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Indiana Supreme Court Addresses Issue Preclusion In Tax Cases
Posted in Litigation

Last Friday, in Miller Brewing Co. v. Indiana Department of Revenue, the Indiana Supreme Court addressed an issue of first impression in Indiana law:  whether, and to what extent, issue preclusion applies in tax cases.

The issue in Miller Brewing arose from Indiana's taxation of a portion of the income of corporations doing business in the state, measured by the percentage of sales allocated to Indiana.  This practice has created an issue when determining what to do with sales to an Indiana customer who arranges for a common carrier to pick up products at an out-of-state facility.

Miller Brewing had faced this issue before, in its Indiana tax returns for 1994-1996.  In those returns, Miller reported all sales to Indiana customers irrespective of the means of delivery.  Miller then asked for a refund for those sales where the products were the customer arranged for out-of-state pick-up by a common carrier.  The Indiana Supreme Court summarized the 2005 Tax Court case addressing those returns as holding “that sales to customers who arranged transportation to Indiana by common carrier did not constitute Indiana sales for the purpose of allocation of income to this state.”  Thus, Miller received its refund.  Miller Brewing Co. v. Ind. Dep’t of State Revenue, 831 N.E.2d 859 (Ind. Tax Ct. 2005) (“Miller I”).

The present appeal arose from the Department of Revenue’s audit of Miller Brewing’s tax returns for 1997-99.  The DOR’s proposed assessments included sales of products shipped by common carriers hired by customers in Indiana.  When Miller Brewing protested, the DOR responded with an argument not raised in Miller I – that Indiana’s sales factor was based on the “destination rule,” under which Indiana may “treat sales of products picked up by common carriers for delivery to Indiana as sales derived from this state.”  Miller Brewing argued that issue preclusion barred the DOR’s interpretation and application of the “destination rule,” and moved for summary judgment on that basis in the Tax Court.

Addressing only the issue preclusion aspect of the case – not the merits – the Indiana Supreme Court sided with the DOR.  The Court observed first that issue preclusion generally “is less favored against a government agency responsible for administering a body of law that affects the general public, such as tax law.”  The Court then explained that, though a new argument usually is insufficient to reopen an issue of law previously decided as to the parties, “in tax cases that principle should be relaxed.”  “If failure to raise an omitted argument can forever preclude the Department from relitigating a legal issue,” the Court stated, “the state is in effect barred by the omission of its agents who generally do not bind the government by a mistake of law.” 

Notably, the Court did not agree with several arguments against issue preclusion advanced by the DOR.  For example, the Court rejected the argument that Indiana Appellate Rule 63 contemplates relitigation of the same facts or issues in subsequent tax cases.  The Court also addressed the DOR’s argument that “the legal climate has changed,” by noting that any such changes have occurred in years since the tax years in question, with no indication they were to be applied retroactively.   “[R]esolution of a case,” the Court explained, “should not turn on subsequent events if for no other reason than to remove the incentive to drag out litigation in hopes of relief from some external source.”



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