ATTORNEYS FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
JAMES H. HANSON KAREN M. FREEMAN-WILSON
LYNNE D. LIDKE ATTORNEY GENERAL OF INDIANA
SCOPELITIS, GARVIN, LIGHT Indianapolis, IN
Indianapolis, IN JOEL SCHIFF
DEPUTY ATTORNEY GENERAL
IN THE INDIANA TAX COURT _____________________________________________________________________
GREAT AMERICAN LINES, INC., ) ) Petitioner, ) ) v. ) Cause No. 49T10-9512-TA-136 ) INDIANA DEPARTMENT OF STATE ) REVENUE, ) ) Respondent. )_____________________________________________________________________
(Petr Ex. 4 at 2.) In addition, Great Americans protest of the
penalty was denied, without explanation.
Subsequently, the Department conducted its first supplemental audit. The Department thereafter issued a proposed assessment of $234,440.70 in fuel tax, interest and penalty. (Petr Ex. 5 at 1.) In this first supplemental audit, the Department determined a calculated mpg for the leased vehicles using two categories of Great Americans leased vehicles. First, the Department analyzed leased vehicles lacking any Ohio activity. According to the Department, these vehicles were not susceptible to the policy of disregarding the Ohio fuel [purchases]. See footnote (Petr Ex. 5 at 14.) Second, the Department allowed Great American to obtain additional information regarding Ohio fuel purchases for leased vehicles having invoices for Ohio activity. In both cases, only vehicles reporting a reasonable mpg were used to determine the calculated mpg. Id. The reasonable mpg was based on the highest MPG that the taxpayer reported for the audit period. Id. The highest fleet-wide mpg ratio reported by Great American during the audit period was 5.21 mpg; vehicles with a mpg higher than this ceiling were discarded from the calculation. (Stipulation, ¶ 6.) The audit assigned Great Americans leased vehicles mpg ratios of 4.0 for 1990, 4.14 for 1991 and 4.11 for 1992. See footnote (Stipulation, ¶ 7.)
Great American protested this proposed assessment. Per the parties agreement, no administrative hearing was conducted. Rather, the Department performed a second supplemental audit. On May 18, 1995, the Department issued its final proposed assessment, calling on Great American to pay $138,688.49 in fuel tax, interest and penalty. (Petr Ex. 6 at 1.) Two major adjustments led to this decreased assessment. First, in the second supplemental audit, the Department considered and incorporated vehicles leased to Great American by Valley Transportation, an Ohio-based fleet operator that leased a captive fleet exclusively to Great American. (Stipulation, ¶¶ 3(3), 10.) The audit applied mpg ratios of 5.60 in 1990, 5.66 in 1991 and 5.79 in 1992 to the Valley Transportation vehicles. (Stipulation, ¶ 10.) However, the Department separated the mileage and fuel information pertaining to these vehicles; it refused to consider the information as being representative of the leased vehicle portion of Great Americans fleet.See footnote (Stipulation, ¶ 10.) Second, in addition to the 5.21 mpg ratio ceiling, the Department imposed a floor of 3.0 mpg in determining which leased vehicles had a reasonable mpg for purposes of calculating a mpg ratio for all of the remaining leased vehicles. (Stipulation, ¶ 11.)
Great American protested this final proposed assessment, claiming that the Departments auditing technique was erroneous. The Department conducted a hearing on August 24, 1995. On October 30, 1995, the Department issued its second letter of finding. This letter of finding stated that the taxpayers protest is denied and explained that the assessment was consistent with Ind. Code Ann. § 6-8.1-5-1. (Petr Ex. 8 at 1.)
Great American filed this original tax appeal on December 12, 1995. See footnote The Court conducted a trial on January 10, 1997 and heard oral arguments from the parties on July 7, 1997. Additional facts will be supplied as needed.
