ATTORNEYS FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
MARTHA B. WENTWORTH JEFFREY A. MODISETT
JOSEPH R. IMPICCICHE Attorney General of Indiana
Hall, Render, Killian, Heath & Lyman
Indianapolis, Indiana MARILYN S. MEIGHEN
Deputy Attorney General
NOT FOR PUBLICATION
Revenue (Department) for the years 1985, 1986, 1987, and 1988. Storm now asks this Court to
award it a portion of the fees and expenses it incurred litigating this case. In its motion for an
award of fees, Storm raises two issues. First, Storm contends that the Department's litigation
position was unreasonable with respect to its liability for the special fuel tax. Second, Storm
contends that the Department's litigation position with respect to penalties was unreasonable.
This Court disagrees with this characterization of the Department's positions and consequently
DENIES Storm's motion.
business entity with fewer than fifty employees or an organization exempt from federal income
taxation. See id. § 34-2-36-5(4). The party must obtain a final judgment in its favor, and it must
file a claim within thirty days after a final judgment is rendered. See id. § 34-2-36-5(2), -5(6).
However, this Court is not authorized to make an award if "the agency as a party had a
reasonable basis for its position." Id. § 34-2-36-6(2).
The statute requires a three-part analysis. The first part involves whether the party is statutorily eligible for such an award. The second part is a determination of whether the Department had a reasonable basis for its litigation position. The last part involves equitable considerations. The court is not required to award expenses.See footnote 1
The Department does not dispute that Storm is statutorily eligible for an award of fees and expenses and concedes that Storm is a prevailing party (i.e., has obtained final judgment in its favor). Therefore, the only issue to be decided is whether the Department's litigation position was reasonable. If this Court concludes that it was not, this Court will conduct an inquiry to determine what award, if any, is proper. Storm takes issue with two of the Department's litigation positions: 1) that it was liable for certain taxes arising from the use of special fuel, and 2) that certain penalties were warranted.
"Reasonable basis" is not defined in the statute, and there have been no reported decisions construing its meaning. There is, however, a similar statute that allows the award of attorney's fees where a party brings an "action or defense that is frivolous, unreasonable, or groundless; . . . or continue[s] to litigate the action or defense after the party's claim or defense clearly became frivolous, unreasonable, or groundless. . . ." Ind. Code Ann. § 34-1-32-1(b) (West Supp. 1997).
Although the statute at issue in this case contains a limit on the remedy available (as compared to
Ind. Code Ann. § 34-1-32-1), the clear purpose of both statutes is to shift at least some of the
expense of unreasonable litigation to the partySee footnote
making the litigation unreasonable. Additionally,
there appears to be little practical difference between requiring an agency to have a reasonable
basis for its position and requiring a party in ordinary litigation not to maintain groundless or
unreasonable litigation.See footnote
Therefore, cases construing section 34-1-32-1 will guide this Court in
determining whether the Department had a reasonable basis for its position.See footnote
In determining whether a claim or defense is unreasonable, courts will look to the totality of the circumstances. If the court finds that no reasonable attorney would find the claim or defense worthy of litigation, then the claim or defense is unreasonable. See Kahn v. Cundiff, 533
N.E.2d 164, 170-71 (Ind. Ct. App.), adopted, 453 N.E.2d 627 (Ind. 1989); McDonald v.
McDonald, 631 N.E.2d 522, 524 (Ind. Ct. App. 1994). Similarly, a claim or defense is groundless
if no facts exist that would support the claim or defense. See United Farm Bureau Mut. Ins. Co.
v. Ira, 577 N.E.2d 588, 597 (Ind. Ct. App. 1991). Lastly, the mere fact that a party is
unsuccessful does not necessarily mean that an award is warranted. See Kahn, 533 N.E.2d at 171.
With these principles in mind, this Court turns to the facts of this case.
that was used to the station operator.
Storm's argument that the Department's litigation position was unreasonable with respect to Storm's liability for the special fuel tax has three components. First, Storm contends that Scott Oil Co. v. Department of State Revenue, 584 N.E.2d 1127, 1129 (Ind. Tax Ct. 1992) and C & C Oil Co. v. Department of State Revenue, 570 N.E.2d 1376, 1380 (Ind. Tax Ct. 1991) demonstrate that the Department's position is without reasonable basis. Second, Storm contends that the federal taxation scheme is wholly different from Indiana's, thereby making the Department's reliance on Central Oil & Supply Co. v. United States, 557 F.2d 511 (5th Cir. 1977) unreasonable. Third, Storm argues that the imposition statute is clear on its face and makes the Department's position unreasonable. Each point will be addressed in turn.
