ATTORNEYS FOR PETITIONERS: ATTORNEYS FOR RESPONDENT:
B. KEITH SHAKE
KERRY L. WAGNER
ATTORNEY GENERAL OF INDIANA
HENDERSON DAILY WITHROW &
VINCENT S. MIRKOV
DEPUTY ATTORNEY GENERAL
INDIANA TAX COURT
W.H. PAIGE & CO., )
v. ) Cause No. 49T10-9611-TA-157
STATE BOARD OF TAX COMMISSIONERS, )
ON APPEAL FROM A FINAL DETERMINATION OF
THE STATE BOARD OF TAX COMMISSIONERS
JULY 19, 2000
W.H. Paige & Co. (Paige) challenges the final determination of the State Board
of Tax Commissioners (State Board) assessing Paige a 20% undervaluation penalty pursuant to
Ind. Code Ann. § 6-1.1-37-7(e) (West 2000) for failing to file the required
personal property tax returns on musical instruments that Paige leases to its customers.
The sole issue for the Courts consideration is whether interpretive differences existed
between Paige and the State Board regarding the applicability of personal property tax
that precludes the imposition of the undervaluation penalty. For the reasons stated
below, the Court finds for the State Board.
FACTS AND PROCEDURAL HISTORY
The Court has previously reviewed the undisputed facts of this case, which
are set forth in W.H. Paige & Co. v. State Board of Tax
Commissioners, 711 N.E.2d 552, 553-54 (Ind. Tax Ct. 1999) (Paige I), review
denied. To avoid redundancy, the Court will only discuss factual and procedural
history pertinent to the penalty issue. Paige is engaged in the business
of selling and leasing musical instruments. On September 27, 1996, the State
Board issued its final order assessing a business personal property tax for the
assessment date of March 1, 1995, against Paige on the musical instruments that
it leases to its customers. In Paige I, the Court found that
the lease agreements, which Paige enters into under its monthly rent-to-own program, did
not grant Paige a security interest in the musical instruments. See id.
at 558. Thus, the Court determined that Paige remained owner of the
instruments for purposes of imposing the personal property tax. See id. at
560. Of significance was the fact that Paiges leases were terminable at
will by the lessee.
See id. at 558. Accordingly, the Court
held that Paige was liable for the property tax on the musical instruments.
See id. at 561.
At issue in the present litigation is whether the State Boards assessment of
the undervaluation penalty pursuant to section 6-1.1-37-7(e) should be imposed.
See footnote Deeming
the State Boards assessment of the penalty erroneous, Paige filed a motion for
summary judgment on February 8, 2000. The State Board filed its response
to Paiges motion, together with its own cross motion for summary judgment, on
April 28, 2000. The Court heard oral arguments on May 15, 2000.
Additional facts will be supplied as necessary.
ANALYSIS AND OPINION
Standard of Review
The State Board is given great deference when it acts within
the scope of its authority. See Wetzel Enters. Inc. v. State Bd.
of Tax Commrs, 694 N.E.2d 1259, 1261 (Ind. Tax Ct. 1998). Accordingly,
this Court reverses State Board final determinations only when those determinations are unsupported
by substantial evidence, are arbitrary or capricious, constitute an abuse of discretion, or
exceed statutory authority. See id. The taxpayer bears the burden of
demonstrating the invalidity of the State Boards final determination. See Clark v.
State Bd. of Tax Commrs, 694 N.E.2d 1230, 1233 (Ind. Tax Ct. 1998).
Summary judgment is proper only when no genuine issues of material fact exist
and the moving party is entitled to judgment as a matter of law.
See Ind. T.R. 56(C); See also Dana Corp. v. State Bd. of
Tax Commrs, 694 N.E.2d 1244, 1246 (Ind. Tax Ct. 1998). Cross motions
for summary judgment do not alter this standard. See Hyatt Corp. v.
Department of State Revenue, 695 N.E.2d 1051, 1053 (Ind. Tax Ct. 1998) review
Paige contends that it should not be penalized for undervaluing its property because
interpretive differences existed as to whether Paige was the owner of the musical
instruments for the purposes of personal property tax. Conversely, the State Board
argues that the imposition of the penalty is mandatory and cannot be waived.