This original tax appeal challenges the Departments second final determination. Specifically, Great
American challenges the Departments application of the 5.21 mpg ratio ceiling to its
other leased vehicles. (Petr Reply Br. at 6.) The other leased
vehicles were those leased vehicles (1) with Ohio invoices for fuel purchases and
(2) without miles traveled in Ohio. According to Great American, the Department
should have calculated an average mpg ratio for its other leased vehicles by
considering the mpg ratios of all sample vehicles, regardless of the individual mpg
ratios applicable to the sample vehicles. (Petr Reply Br. at 7.)
Great American asserts that all the sample vehicles together constitute the best
information available to the Department. Ind. Code § 6-6-4.1-24(a). Because the Department
refused to consider the best information available, Great American contends that the Departments
auditing technique for its second supplemental audit is fatally flawed. (Petr Reply
Br. at 7.) Therefore, Great American argues, the Departments final determination upholding
the second supplemental audit must be reversed.
By statute, Great American has the burden of proof in this matter. Ind. Code § 6-6-4.1-24(b). See Blacks Law Dictionary 190 (7th ed. 1999) (defining burden of proof as a partys duty to prove a disputed assertion or charge). Its burden is two-fold, consisting of both the burden of persuasion and the burden of production. Porter Meml Hosp. v. Malak, 484 N.E.2d 54, 58 (Ind. Ct. App. 1985) (noting that burden of proof is not a precise term, as it can mean both the burdens of persuasion and production); State v. Huffman, 643 N.E.2d 899, 900 (Ind. 1994) (stating that there are two senses of the term burden of proof, the burdens of persuasion and production). The burden of persuasion is the taxpayers duty to convince the fact-finder to view the facts in a way that favors that party. See footnote Blacks Law Dictionary 190 (7th ed. 1999). In contrast, the burden of production, also referred to as the burden of going forward, is the taxpayers duty to introduce enough evidence on an issue to have the issue decided by the fact-finder. Id. In other words, the taxpayer must submit evidence sufficient to establish a prima facie case, i.e., evidence sufficient to establish a given fact and which if not contradicted will remain sufficient to establish that fact. See Longmire v. Indiana Dept of State Revenue, 638 N.E.2d 894, 898 (Ind. Tax Ct. 1994); Canal Square Ltd. Partnership v. State Bd. of Tax Commrs, 694 N.E.2d 801, 804 (Ind. Tax Ct. 1998). Cf. Bullock v. Foley Bros. Dry Goods Corp., 802 S.W.2d 835, 839 (Tex. App. 1990) (observing, in challenge to states sales and use tax audit, that comptrollers deficiency determination is prima facie correct and that taxpayer must disprove it with documentation), writ denied. The burden of persuasion does not shift, while the burden of production may shift several times in one case. See Longmire, 638 N.E.2d at 898; Thorntown Tel Co. v. State Bd. of Tax Commrs, 629 N.E.2d 962, 965 (Ind. Tax Ct. 1994).
In this case, Great American has the duty to submit evidence sufficient to prove that the Departments auditing method was improper because it refused to consider leased vehicles with mpg ratios above its designated ceiling. Great American failed to adequately comply with the Departments record-keeping requirements, a fact acknowledged by the taxpayer. (Petr Reply Br. at 9.) Because Great Americans records were incomplete and insufficient, the Department was permitted to calculate and issue a proposed assessment based upon the information that was provided by the taxpayer. Ind. Code § 6-6-4.1-24(a). In calculating an average mpg ratio for Great Americans other leased vehicles, the Department excluded from consideration sample vehicles with mpg ratios below the 3.0 mpg floor and above the 5.21 mpg ceiling. The Department explained its rationale for establishing this range as follows:
It was obvious that even with the additional information that many vehicles still had unattainable mpgs. Typically in an audit, where there are questionable areas, those areas are tested to determine if they contain missing or inaccurate information. In this case, it was not possible to conduct a test because there were [not] mileage or fuel source documents to test. Therefore, to even consider the additional information, a ceiling had to be imposed. . . . Once it was determined by the Department to try to use this information, the line could have been drawn anywhere. However, as the mpgs became higher, the probability of missing fuel increased. It was decided to consider those vehicles with mpgs up to the highest reported fleet mpg during the audit period of 5.21. . . .
