West Lafayette shop prevails in Tax Court over proposed assessments

The Indiana Tax Court has found in favor of West Lafayette shop owners in their appeal of the Department of State Revenue’s proposed assessments against them, finding the proposed assessments should have been based on evidence presented during an administrative protest.

In John and Sylvia von Erdmannsdorff v.  Indiana Department of Revenue, 49T10-1112-TA-93, John von Erdmannsdorff was the sole proprietor of Von’s Shops, a West Lafayette new and used bookstore that sold books, music, comics and rented and sold VHS and DVDs, among other items. The Indiana Department of State Revenue conducted an audit of the store for the 2007 and 2008 tax years and learned von Erdmannsdorff had not filed income tax returns because he had been operating in the red.

The department instructed von Erdmannsdorff to file returns for the years at issue and expanded its audit to include 2000 through 2006 and 2009. During the audit, von Erdmannsdorff was unable to provide copies of Von’s Shops’ inventories because he did not take inventories during the years at issue. Instead, the department relied on general information in the “sole proprietorship sporting goods-hobby-book-music store” category from BizStats, an online business statistics provider, to estimate Von’s Shops’ annual cost of goods sold.

After von Erdmannsdorff missed the deadline to provide his tax returns, the revenue department issued proposed assessments totaling $245,000 in adjusted gross income tax, interest and penalties for the years at issue based on the BizStats data. Von Erdmannsdorff and his wife, Sylvia, protested the proposed assessments and finally presented copies of their federal and state income tax returns, as well as estimates of the annual cost of goods sold based on “reconstructed” inventories.

The reconstructed inventories used store measurements, book thickness and average prices to estimate the inventories for the years at issue. Additionally, the inventories for the 2001 through 2008 tax years were extrapolated from the 2000 and 2009 inventories using straight-line adjustments to track the flow of inventory over the 10-year period.

The department ultimately denied the von Erdmannsdorffs’ protest and request for rehearing, prompting their original appeal. After the department’s motion for summary judgment was denied and the shop owners’ counter-motion for partial summary judgment was granted, the case proceeded to a trial before the Tax Court, which found in favor of the shop owners on Tuesday.

While the department argued on appeal the methods the von Erdmannsdorffs used to reconstruct the inventories were improper, Indiana Tax Court Judge Martha Blood Wentworth pointed to expert testimony that said those methods were consistent with industry practices and clearly reflected Von’s Shops’ income.  Wentworth also affirmed the use of a 2005 “fire loss and insurance claim” as corroboration for the reconstructed inventories because there was evidence the insurance company conducted an independent, third-party count of the shop’s actual inventory.

Further, because the von Erdmannsdorffs demonstrated the department “failed to account for factors that may have caused the (cost of goods sold) of businesses in the BizStats category to vary from the BizStats figure…the Department used for its COGS estimates,” the chosen BizStats category is not comparable to the Von’s Shops business profile, the judge held. The couple also proved the department’s COGS estimates were too low and were based on inaccurate inventory estimates, she wrote.

Thus, Wentworth determined the proposed assessments “should have been adjusted to reflect the more reliable evidence presented during the administrative protest and the original tax appeal.”