Paul J. Elmer and Carol A. N. Elmer v. Indiana Department of Revenue
2015 Ind. Tax LEXIS 50
| Ind. T.C. | 2015Background
- Paul and Carol Elmer reported pass-through income and deductions from two S-corporations (Pharmakon and Hamilton) on individual Indiana AGIT returns for 2005–2008; Mr. Elmer was sole shareholder of both.
- Indiana Department of State Revenue disallowed numerous business expense deductions (vehicle, contract labor, operating, management/marketing) and an uncollectible (bad) debt deduction for 2008, recalculated AGIT, and assessed additional tax, interest, and penalties.
- The Department issued a Letter of Findings upholding its assessments; the Elmers appealed to the Indiana Tax Court and the Department moved for summary judgment.
- Department relied on proposed assessments and various documents to argue (1) transactions lacked economic substance, (2) expenses were not ordinary and necessary, and (3) deductions were insufficiently substantiated by written records.
- The Elmers relied on Mr. Elmer’s affidavit, deposition testimony (including Mr. Reed’s), and testimony that Hamilton was formed for legitimate business reasons, that oral industry agreements were customary, and that some documentation existed or could be developed.
- The Tax Court concluded genuine factual disputes remain (economic substance, ordinary/necessary, and substantiation), denied the Department’s motion, and ordered further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the corporations’ transactions lack economic substance (sham) | Elmer: Hamilton was formed for legitimate business expansion; dealings with Reed/Augusta were bona fide and customary in the industry | Dept.: Closely related entities, overlapping roles, lack of employees and documentation show transactions were sham and tax-motivated | Genuine factual dispute exists; summary judgment denied |
| Whether deductions qualify as ordinary and necessary under IRC §162 | Elmer: Expenses arose from ordinary business activity and were appropriate/helpful to Pharmakon/Hamilton | Dept.: Expenses are not ordinary/necessary for either corporation and lack transactional detail | Credibility and factual disputes preclude summary judgment |
| Whether travel/vehicle and other expenses were substantiated (IRC §274 and §6001) | Elmer: Testimony and some records (depositions/affidavit) raise triable issues; written records may be industry-unusual but oral corroboration exists | Dept.: Lack of adequate written records requires disallowance and supports summary judgment | Under Indiana summary-judgment standards, lack of written records alone did not entitle Dept. to judgment given genuine disputes; summary judgment denied |
| Whether the 2008 uncollectible (bad debt) deduction was allowable | Elmer: Pharmakon wrote off receivables based on insurance/payment windows and oral repayment agreements with Magnolia; debt became worthless | Dept.: Magnolia continued making payments; no sufficient written proof of worthlessness or terms | Dept. failed to make a prima facie showing for 2008 bad-debt disallowance; genuine issue remains |
Key Cases Cited
- Indiana Dep’t of State Revenue v. Rent-A-Center E., Inc., 963 N.E.2d 463 (Ind. 2012) (movant’s burden in tax summary judgment and designation of proposed assessments)
- Jarboe v. Landmark Cmty. Newspapers of Ind., Inc., 644 N.E.2d 118 (Ind. 1994) (Indiana summary-judgment burden differs from federal standard)
- Lenhardt Tool & Die Co. v. Lumpe, 703 N.E.2d 1079 (Ind. Ct. App. 1998) (defendant must designate evidence negating essential element to shift burden)
- Rice’s Toyota World, Inc. v. C.I.R., 752 F.2d 89 (4th Cir. 1985) (two-prong economic substance test)
- C.I.R. v. Lincoln Sav. & Loan Ass’n, 403 U.S. 345 (1971) (elements for business expense deduction under federal law)
- Owens Corning Fiberglass Corp. v. Cobb, 754 N.E.2d 905 (Ind. 2001) (summary judgment is not a substitute for trial when factual disputes remain)
- Miller Pipeline Corp. v. Indiana Dep’t of State Revenue, 995 N.E.2d 733 (Ind. Tax Ct. 2013) (court will consider only properly designated, admissible evidence on summary judgment)
- Scott Oil Co. v. Indiana Dep’t of State Revenue, 584 N.E.2d 1127 (Ind. Tax Ct. 1992) (construing facts and inferences in favor of nonmovant on summary judgment)