By Erica Horn
In Rent A Center East v. Finance and Administration Cabinet, Department of Revenue, Kentucky Board of Tax Appeals, File No. K13-R-04, Order No. K-24567 (February 13, 2014), appealed to Jefferson Circuit Court, Civil Action No. 14-CI-001476, the issue is the valuation of tangible personal property owned by Rent A Center (“RAC”), which is in the business of renting household items such as computers, TVs, electronics, etc. Despite the relatively straight-forward nature of the issue, the Board of Tax Appeals made four decisions more far-reaching than how to value a taxpayer’s tangible personal property. First, the Board granted a “directed verdict” for the Department of Revenue on the basis that the Board was “unpersuaded by the case presented by the taxpayer”, and provided an indication of what type of valuation evidence might be acceptable. Second, the Board excluded the taxpayer’s potential expert witness of the basis that the witness had not been disclosed to the Department in a timely manner. 3rd, the Board held the Department was not required to set forth its method for valuing tangible personal property in a regulation. Finally, the Board upheld the Department’s imposition of penalties based on the omitted property tax statute.
1. Directed Verdict for the Department and Acceptable Valuation Evidence
Kentucky tax practitioners cannot recall a time when the Board entered a “directed verdict” for either the Department or a taxpayer. This first-time use surprised Kentucky’s SALT community, but is supported in Kentucky case law by Koo v. Kentucky Department for Adult and Technical Education, 919 S.W.2d 531 (Ky. App. 1995), which was cited by the Board. In Koo, the Kentucky Court of Appeals upheld a directed verdict issued by a state hearing officer when the hearing officer found the appellant had failed to meet his burden of proof.
In its order, the Board notes the taxpayer did not present an appraiser as a witness and the corporate representative of the taxpayer admitted he was not presenting any valuation evidence. Instead, the witness “merely testified in general that he believed the property was overvalued” because rent-to-own property has a shorter useful life than the useful life required by the Department on its tax returns. Furthermore, no witness was called from the accounting firm that had prepared the tangible personal property tax returns at issue. The support for the values used by the accounting firm was described by the Board as “documents merely set[ting] forth conclusory information about the claimed overvaluation of the rental household items, but  never any back-up, supporting information presented which specifically showed why the valuation was too high.”
Before leaving the subject matter of valuation, the Board acknowledged the difficulty of valuing tangible personal property and provided taxpayers with a hint of what might be acceptable evidence. The Board stated,
The Board understands it would be a daunting task to appraise each individual item of property, when there are thousands of items. In a future case, though, an appraiser could simply present a sampling of the items in question along with the supporting information necessary to demonstrate the existence of any additional physical, functional and economic obsolescence.
(Order, p. 7.)
- Exclusion of Taxpayer’s Expert Witness
The Board upheld a motion in limine filed by the Department excluding the testimony of the taxpayer’s proposed expert witness. The Department objected to the expert witness based on the taxpayer’s failure to name an expert prior to the deadline for the close of discovery. Based on the Board’s prehearing order all discovery must be completed within 60 days prior to the date on which the hearing is set. In this case, the discovery deadline was September 20, 2013. On October 7, 2013, counsel for RAC filed Supplemental Answers to the Department’s interrogatories and disclosed the name of its intended expert witness. Citing its own administrative regulation, 802 KAR1:010 Section 4(3), which provides for the exclusion of documents or testimony at a hearing if a party fails to obey a discovery order, the Board did not take any testimony from the expert as to his qualifications or otherwise. However, a proffer of proof outlining the qualifications of the intended witness and his testimony was taken by the Board’s hearing officer outside the hearing of the Board.
- No Regulation Required, But Propriety of Department’s Methodology Not Decided
Administrative guidance for Kentucky’s tax law, especially property tax, is woefully lacking. Unfortunately, the Board rejected the taxpayer’s argument that the Department’s methodology for valuing tangible personal property should be set forth in a regulation. Instead, the Board held that because the method of assessment is set forth on the tax return and in the instructions to the return this was sufficient. In support of this decision the Board cited 103 KAR 3:010, which incorporates by reference all tax returns, forms and instructions of the Department. The Board also cited Dan v. Revenue Cabinet, 976 S.W.2d 594 (Ky. App. 1998) for the proposition, “the statutes are not unconstitutional because they do not provide a “measuring stick” for assessments.” (Order, p. 9.) Nevertheless, the Board did note it was not making an “adjudication” as to the validity of the Department’s method of assessment.
- Imposition of Omitted Property Penalties
The taxpayer filed its tangible personal property tax returns using a methodology agreed to with the Department in a settlement agreement for prior years. The Board held the prior agreement did not cover the tax years before the Board, and the taxpayer did not seek the permission of the Department to use this approach in advance of filing the returns. Advance permission is necessary when an alternative valuation methodology is employed by a taxpayer.
In upholding the penalties based on the omitted property statute, KRS 132.360, the Board found the taxpayer’s returns constituted an initial “assessment” that could be “reopened” by the Department. Pursuant to KRS 132.360(2), an assessment based on this “reopening” is to be “handled and collected as an omitted tax bill, and the additional tax shall be subject to the same penalties and interest as the tax on omitted property voluntarily listed.”
Furthermore, the Board determined there was no basis for a waiver of the penalties. The taxpayer asserted it relied upon its accountant and “erroneous advice by tax advisor” is a basis for waiver. In finding this penalty exception inapplicable, the Board ruled: “[T]hat taxpayer did not exercise reasonable care and prudence when it failed to seek a determination for future years’ application of its alternative method of valuation with the Department. Without such a determination, its tangible assessment was subject to being reopened, as it was, and the omitted penalty became applicable.” (Order, p. 8.)
Moral of this story: Taxpayers beware!