In Storm, there was no dispute about whether tax arose from the special fuel use; the only dispute was whether Storm was liable for it. A close reading of Scott Oil and C & C Oil reveal that they only address whether the special fuel tax arose in the first place. In Scott Oil, this Court determined that a licensed special fuel dealer was liable for tax on all of its special fuel sales because the dealer had not established the non-taxability of particular sales. In C & C Oil, this Court faced a similar issue and concluded that the Department had not established that sales of special fuel were taxable once the taxpayer had provided adequate books and records showing non-taxability. Neither case addresses the issue presented in this case, i.e., whether another taxpayer besides the taxpayer using the special fuel may be taxed on that special fuel use. Therefore, these cases do not obviate the Department's position and consequently do not
demonstrate that the Department's position was unreasonable.See footnote
In Central Oil, the court dealt with a statute imposing a tax of four cents on each sale of diesel fuel to an operator of a diesel-powered highway vehicle. I.R.C. § 4041(a)(1) (1976). Indiana's taxation scheme works similarly. The selling of special fuel to a highway motorist is a taxable transaction in Indiana. See Ind. Code Ann. § 6-6-2.1-201. The question then becomes who is liable for the tax. In the case of the federal statute in Central Oil, U.S. Treasury Regulations provided the answer. See Central Oil, 557 F.2d at 516 (quoting 26 C.F.R. § 48- 4041-4(b)(1) (1976)). In Indiana, at the time Storm was decided, no statute, regulation, or judicial decision expressly stated or unmistakably led to the conclusion that the only person who could be liable for the special fuel tax was the user. Therefore, it was proper to look to the law in other jurisdictions. See USAir, Inc. v. Department of State Revenue, 623 N.E.2d 466, 469 (Ind. Tax Ct. 1993). Hence, it cannot be said that no reasonable attorney would have relied on Central Oil.
In Storm, 663 N.E.2d at 557, this Court stated,
I.C. 6-6-2.1-201, I.C. 6-6-2.1-103(h), and I.C. 6-6-2.1-505(b) establish that, in the absence of a written agreement under I.C. 6-6-2.1-505(b), special fuel dealers (i.e. station operators) are liable to the Department for special fuel taxes on the special fuel that they deliver or place into the fuel supply tanks of motor vehicles in Indiana. The apparent purpose of the law is to conclusively establish who (as between station operators and their suppliers) is liable for the special fuel tax in order to avoid confusion about who must pay.
Obviously, the question about whether suppliers may be taxed for merely supplying special fuel to dealers has been definitively settled. However, nothing in the statutory scheme or (judicial
of it) either explicitly or by unmistakable implication made the result in Storm such a
foregone conclusion so as to render the Department's position one that no reasonable attorney
would argue. A careful reading of the relevant statutes should have revealed that the intent of the
statutory scheme was to place the tax liability on the station operators rather than the suppliers (in
an absence of an agreement under Ind. Code Ann. § 6-6-2.1-505(b) (West 1989) (repealed
1993)) and that this Court probably would not have ruled in the Department's favor. However, it
was reasonable for the Department to have this Court pass on the question.
None of Storm's contentions demonstrate that the Department's litigation position with respect to these special fuel taxes was unreasonable. Consequently, Storm may not recover fees and expenses incurred in litigating its liability for the special fuel taxes.
completely silent about penalties" its litigation position with respect to penalties was
unreasonable. (Pet'r Mem. Supp. at 13). Storm also stated, "Failing to halt litigating an issue
after discovering it is a basis to implicate the Attorney's fees statute." Id. In the unreported
opinion, this Court determined that Storm was liable for some, but not all of the penalties assessed
by the Department. To the extent that Storm was liable for penalties, this Court is prohibited
from awarding fees and expenses because Storm was not a prevailing party. See Ind. Code Ann.
§ 34-2-36-5(2). This Court therefore limits its inquiry to where Storm was successful.
This Court found that Storm was not liable for the penalties with respect to the special fuel taxes arising when Storm owned and operated one of the stations. Storm persuaded this Court that Storm reasonably believed that the tax had been paid. Storm's success, however, does not mandate a finding that the Department's position was unreasonable.
It is troubling that the Department neglected to argue the propriety of the penalties in its post-trial brief (it did so on the motion for rehearing). However, in light of the fact that the statute places the burden of making an affirmative showing that the penalty must be waived on the taxpayer, a finding that the Department's litigation position was unreasonable simply because it did not argue this point is not justified.
Subsection 6-8.1-10-2(e) requires a taxpayer to demonstrate a non-culpable state of mind (i.e., lack of willful neglect) and a reasonable basis for its error to avoid the penalty. If the taxpayer does not do so, the penalty stands, whether or not the Department makes any affirmative showing. When taxes are not paid on time, the Department may assess the penalty and force the taxpayer to justify its failure to pay. In other words, the Department only has to show that taxes were overdue in order to assess the penalty. Because the Department was not required to
affirmatively present evidence to justify its position that Storm was liable for the penalty (except
the prima facie showing that taxes were not paid on time) failure to litigate that position does not
constitute a basis for implicating section 34-2-36-5 in this case.
Thomas G. Fisher, Judge
Indiana Tax Court
Martha B. Wentworth
HALL, RENDER, KILLIAN, HEATH & LYMAN
Suite 2000, Box 82064
One American Square
Indianapolis, IN 46282
Jeffrey A. Modisett
Attorney General of Indiana
By: Marilyn S. Meighen
Deputy Attorney General
Indiana Government Center South, Fifth Floor
402 West Washington Street
Indianapolis, IN 46204
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