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Smith v. Indiana Department of State Revenue

Tax Court of Indiana

April 12, 2019

TONY W. SMITH and SHIRLENA SMITH, Petitioners,
v.
INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

          ATTORNEY FOR PETITIONERS: JAMES K. GILDAY GILDAY & ASSOCIATES, P.C. Indianapolis, IN

          ATTORNEYS FOR RESPONDENT: CURTIS T. HILL, JR. ATTORNEY GENERAL OF INDIANA WINSTON LIN DEPUTY ATTORNEY GENERAL Indianapolis, IN

          ORDER ON RESPONDENT'S MOTION FOR PARTIAL SUMMARY JUDGMENT

          MARTHA BLOOD WENTWORTH, JUDGE

         Tony W. Smith and Shirlena Smith have appealed the Indiana Department of State Revenue's assessments of Indiana adjusted gross income tax (AGIT) for 2005 through 2007 and 2009 through 2014. The Smiths also appeal the Department's denial of their refund claim for 2014. The matter, currently before the Court on the Department's Motion for Partial Summary Judgment ("Motion"), questions whether the Department's AGIT assessments for 2005 through 2007 and 2009 through 2011 (the "years at issue") were timely as a matter of law.[1] Upon review, the Court finds in favor of the Department in part and against it in part.[2]

         FACTS AND PROCEDURAL HISTORY

         The following facts are not in dispute. The Smiths, a married couple, are residents of the State of Ohio. (See Resp't Mem. Supp. Mot. Partial Summ. J. ("Resp't Br.") at 5 (citing Pet'rs' Am. Pet. Original Tax Appeal, Denied Claim Refund & Final Determination Ind. Dep't State Revenue, & Req. Inj. Collection Tax ("Pet'rs' Am. Pet.") ¶ 1), Confd'l Ex. E.) During the years at issue, the Smiths visited Indiana to gamble at approximately five different casinos. (See Resp't Br., Ex. B at 19-20, Confd'l Ex. D ¶ 4, Confd'l Ex. D-2 at 233.)

         The Smiths timely filed their 2005 through 2007 federal income tax returns, 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 the 2005 through 2007 tax years. (Pet'rs' Resp. Br. at 4 (citing Stip. ¶¶ 3-5), Confd'l Ex. A ¶ 6, Confd'l Exs. A-4 to A-6.)

         At some point in 2008, the Internal Revenue Service (the "IRS") audited the Smiths' 2005 through 2007 federal income tax returns to examine their status as professional gamblers. (See Resp't Br., Ex. C at 50; Pet'rs' Resp. Br., Confd'l Ex. B ¶ 7, Confd'l Ex. B-2.) The IRS subsequently 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., Confd'l Ex. D ¶ 3, Confd'l Ex. D-1 at 1359.) The Smiths disagreed with the audit findings reflected in the RARs and, as a result, filed an appeal with the IRS. (See Resp't Br., Ex. C at 50-51, 58.) The IRS and the Smiths ultimately settled the matter on January 21, 2011. (See Resp't Br., Ex. C at 51, 54; Pet'rs' Resp. Br., Confd'l Ex. A ¶¶ 11(b), 12(b).)

         In the meantime, the Smiths timely filed their 2009 through 2011 federal income tax returns, which also reported income and deductions associated with their gambling activities. (See Pet'rs' Resp. Br. at 7 (citing Stip. ¶¶ 6-8); Resp't Br., Confd'l Ex. D ¶ 4, Confd'l Ex. D-2 at 204-17, 233-34.) Also, the Smiths filed Indiana nonresident income tax returns for those years. (Pet'rs' Resp. Br. at 7 (citing Stip. ¶¶ 6-8).)

         In 2015, the Smiths filed their 2014 nonresident Indiana income tax return requesting a refund of over $300, 000. (See Pet'rs' Des'g Evid. Supp. Resp. Opp'n Resp't Mot. Partial Summ. J. ("Pet'rs' Des'g Evid.") ¶ 2, Pet'rs' Am. Pet. ¶¶ 9-11.) The Department then opened a desk audit to examine the Smiths' refund claim. (See Resp't Br., Confd'l Ex. D ¶ 4, Confd'l Ex. D-2 at 264.) By September of 2015, the Department had expanded the desk audit to include all the years at issue. (See Resp't Br., Confd'l Ex. D ¶ 4, Confd'l Ex. D-2 at 264.) On September 26, 2015, the Department issued an Important Taxpayer Notification to the Smiths that granted in part and denied in part their refund claim. (See Pet'rs' Des'g Evid. ¶ 2, Pet'rs' Am. Pet. at Confd'l Ex. A.) On May 10, 2016, the Smiths filed an appeal in the Tax Court challenging the Department's denial of their 2014 refund claim. (See Pet'rs' Des'g Evid. ¶ 1, Pet'rs' Am. Pet. ¶¶ 14-17.) The Court stayed those proceedings, awaiting the completion of the Department's audit for all the years at issue. (Pet'rs' Resp. Br. at 2.)

         On August 1, 2016, the Department issued its audit report to the Smiths that increased their 2005 through 2007 Indiana AGIT liabilities based on the federal adjustments reflected in the RARs. (See Resp't Br., Confd'l Ex. D ¶ 3, Confd'l Ex. D-1.) Then, on August 8, 2016, the Department issued Proposed Assessments against the Smiths for those same tax years. (Resp't Br., Confd'l Ex. A at 168-73.) The Smiths, believing the Department's adjustments improper, filed amended Indiana income tax returns for 2005 and 2006 on September 12, 2016. (See Pet'rs' Des'g Evid. ¶ 4, Stip. ¶¶ 3-4; Pet'rs' Resp. Br., Confd'l Ex. A ¶ 19, Confd'l Ex. B ¶ 15.) The Smiths also filed an amended Indiana income tax return for 2007 on October 6, 2016. (Pet'rs' Des'g Evid. ¶ 4, Stip. ¶ 5.)

         A few days later, on October 13, 2016, the Department issued a second audit report to the Smiths that indicated, among other things, that they had underreported their Indiana adjusted gross income for 2009 through 2011 by more than 25%. (See Resp't Br., Confd'l Ex. D ¶ 4, Confd'l Ex. D-2.) The Department issued Proposed Assessments against the Smiths for those years on October 18, 2016. (Resp't Br., Confd'l Ex. A at 176-81.) The Smiths protested the Proposed Assessments for all the years at issue, and the Department denied their protests on November 29, 2017, in two separate Letters of Findings. (Pet'rs' Des'g Evid. ¶ 4, Stip. ¶¶ 18, 21-23.)

         On January 8, 2018, the Smiths incorporated their additional claims regarding all of the Department's Proposed Assessments into their pending original tax appeal. (See Pet'rs' Des'g Evid. ¶ 2, Pet'rs' Am. Pet.) On December 4, 2018, the Department moved for partial summary judgment. On February 20, 2019, the Court held a hearing on the Department's Motion. Additional facts will be supplied as necessary.

         STANDARD ...


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