The Indiana personal property tax system is a self-assessment system. See Paul
Heuring Motors, Inc. v. State Bd. of Tax Commrs, 620 N.E.2d 39, 41
(Ind. Tax Ct. 1993). It is therefore heavily reliant on full disclosure
and accurate reporting. See id. Ind. Code Ann. § 6-1.1-3-9 (West
2000) requires in part:
In completing a personal property tax return for a year, a taxpayer shall
make a complete disclosure of all information, required by the state board of
tax commissioners, that is related to the value, nature, or location of personal
which he owned on the assessment date of that year; or
which he held, possessed, or controlled on the assessment date of that year.
Likewise, the term owner has been defined by the Legislature for purposes of
See footnote Under section 6-1.1-1-9(b) (West 2000), the general rule is that
the owner of tangible personal property is the holder of legal title to
nd. Code Ann. § 6-1.137-7(e) deals with the assessment of a
twenty percent (20%) undervaluation penalty. It provides in relevant part as follows:
If the total assessed value that a person reports on a personal property
return is less than the total assessed value that the person is required
by law to report and if the amount of the undervaluation exceeds five
percent (5%) of the value that should have been reported on the return,
then the county auditor shall add a penalty of twenty percent (20%) of
the additional taxes finally determined to be due as a result of the
undervaluation. . . . If a person has complied with all of the
requirements for claiming a deduction, an exemption, or an adjustment for abnormal obsolescence,
then the increase in assessed value that results from a denial of the
deduction, exemption, or adjustment for abnormal obsolescence is not considered to result from
an undervaluation . . . .
(emphasis added). The purpose of the undervaluation penalty is stated in Ind.
Admin. Code tit. 50, r. 4.2-2-10(d) (1996):
The purpose of the twenty percent (20%) penalty is to ensure a complete
disclosure of all information required by the state board on the prescribed self-assessment
personal property form(s). This enables the township assessor, county board of review,
and state board to carry out [its] statutory duties of examining returns each
year to determine if they substantially comply with the rules of the state
board. This examination cannot take place if all required information is not
shown on the self-assessment return form.
It is not the purpose of this provision to impose a penalty on
a person who has made a complete disclosure of information required on the
assessment return form. . . .
An exception to the mandatory penalty exists only if the taxpayer has complied
with all of the requirements for claiming a deduction, an exemption or an
adjustment for abnormal obsolescence or permanently retired equipment.
See id. See
also Ind. Ann. Code § 6-1.1-37-7(e). If such deduction, exemption, or adjustment
is denied, the increase in assessed value that results from [the] denial of
the deduction, exemption
See footnote or adjustmentSee footnote is not considered to be an undervaluation.
See id. See also Ind. Admin. Code tit. 50, r.
4.2-2-10(d). Rather, it is considered to be an interpretive difference not subject
to the penalty. See Ind. Admin. Code tit. 50, r. 4.2-2-10(d).
However, all other amounts not fully disclosed through omission or undervaluation . .
. are subject to the twenty percent (20%) penalty. See id. To
be clear, the term interpretive difference, as defined in the regulations, does not
mean any disagreement or misunderstanding between the taxpayer and the State Board.
Instead, the regulations have limited the situations in which the term interpretive difference
applies. See id. CONCLUSION
Some of the Courts prior cases have dealt with the exceptions to the
undervaluation penalty. In Rogers v. State Board of Tax Commissioners, 565 N.E.2d
398, 400 (Ind. Tax Ct. 1991), the taxpayer argued that he qualified for
a personal property tax adjustment for formal wear that he maintained was permanently
retired pursuant to Ind. Admin. Code tit. 50, r. 4.1-2-4 (1988) (repealed 1989.)
The State Board denied the adjustment and imposed an undervaluation penalty.
See Rogers, 565 N.E.2d at 399. This Court held that the State
Board improperly imposed the penalty on the taxpayers taxes because the taxpayers undervaluation
resulted from interpretive differences concerning a personal property tax adjustment. See id.
at 403. Moreover, the Court stated that the increase in assessed value
resulting from the State Boards denial of the adjustment is not subject to
Similarly, in Monarch Steel v. State Board of Tax Commissioners, 611 N.E.2d 708,
710 (Ind. Tax Ct. 1993), the taxpayer appealed the State Boards final determination
that the interstate commerce exemption was unavailable for steel cut by the taxpayer
prior to shipment. The State Board penalized the taxpayer for failing to
include its allocable expenses as required by Ind. Admin. Code tit. 50, r.
4.2-5-5(c)(1996) in the valuation of its inventory. See Monarch Steel, 611 N.E.2d
at 715. This Court held that the nature and length of litigation
over the applicability of the interstate commerce exemption for business personal property assessments
established interpretive differences that precluded imposition of the penalty against the taxpayer for
undervaluation of its inventory.
