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JOSEPH R. IMPICCICHE                Attorney General of Indiana
Hall, Render, Killian, Heath & Lyman
Indianapolis, Indiana                  MARILYN S. MEIGHEN
Deputy Attorney General
                            Indianapolis, Indiana

STORM, INC.,                                                              )
            Petitioner,                                                            )
v.                                                                             ) Case No. 49T10-9403-TA-00112
INDIANA DEPARTMENT OF                                                       ) 
STATE REVENUE,                                                                 )
            Respondent.                                                            )                 


November 13, 1997


    In Storm, Inc. v. Department of State Revenue, 663 N.E.2d 552 (Ind. Tax Ct. 1996) and Storm, Inc. v. Department of State Revenue, No. 49T10-9403-TA-00112 (Ind. Tax Ct. May 22, 1996) (unpublished order on rehearing), this Court found that Storm Inc. (Storm) was not liable for a majority of the special fuel taxes, interest, and penalties assessed by the Department of State

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.

    The procedural and factual history of this case is detailed in the reported opinion, and this Court sees no reason to repeat it at length here. Storm complied with the procedural requirements for requesting an award of expenses and fees. This Court heard oral argument on Storm's motion for an award of fees on October 10, 1996.
    In general, Indiana follows the so-called American Rule, whereby each litigant is to bear its own expenses in a civil action. Shumate v. Lycan, 675 N.E.2d 749, 753-54 (Ind. Ct. App. 1997), trans. denied. One of the statutory exceptions to this rule is found at Ind. Code Ann. §§ 34-2-36-1 to -9 (West Supp. 1997). Under this exception, this Court may award some or all of a small commercial entity's expenses and fees (up to $10,000) incurred in successful litigation with the Department. See id. § 34-2-36-5.
    In order for a party to receive this award, certain statutory prerequisites must be met. First, the party must give written notice of its intent to recover costs within thirty days of commencing the action. See id. § 34-2-36-5(1). The party must be either a commercial or

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 2 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 3 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 4
    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.     

I. Storm's Liability for the Use of Special Fuel
    Indiana imposes a tax on the use of special fuel. See Ind. Code Ann. § 6-6-2.1-201 (West 1989) (repealed 1993) (codified in present form at id. § 6-6-2.5-28(a) (West Supp. 1997). The use of special fuel is defined as "the delivery or placing of special fuel into the supply tank of a motor vehicle in Indiana." Id. § 6-6-2.1-103(i) (West 1989) (repealed 1993).
    In the reported opinion, this Court decided whether Storm was liable for the tax arising from certain special fuel use (i.e., sales) at two gas stations. Resolving this issue required this Court to evaluate a fairly complicated set of facts. Storm's liability turned on its often changing relationship (as an owner, operator, or supplier) with the stations. Storm successfully argued that the Department erroneously assessed Storm for special fuel taxes at the times when Storm did not own or operate the stations, but merely supplied the stations with special fuel. (Storm unsuccessfully argued that it was not liable for special fuel taxes arising when it either owned or operated the gas stations). The Department based its argument that Storm was liable at times it merely supplied the stations (but did not own or operate the stations) on the theory that the station operators were Storm's agents. In support of its argument, the Department attempted to demonstrate 1) that Storm owned the fuel as it was used, and 2) that Storm consigned the fuel

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 5
    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

constructionSee footnote 6 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.

II. Waiver of Penalties
    Under Ind. Code Ann. § 6-8.1-10-2 (West 1989) (repealed 1991, codified in present form at id. § 6-8.1-10-2.1 (West Supp. 1997)), a taxpayer who negligently fails to pay its taxes when due is subject to a ten percent penalty. The Department is required to waive the penalty if the failure to pay was due to reasonable cause and not willful neglect. See id. § 6-8.1-10-2(d) (West 1989). The statute places the burden of proving that the penalty should be waived on the taxpayer. See id. § 6-8.1-10-2(e).
    As for the penalties at issue in this case, Storm argues that because "[t]he Department was

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.

    For the reasons stated above, this Court DENIES Storm's motion for fees and expenses. THEREFORE, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Storm take nothing on its motion for an award of fees and expenses.

                                Thomas G. Fisher, Judge
                                 Indiana Tax Court


Martha B. Wentworth
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

Footnote:     1 The statute uses the word"may" rather than "shall."
Footnote:     2 Ind. Code Ann. §§ 34-2-36-1 to -9 do not contemplate an award to the Department. However, the Department may recover under Ind. Code Ann. § 34-1-32-1.
Footnote:     3 Storm does not allege that the Department's position was maintained in bad faith or was frivolous. Clearly, bad faith or frivolous litigation is litigation that does not have a reasonable basis. One panel of the Indiana Court of Appeals has recently stated that bad faith in litigation will not be imputed to the State. Family & Soc. Servs. Admin. v. Calvert, 672 N.E.2d 488, 495 (Ind. Ct. App. 1996), trans. denied. But see Bogner v. Department of Revenue & Taxation, 693 P.2d 1056, 1059 (Idaho 1984).
Footnote:     4 To bolster its argument, Storm cites various cases and statutes from other jurisdictions. Most of them contain a functionally equivalent standard for determining the propriety of an agency's litigation position. However, one case, deserves discussion: Wilderness World, Inc. v. Department of Revenue, 895 P.2d 108 (Ariz. 1995). In Wilderness World, the Arizona Supreme Court determined that the taxpayer was entitled to reimbursement for attorney's fees. At the time the case was decided, there was no provision in the Arizona law forbidding the award of fees where the agency's position was substantially justified. See id. at 113-14; Ariz. Rev. Stat. Ann. § 12-348(B) (West 1992). The Arizona Legislature has since enacted a statute that forbids the awarding of attorney's fees where the agency's position is substantially justified. Ariz. Rev. Stat. Ann. § 42-139.14 (West Supp. 1997). Although not taking issue with the propriety of the decision in Wilderness World, this Court declines to follow it because the statute under which it was decided is materially different from the statute at issue in this case.
Footnote:     5 It is true that in C & C Oil, this Court cautioned against the Department "enlarg[ing] the group of persons subject to the tax." Id. at 1380. However, it is difficult to see how this statement renders the Department's position unreasonable.
Footnote:     6 This is not to say that the absence of a judicial decision construing a statute necessarily precludes an award. See St. Mary Med. Ctr. v. Baker, 611 N.E.2d 135, 138 (Ind. Ct. App. 1993). Cf. BT Inv. Managers, Inc. v. Lewis, 559 F.2d 950, 954 (5th Cir. 1977) ("mere absence of judicial interpretation does not render [statute's] meaning unsettled or uncertain"). But cf. Watson v. Thibodeau, 559 N.E.2d 1205, 1211 (Ind. Ct. App. 1990) (refusing to hold that common law claim was unreasonable or groundless where no judicial precedent existed).

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