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Taxpayers argue that the Department's assessment of sales/use tax on the purchase of two automobiles was erroneous. Taxpayers set out various arguments including "insufficiency of evidence," "abuses of due process," and that the assessments violate the constitutional sovereignty of both Louisiana and Montana.
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Taxpayers freely admit in writing that, the vehicles are used in Indiana but argue that the two vehicles were actually purchased by Taxpayers' Montana based Limited Liability Company. Taxpayers are or were the LLC's managers. A Montana "Services Company" assisted Taxpayers in establishing their LLC. The "Services Company" invites its prospective customers – such as Taxpayers – to "Register your vehicles in Montana and Pay No Sales Tax." (Emphasis in original). The "Services Company" invites its customers to "Incorporate your Limited Liability Company in tax-free Montana and our experienced Registered Agents can help you save thousands on RV, car, and airplane registered simply with a Montana LLC." In apparent response to "Service Company's" invitation, a one-page document was prepared designating "Service Company" as the LLC's Montana "agent."
Other than the purchase of the vehicles, Taxpayer was unable to provide any documentation or evidence establishing any business or non-business activity by the LLC 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 vehicles by the LLC did have an effect on Taxpayer's sales/use tax responsibility. This tax avoidance effect 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 (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 Montana LLC had no business or non-business functions and never attempted to acquire, maintain, or dispose of any property other than vehicles in question. In fact, the LLC had no apparent functions of any kind other than those directly related to the purchase of the vehicles in question. The titling of the vehicles in Montana, a state without a sales tax, was an apparent attempt – as publicly advertised by "Services Company" – to reduce or eliminate Taxpayers' sales and use tax liabilities. The formation of the LLC and the titling of the vehicles in the name of the LLC constituted a "sham transaction."
In conclusion, there is no apparent indication that the LLC had any valid function beyond avoiding sales and use taxes on the purchase of the vehicles. Therefore, the formation of the LLC and the titling of the vehicles by the LLC constituted a legal 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.
In such circumstances, Indiana use tax is due as provided under 45 IAC 2.2-3-4 .