Unlike the taxpayers in Rogers and Monarch, Paige did not claim a qualified
deduction, exemption, or adjustment for abnormal obsolescence or permanently retired equipment on the
return form as required by Ind. Code § 6-1.1-37-7(e) and Ind. Admin. Code
tit. 50, r. 4.2-2-10(c). Rather, Paige erroneously understood its own agreements to
be sales with security interests instead of leases. Consequently, Paige omitted the
musical instruments that it leases from its personal property tax return resulting in
an undervaluation that exceeded five percent of the value that should have been
reported on the return. This does not fall within one of
the exceptions to the mandatory undervaluation penalty and is not considered to be
an interpretive difference. See id. See also Ind. Admin. Code tit. 50,
r. 4.2-2-10. Therefore, section 6-1.1-37-7(e) is triggered and a 20% undervaluation penalty
must be applied.
This Court has held that where a statute is clear and offers no
opportunity for discretion in applying a penalty and where the facts meet the
requirements of the statute, the penalty cannot be waived. See American Juice
Co. v. State Bd. of Tax Commrs, 527 N.E.2d 1169, 1171 (Ind. Tax
Ct. 1988) (citing Gulf Stream Coach, Inc. v. State Bd. of Tax Commrs,
519 N.E.2d 238, 243 (Ind. Tax Ct. 1988)). Because Paige reported less
than the total assessed value it was required by law to report and
because the amount of the undervaluation exceeds five percent (5%) of the value
that should have been reported, the penalty must stand.
Based on the foregoing, this Court finds that the material facts in this
case are undisputed and that, as a matter of law, Paige is liable
for the 20% undervaluation penalty assessed by the State Board.
Therefore, the Court DENIES Paiges motion for summary judgment. Moreover, the Court
now GRANTS the State Boards cross motion for summary judgment pursuant to Ind.
Paige I, the Court reasoned that the legislative amendment in 1991
to Ind. Code Ann. § 26-1-1-201(37) (West 1995) stressed the relevance of the
terminability of a lease when determining whether it is a lease or a
security interest. 711 N.E.2d at 558. (citing Act of May 5,
1991, No. 189, §2, 1991 Ind. Acts 2800, 2804-05).
This Court did not address the penalty issue in
Paige I because
the State Board did not brief the issue in its motion for summary
judgment. Therefore, this Court treated the State Boards motion as a motion
for partial summary judgment. See Paige I, 711 N.E.2d at 554 n.2.
The issue in
Paige I was whether Paige was the owner of
the musical instruments under section 6-1.1-1-9. This matter has already been decided
by this Court and will not be revisited here. See Paige I,
711 N.E.2d at 560.
nd. Admin. Code tit. 50, r. 4.2-2-10 expressly sets out the basic
types of exemptions and allowable adjustments that are available to a taxpayer and
which are permitted to be claimed on the annual business personal property return.
None of these exemptions or adjustments is involved here.
Concerning exemptions, I
nd. Admin. Code tit. 50, r. 4.2-2-10(d)(1) states, It should
be noted that when the reporting requirements have been met, but for some
reason the exemption is not allowed, the amount disallowed is an interpretive difference
and is not subject to the omitted or undervalued personal property tax penalty.
As regards mandatory adjustments, which consists of mandatory adjustments for depreciable assets
and mandatory adjustments for inventory, I
nd. Admin. Code tit. 50, r. 4.2-2-10(d)(3) further
With the exception of the valuation of permanently retired equipment and abnormal obsolescence,
mandatory adjustments for depreciable assets and inventory are not interpretive differences . .
. . Any resulting differences in assessment between the amount reported by the
taxpayer and the amount of assessment determined by the assessing official after making
all mandatory adjustments is subject to the twenty percent (20%) penalty . .
nd. Admin. Code tit. 50, r. 4.1-2-4(c) defined permanently retired property as
depreciable personal property that . . . has been removed from services other
than manufacturing on the assessment date, and is awaiting disposition, and must be
scheduled to be scrapped, removed or dispose [sic] of and will be considered
to be permanently retired providing the taxpayer actually scraps or sells such property.
The interstate commerce exemption is one of the basic types of exemptions
that qualify for an exception to the undervaluation penalty of I
nd. Code §
6-1.1-37-7(e). See Ind. Admin. Code tit. 50, r. 4.2-2-10(d)(1).