Paul J. Elmer and Carol A.N. Elmer v. Indiana Department of State Revenue
49T10-1110-TA-64
Ind. T.C.Jan 4, 2018Background
- Paul and Carol Elmer owned two S-corporations: Pharmakon Long Term Care Pharmacy, Inc. (Pharmakon) and Hamilton Consulting Group, Inc. (Hamilton); audits covered tax years 2005–2008.
- Pharmakon operated as a pharmacy to long-term care facilities (many affiliated with Magnolia Health Systems, run by Stuart Reed); Pharmakon paid Hamilton for coordination services; Hamilton paid Augusta Corporation for services.
- Much of the business relationship was governed by oral agreements; Pharmakon paid Hamilton about $9 million during the years at issue and Hamilton paid Augusta about $7 million (≈80%).
- The Indiana Department of State Revenue disallowed large portions of both companies’ expense deductions (contract labor/consulting, vehicle expenses, management fees, miscellaneous items) and an uncollectible debt write-off (~$650,000), leading to proposed assessments and this appeal.
- At trial the Elmers produced testimony, some internal reports (accounts receivable), Augusta invoices, and affidavits; the court found the evidence vague, inconsistent, and often lacking documentary support.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Deductibility of Pharmakon’s contract-labor payments to Hamilton | Payments reflect bona fide services (coordination of respiratory care); oral agreements and monthly reports substantiate deduction | Lacked invoices, specifics, or documentary proof tying payments to identifiable services; oral agreements insufficient | Disallowed — Elmers failed to provide reliable, detailed evidence to substantiate contract-labor deductions |
| Deductibility of Hamilton’s consulting payments to Augusta | Augusta performed respiratory and other consulting services; patient records and invoices support payments | Invoices were generic ("marketing and management"), attachments missing; testimony was conclusory and inconsistent | Disallowed — evidence did not credibly establish the terms or substance of services paid for |
| Deductibility of Hamilton’s miscellaneous expenses (depreciation, dry cleaning, bank fees, etc.) | General ledgers substantiate these items | Department disputed sufficiency; ledgers were not admitted at trial | Disallowed — taxpayers failed to admit or walk the court through supporting ledgers; no probative evidence presented |
| Deductibility of Pharmakon’s uncollectible-debt write-off (~$650,000) | Portions were billing mistakes or unpaid invoices from Magnolia affiliates, warranting §166 treatment | Insufficient proof of collection efforts, timing of worthlessness, debtor-creditor terms, and inconsistent summaries; some payers may still have been liable | Disallowed — Elmers did not show debts were bona fide, worthless in year claimed, or that reasonable collection efforts were exhausted |
Key Cases Cited
- Riverboat Dev., Inc. v. Indiana Dep’t of State Revenue, 881 N.E.2d 107 (Ind. Tax Ct.) (S-corporation items pass through to shareholders for individual tax reporting)
- Horseshoe Hammond, LLC v. Indiana Dep’t of State Revenue, 865 N.E.2d 725 (Ind. Tax Ct.) (de novo review of Department determinations)
- Barth, Inc. v. State Bd. of Tax Comm’rs, 756 N.E.2d 1124 (Ind. Tax Ct.) (definition and requirement of probative evidence)
- Fox Dev., Inc. v. England, 837 N.E.2d 161 (Ind. Ct. App.) (oral contracts valid where parties agree to all terms)
- Blesich v. Lake Cnty. Assessor, 46 N.E.3d 14 (Ind. Tax Ct.) (conclusory statements lack probative value)
- Indianapolis Racquet Club, Inc. v. Washington Twp. (Marion Cnty.) Assessor, 802 N.E.2d 1018 (Ind. Tax Ct.) (taxpayers must walk the court through their evidence and analysis)