Indiana RV owner outruns 100% fraud penalty and use tax on 3 vehicles purchased with Montana LLC, where assessments were issued beyond statute of limitations

Montana is called “The Treasure State,” but the Indiana Department of Revenue charged an Indiana resident with fraud in using a Montana LLC to make the “Hoosier State” a “State of Lost Treasure.”  In its Letter of Findings No. 04-20110450 released last month, the Department reported its proposed assessments of use tax against the resident and his wife, who were the sole members/owners of a Montana LLC which held title to three recreational vehicles (RVs).  One RV was purchased from an Indiana vendor in 2007.  The other two were acquired in 2006.  The owner had paid no sales tax and remitted no use tax on the purchases.  The Department issued proposed assessments of use tax, a fraud penalty, and interest.  The standard penalty is 10% of the unpaid tax; the fraud penalty is 100% of the tax if no return is filed.  See Ind. Code § 6-8.1-10-4. 

The Department’s rule defines “fraudulent intent” as the “making of a misrepresentation of a material fact which is known to be false, or believed not to be true, in order to evade taxes.”  See 45 IAC 15-11-4.  Negligence is not the required intent.  See id.  The Department’s rule also requires a showing by “clear and convincing evidence” that these five elements of fraud are present:  (1) misrepresentation of a material fact; (2) scienter (“a legal term meaning guilty knowledge”); (3) deception; (4) reliance; and (5) injury.  See 45 IAC 15-5-7.  These factors, if present, might form the basis for the next great American tax-mystery novel, but the Department found the scienter element missing.  Taxpayer had hired a Montana lawyer to form an LLC in 2005.  That lawyer, according to the Department’s citations to public information, represented that clients potentially could “eliminate all sales taxes” in buying and registering an RV using a Montana LLC.  The Department reasoned:  “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 eliminate sales tax.  The Department could not establish by “clear and convincing” evidence that Taxpayer possessed sufficient scienter to sustain the 100% fraud penalty.

A fraud penalty, the Department observed, effectively tolls the statute of limitations for issuing a proposed assessment.  See 45 IAC 15-5-7.  Since fraud was not proven, the three-year statute of limitations applied.  The Department’s assessments were issued too late, so the RV owner’s protest was sustained.  Nevertheless, the Department observed that, had the assessments been timely, “Taxpayer’s protest of the Department’s assessments would only have succeeded if Taxpayer had been able to demonstrate that the vehicle was used exclusively outside of Indiana and the ownership by the Montana LLC would have been found to be a sham.”


  1. Dave Bachrach says:

    Don't worry, State of Indiana! You'll catch 'em next time!


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