after the assessment is made.’ 45 I.A.C. 15-5-8(c).  Consequently, through its argument, the Department attempts to eliminate one administrative path to the Tax Court when there are actually at least two. See A.I.C. § 6-8.1-5-1 (the protest process); A.I.C. § 6-8.1-9-1 (the claim for refund process).  This Court, however, will not sanction such actions.

See Garwood I, Slip op. at  9.  The Court held that, for purposes of the case, the Department’s letter to the Garwoods rejecting their request for a hearing constituted a final judgment.  Id. at 10.  Accordingly, the Court denied the Department’s motion to dismiss.  Id.

Garwood II ruling.  The Tax Court first explained the special nature of jeopardy assessments as follows:

[T]he Indiana Legislature has granted the Department authority to employ the powerful tool of jeopardy assessment in exceptional circumstances.  Indeed, the use of a jeopardy assessment is an extraordinary measure because it allows the state to deprive a taxpayer of property without first providing constitutionally guaranteed notice or an opportunity to be heard.  As a result, our Legislature very narrowly tailored the Department’s jeopardy assessment power to further the essential state interest of exercising its power to tax when collection is at risk. . . .   [T]he general jeopardy assessment statute, Indiana Code § 6-8.1-5-3, requires that specific exigent circumstances exist before a jeopardy assessment may be imposed: circumstances identifying the line between fair tax administration and oppression.

Garwood II, Slip op. at 7-8 (case citations omitted, emphasis added). Jeopardy assessments are allowed if the Department finds “that a person owing taxes intends to [1] quickly leave the state, [2] remove his property from the state, [3] conceal his property in the state, or [4] do any other act that would jeopardize the collection of those taxes.” Id. at 8 (citing IND. CODE § 6-8.1-5-3(a)).  The Department’s assessments met none of these standards, the Garwoods claimed. And the Tax Court agreed, holding: “[T]he Department did not show the presence of the statutorily prescribed exigent circumstances that the Garwoods intended to quickly leave the state, remove their property from the state, conceal their property in the state, or do any other act that would jeopardize the collection of taxes.” Id. at 12-13. The Court’s decision was based on a number of factors:    

  •      There was no evidence that the Garwoods were a “flight risk” (or, perhaps more appropriately, a “run” risk).  
  •      The Department did not claim and no evidence showed that the Garwoods intended to remove the dogs from the State.
  •      The Garwoods’ refusal to allow an animal control officer onto the property was not evidence of intent to conceal property in the State.  “In fact, it is not reasonable to infer that [the taxpayer’s] intent was to conceal property to avoid paying taxes because one would not normally expect an Animal Control Officer, who typically investigates matters involving animals, to be the emissary of the tax collector.” Id. at 10
  •      There was no evidence “that indicates the Garwoods would sell all their dogs or release them to avoid paying tax. . . .   Specious non sequiturs are not probative evidence of an intent to conceal property.”  Id. (emphasis added).    

The Court held:  “[T]aken as a whole, these actions suggest that the Garwoods were not properly reporting and paying taxes allegedly due, not that they intended not to pay, or preserve the wherewithal to pay, their taxes.  The absence of facts demonstrating the Garwoods’ intent to thwart collection is palpable.” Id. at 12 (emphasis added).

The Tax Court was not impressed with the OAG’s and the Department’s dog show.  The jeopardy assessments were not intended to protect the State’s fiscal interest.  The Court observed:  “The unusual occurrence of this media hype in conjunction with the Department’s sale of the Garwoods’ property for a nominal sum demonstrate that the Department wielded the power of jeopardy assessments as a sword to eliminate a socially undesirable activity and close down a suspected ‘puppy mill,’ not to fill the State’s coffers with the tax liabilities the Garwoods purportedly owed.” Id. at 13-14.  

The jeopardy assessments were deemed void as a matter of law, because the Department “overstepped its authority in this case by issuing jeopardy assessments without having shown the exigent circumstances required by Indiana Code § 6-8.1-5-3 and 45 IAC 15-5-8.” Id. at 14.

The Indiana Supreme Court’s decision to vacate its order granting review means that the Tax Court’s rulings in both Garwood opinions remain in place to limit the Department of Revenue’s ability to “unleash the hounds” against taxpayers by pursuing collections of alleged liabilities with jeopardy assessments. 

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