Taxpayer is an individual and is a resident of Indiana. The
Indiana Department of Revenue ("Department") determined that on
January 24, 2009, Taxpayer purchased a recreational vehicle ("RV") in
Florida and had been using the RV in Indiana and other states without paying
sales tax in any jurisdiction. As a result, the Department issued proposed
assessments for Indiana use tax, ten percent negligence penalty, and interest.
...
Taxpayer protests the imposition of use tax on the use and
storage of an RV in Indiana. The Department imposed use tax after determining
that Taxpayer had been using and storing the RV in Indiana and that no sales
tax had been paid on the purchase of the RV. Taxpayer protests that the RV was
titled by a Montana LLC and that all legal documents establishing the existence
of the LLC were properly filed in Montana. Also, Taxpayer states that the RV
was never brought into Indiana, but rather was purchased, used, and stored in
Florida.
...
Therefore, when tangible personal property is acquired in a
retail transaction and is stored, used, or consumed in Indiana, Indiana use tax
is due if sales tax has not been paid at the point of purchase. The Department
determined that Taxpayer purchased the RV in Florida in a retail transaction on
January 24, 2009, but did not pay Florida sales tax on the purchase. The
Department therefore issued proposed assessments for Indiana use tax.
Other than the purchase of the RV, Taxpayer was unable to
provide any documents establishing any LLC business or non-business activity at
all in Indiana, Montana, or any other state in the union. While the LLC made no
attempt to undertake any further activity, the titling of the RV by the LLC did
have a significant impact on Taxpayer's sales taxes. This leads to
consideration of the "sham transaction" doctrine, which is long
established both in state and federal tax jurisprudence dating back to Gregory
v. Helvering, 293 U.S. 465 (1935). In that case, the Court held that in order
to qualify for favorable tax treatment, a corporate reorganization must be
motivated by the furtherance of a legitimate corporate business purpose. Id. at
469. A corporate business activity undertaken merely for the purpose of
avoiding taxes was without substance and "[T]o hold otherwise would be to
exalt artifice above reality and to deprive the statutory provision in question
of all serious purpose." Id. at 470.
The courts have subsequently held that "in construing
words of a tax statute which describe [any] commercial transactions [the court
is] to understand them to refer to transactions entered upon for commercial or
industrial purposes and not to include transactions entered upon for no other
motive but to escape taxation." Comm'r v. Transp. Trading & Terminal
Corp., 176 F.2d 570, 572 (2d Cir. 1949), cert. denied, 338 U.S. 955 (1950).
"[T]ransactions that are invalidated by the [sham transaction] doctrine
are those motivated by nothing other than the taxpayer's desire to secure the
attached tax benefit" but are devoid of any economic substance. Horn v. Comm'r,
968 F.2d 1229, 1236-7 (D.C. Cir. 1992). In determining whether a business
transaction was an economic sham, two factors can be considered; "(1) did
the transaction have a reasonable prospect, ex ante, for economic gain
(profit), and (2) was the transaction undertaken for a business purpose other
than the tax benefits?" Id. at 1237. The question of whether or not a
transaction is a sham, for purposes of the doctrine, is primarily a factual
one. Lee v. Comm'r, 155 F.3d 584, 586 (2d Cir. 1998).
In this case, the facts are that the Montana LLC had no
business or non-business functions and never attempted to acquire, maintain, or
dispose of any property other than the RV in question. In fact, the LLC had no
functions of any kind other than those directly related to the purchase of the
RV in question. The titling of the RV in Montana, a state without a sales tax,
was merely an attempt to reduce or eliminate Taxpayer's sales and use tax
liabilities. The formation of the LLC and the titling of the RV in the name of
the LLC was therefore a "sham transaction."
In conclusion, Taxpayer never intended for the LLC to have
any valid functions beyond avoiding sales and use taxes on the purchase of the
RV. Therefore, the formation of the LLC and the titling of the RV by the LLC
was a sham transaction. Consequently, Taxpayer acquired tangible personal
property in a retail transaction, used and stored it in Indiana, but did not
pay sales tax at the point of purchase or anywhere else. Taxpayer submitted
documentation which established the existence of the RV parks at which Taxpayer
claimed the RV was used and stored, but Taxpayer did not submit documentation
such as invoices for RV lot rental or utility usage to establish that the RV
was actually used and stored there. In such circumstances, Indiana use tax is
due, as explained by 45 IAC
2.2-3-4.
...
In this case, Taxpayer incurred an assessment which the
Department determined was due to negligence under 45 IAC
15-11-2(b), and so was subject to a penalty under IC § 6-8.1-10-2.1(a).
After a review of the circumstances in this case, Taxpayer has established that
the assessment arose due to reasonable cause and not due to negligence, as
required by 45 IAC
15-11-2(c). Therefore, the negligence penalty will be waived.
