John and Sylvia Von Erdmannsdorff v. Indiana Department of State Revenue
82 N.E.3d 952
| Ind. T.C. | 2017Background
- John operated Von’s Shops (new/used books, music, comics, rental VHS/DVDs) as a sole proprietorship in West Lafayette; business records were incomplete and no contemporaneous inventories were taken for 2000–2009.
- During a Dept. of State Revenue audit (initiated 2010) petitioner failed to provide inventories; Dept. issued Proposed Assessments using BizStats industry ratios (COGS = 56.48%) as the "best information available," assessing ~ $245,000.
- Petitioners later submitted federal/state returns and reconstructed inventories (2000 and 2009 built from measurements, counts, memory; 2001–2008 extrapolated by straight-line with adjustments) and a 2005 third‑party insurance inventory.
- Dept. rejected reconstructed inventories as unreliable (non‑contemporaneous, estimated counts/costs, straight‑line method, inclusion of rental property) and maintained BizStats estimates.
- Trial evidence included expert testimony (CPA Bartholomew) supporting reconstruction methods and showing insurance company performed an independent count; court previously denied Dept. summary judgment and proceeded to trial.
Issues
| Issue | Plaintiff's Argument (von Erdmannsdorff) | Defendant's Argument (Dept.) | Held |
|---|---|---|---|
| Are petitioners’ reconstructed inventories sufficiently reliable to adjust COGS? | Reconstruction methods (physical counts, shelf measurements, averages, extrapolation plus short‑term adjustments) follow industry practice and are corroborated by expert testimony. | Inventories are unreliable: prepared post‑hoc, rely on memory/estimates, use straight‑line extrapolation, and estimate costs rather than contemporaneous records. | Held for petitioner: reconstructed inventories were probative and reliable on the record; Dept. failed to rebut expert and corroborating evidence. |
| Do the 2005 insurance records corroborate petitioners’ inventory valuations? | Insurance company performed an independent count and used invoices; its valuation corroborates petitioners’ reconstructed inventory. | Insurance records rely on taxpayer‑provided information and may be biased; thus not reliable corroboration. | Held for petitioner: insurance inventory is admissible corroboration; Dept. did not substantiate bias or inaccuracy. |
| Was Dept.’s use of BizStats COGS ratio an appropriate and reliable estimator for Von’s Shops? | BizStats category is not comparable (mixes dissimilar stores); BizStats ratio produces implausible ending inventory increases, turnover, and gross margins inconsistent with business facts (obsolescence, reduced purchases). | BizStats matches NAICS and is an acceptable industry source; Dept. properly used it as best information available. | Held for petitioner: BizStats category lacked demonstrated comparability and produced results inconsistent with other evidence, undermining its reliability. |
| Should the Dept.’s Proposed Assessments (issued on best information available) remain unchanged despite post‑audit evidence? | Once petitioners produced reliable post‑audit evidence, assessments should be adjusted to reflect superior evidence. | Best information available at assessment time justified assessments; post‑audit reconstructions are speculative and should not displace Dept. findings. | Held for petitioner: although assessments were initially proper, the court must adjust them where taxpayers produced more reliable evidence; assessments were not sustained. |
Key Cases Cited
- Thor Power Tool Co. v. C.I.R., 439 U.S. 522 (inventory methodologies must reflect income)
- Van Pickerill & Sons, Inc. v. U.S., 445 F.2d 918 (7th Cir. 1971) (inventory methods should conform to trade customs)
- Wal‑Mart Stores, Inc. & Subsidiaries v. C.I.R., 153 F.3d 650 (8th Cir. 1998) (treatment of book inventories under Treasury rules)
- Primo Pants Co. v. C.I.R., 78 T.C. 705 (T.C. 1982) (COGS/end‑inventory effects on taxable income)
- Horseshoe Hammond, LLC v. Indiana Dep’t of State Revenue, 865 N.E.2d 725 (Ind. Tax Ct. 2007) (standard for de novo review of Department determinations)
- Knox Cnty. Prop. Tax Assessment Bd. of Appeals v. Grandview Care, Inc., 826 N.E.2d 177 (Ind. Tax Ct. 2005) (unsupported allegations are insufficient evidence)