Since no testing could be done on these vehicles, it would be imprudent to accept all information provided, knowing that the information is incomplete and has possible timing problems. Therefore, the Department had no alternative but to impose some reasonable parameters when trying to accept some portion of the additional information at face value. The 3.0-5.21 parameters are considered reasonable. It allowed a fluctuation in mpgs of 2.21 miles per gallon. Anything outside the parameters was considered to have potential time problems or missing information.
(Rept Br. at 17.)
Although not applying the term, the Department considered mpg ratios beyond this range to be outliers. An outlier is a subject or other unit of analysis that has extreme values on a variable. W. Paul Vogt, Dictionary of Statistics and Methodology 161 (1993). In other words, [i]n a series of observations or readings, an outlier is a reading that stands unexpectedly far from most of the other readings in the series. 2 International Encycolpedia of Statistics 1039 (1978). At trial, Mr. Joseph A. Scheidler, a certified public accountant testifying on behalf of Great American, described outliers as abnormally high aberrations or abnormally low aberrations [of data within a sample]. (Trial Tr. at 188.) Cf. 61 Pa. Code § 8a.1 (defining outlier as a statistical observation that appears to deviate markedly from other members of the sample from which it came).
In determining its proposed assessment, the Department was obligated to select a method of audit reasonably calculated to reflect the taxes due by Great American. See, e.g., Micheli Contracting Corp. v. New York State Tax Commn, 486 N.Y.S.2d 448, 450 (N.Y. App. Div. 1985) (citing Ristorante Puglia, LTD. v. Chu, 478 N.Y.S.2d 91, 93 (N.Y. App. Div. 1984). Accord Underwood v. Fairbanks North Star Borough, 674 N.E.2d 785, 788 (Alaska 1983) (quoting W.T. Grant Co. v. Joseph, 159 N.Y.S.2d 150, 155-56 (N.Y. App. Div. 1957)). Here, the taxpayer provided information as to mpg ratios for a sample of its other leased vehicle units during the quarters audited by the Department. (Petr Exs. 17-19); (Ex. 15.) The Department disregarded what it basically deemed to be outlier mpg ratios in these samples. (Petr Ex. 7); (Respt Br., Ex. A.) The Court must therefore consider whether Great American has shown that the Departments treatment of these alleged outliers is unreasonable.
Neither party cites authority for the identification or treatment of outliers. Mr. Scheidler did address the issue in his trial testimony. He explained that, in applying a sampling technique, one cannot arbitrarily eliminate any items within the sample. You need to consider all items that are part of the sample. (Trial Tr. at 188.) Mr. Scheidler stated that it is appropriate in some instances to eliminate . . . outliers, . . . [but] there has to be a real logical or factual reason for why those are considered extremes. (Trial Tr. at 188.) Moreover, according to Mr. Scheidler, one must treat the high extremes the same as you treat the low extremes. (Trial Tr. at 188.) However, despite these assertions, there appears to be no standard, generally accepted method for identifying or treating outliers. One recommended method for identifying outliers is the hingespread approach; using this method, the difference between the upper and lower hinges (values that are ordinally halfway between the median and the extremes in a sample) serves as the sample measure of dispersion on the basis of which values may be classified as outliers. A Handbook for Data Analysis in the Behavior Sciences 358, 362 (Gideon Keren & Charles Lewis, eds., 1993) (citing John W. Tukey, Exploratory Data Analysis (1977)). In 2 International Encycolpedia of Statistics 1040-42 (1978), the author notes that there are at least three ways in which an outlier can occur and that a different action would be preferred in each case with respect to addressing or treating the outlier. See footnote
These are general observations, not concrete rules. The parties have not presented the Court with authoritative explanation as to the nature, identification and treatment of outliers. Without further information, the Court can only speculate as to whether the Departments identification and treatment of outliers was an improper auditing methodology. See footnote
Great American has not submitted evidence sufficient to establish a prima facie case as to the invalidity of the State Boards methodology. Therefore, it has not met its burden of production. Consequently, the Court holds that Great American has not satisfied its burden of proof in this case.