On July 14th, the IRS held a public hearing for the debt-equity rule (section 385 of the IRS code) that the Treasury Department proposed last April. The hearing, which had as many as 16 speakers from various industries,...
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Indiana Department of Revenue Rivals the Ministry of Silly Procedures in Tax Refund Case
Most people are familiar with the level of absurdity found in the Monty Python sketches. Aisin USA Manufacturing, a corporation that makes automobile components, found itself in a Pythonesque debacle with the Indiana Department of Revenue (DOR). The case, Zoeller v. Aisin USA Manufacturing, 946 N.E.2d 1148 (Ind. 2011), ultimately resulted in a win for the state and a loss for good tax administration.
The DOR in 2003 sent a refund to Aisin—$1,146,061.83 ($1,071,387.57 plus interest)—for overpayments it had made on its 2001 tax returns. However, when Aisin filed an amended tax return for that year that reflected this refund, the DOR discovered that it had made a clerical error and Aisin did not deserve a refund but actually owed $616,062. When Aisin received the bill, they protested because the statute of limitations had since run and requested a hearing. The company then received a letter from DOR stating, "Your recent explanation and/or payment, with respect to the specific liability number referenced above, is satisfactory. No further action is required on your part for this liability." Yet in 2007 and 2008, the DOR notified Aisin that they actually did have to pay the disputed sum.
The DOR, after Aisin again protested, brought the amount down to $546,994.96 and asserted that "Aisin's continued wrongful retention of this amount d[id] not represent the action of a responsible corporate citizen." The DOR made this decision without first conducting the hearing that Indiana tax code entitles taxpayers to upon request, nor had it issued the letter of findings that should follow a hearing. When Aisin still wouldn't pay, DOR filed a lawsuit against Aisin, alleging unjust enrichment and seeking treble damages. This scenario is troubling because the DOR felt entitled to lecture Aisin about responsibility while it had waffled back and forth for almost a decade.
Further, the DOR filed its lawsuit with a trial court because the Indiana Tax Court can only hear cases if the DOR has completed its standard procedures, which they hadn't. The Court of Appeals admonished the DOR for not conducting a hearing, accusing them of not following procedures because "the DOR fears that the Tax Court's eventual ruling will not be favorable to the DOR." The Indiana Supreme Court, however, held in a 3 to 2 ruling that the DOR's choice in court was proper and that the statute of limitations did not bar the state from collecting the money from Aisin.
Unfortunately, the Indiana Supreme Court's decision will only encourage more of these shenanigans. Company and individuals should not have to endure what Aisin did. It is already costly for both individuals and businesses to comply with tax laws; not being able to trust what the government says makes it difficult for taxpayers to predict the outcome of their compliance efforts, leading to great uncertainty. Such Kafkaesque procedures by taxing authorities mean that taxpayers accrue significant costs, which can discourage them from engaging in productive economic activity.
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