Indiana Law Review 292 INDIANA LAW REVIEW [Vol. 11:292 XVI. Taxation John W. Boyd* A. Death Taxes In a decision of some importance to estate and compensation planners, the First District Court of Appeals in In re Estate of Ban- non^ held that a payment to a widow of a deceased corporate employee pursuant to the terms of his employment contract was not subject to the Indiana inheritance tax.^ The decision is also of more general importance in that it aligns Indiana with those jurisdictions accepting the so-called "ownership" theory of death taxation and re- jects the "receipt" or "succession" theory.' Bannon arose on the following set of facts. In 1969, the decedent and his employer entered into a ten-year employment contract whereby the decedent was to receive $20,000 per year for the first five years of the contract period and $10,000 per year for the second five years. In the event that the employee died before the end of the contract period and was survived by his wife, the employer was to pay her $5,000 per year for the remainder of the contract period. Three years after the contract was entered into the employee died, and the employer took out an annuity payable to the widow for the remainder of the contract period. Ruling that there was no transfer of a property interest from the decedent to his widow on the payment or obligation of payment of the annuity, the Marion Probate Court held that the annuity was non-taxable under the inheritence tax statute then in effect.* The court of appeals was then faced with the question of whether a tax- able event took place. Making that determination required the court to first decide which general theory of death taxation was reflected in the Indiana statutory scheme and then, applying that theory to Member of the Indiana Bar. Law Clerk for the Honorable William E. Steckler. B.A., Northwestern University, 1973; J.D., Indiana University School of Law— In- dianapolis, 1976. The author wishes to extend his appreciation to William Sharp for his assistance in the preparation of this article. '358 N.E.2d 215 (Ind. Ct. App. 1976). 'Ch. 75, §§ 1, 33, 1931 Ind. Acts 192 (repealed 1976) (present Indiana inheritance tax provision now codified at Ind. Code §§ 6-4.1-1-1 to -10-6 (1976)). 'General discussion of the two theories may be found in Brink, Minnesota In- heritance Tax: Some Problems and Solutions, 43 MiNN. L. Rev. 443 (1959); and Meisenholder, Taxation of Annuity Contracts Under Estate and Inheritance Taxes, 39 Mich. L. Rev. 856 (1941). 358 N.E.2d at 216. 1977] SURVEY- TAXATION 298 the facts, to decide whether the annuity fell within the statutory sweep. The court had little problem in concluding that the inheritance tax statute then in effect^ utilized the "ownership" concept. Under the "ownership" or, as it is also known, the "divestment" theory, property in which a decedent had no interest at the time of his death will not be subject to taxation when it passes to a transferee at decedent's death or upon a death-related contigency.* By way of contrast, the "succession" or "receipt" theory is based upon the premise that regardless whether the transferor-decedent retained an interest in property during his lifetime, if there is an enlarge- ment of the interest of a beneficiary at the decedent-transferor's death, then there is a taxable event.^ The court noted that the specific inclusions in the inheritance tax statute* involved situations where the decedent had some degree of control over the property at his death. More fundamentally, the court stated: [T]he "ownership" test reflects a basic distinction which underlies our inheritance tax system. The inheritance tax is directed toward transfers of property by will, by intestate succession, and by other such transfers that substitute for testamentary depositions [sic]. The death tax is not intended to apply to absolute inter vivos gifts.' Applying that distinction, the court found that the payment of the annuity was not subject to the inheritance tax. The employment contract was such that the decedent had no interest in the annuity that became payable to his widow. In this regard, special emphasis was placed upon the fact that the decedent did not have the power to change the beneficiary and thus had relinquished his interest in the amount payable to the widow upon entering into the agreement.^" Because the new inheritance tax statute encompasses the same types of transfers covered in the former statute," it is safe to con- clude that the result in Bannon would have been the same had the new act been applicable. On the general point of law involved in 'Ch. 75, §§ 1. 33, 1931 Ind. Acts 192 (repealed 1976).. 'See Brink, supra note 3, at 444. ''See id. 'Ch. 75, § 1, 1931 Ind. Acts 192 (repealed 1976). The transfer provisions in the 1976 overhaul of the Indiana inheritance tax are codified at Ind. Code § 6-4.1-2-1 (1976). '358 N.E.2d at 217. '"/d. at 218. ''Compare iND. Code §§ 6-4.1-2-1 to -4 (1976) with ch. 75, § 1, 1931 Ind. Acts 192 (repealed 1976). 294 INDIANA LAW REVIEW [Vol. 11:292 Bannon, Indiana inheritance tax law is now congruent with federal estate tax law, which also reflects an "ownership" theory. ^^ One of the credits applicable against a decedent's federal estate tax is for the amount of state death taxes paid.'^ The amount of death taxes imposed by most states is normally much less than the potential total credit available under the federal estate tax; accor- dingly, most states have enacted what are known in tax parlance as "pickup taxes."^* Such taxes impose an additional state tax equal to the amount by which the allowable credit under the federal estate exceeds the state death taxes. The dynamic effect of such taxes is not to increase the total tax liability for a decedent's estate but is instead to allow the states to collect a higher percentage of the total tax liability of an estate. In cases where an Indiana resident dies holding real or personal property in another state which is subject to a death transfer tax in that jurisdiction, a pickup tax provision in that state may likewise apply to effect some redistribution of the gross amount of death tax liability.'^ Such was the case in State v. Purdue National Bank,^^ in which the Second District Court of Appeals construed the forerun- ner of the present Indiana pickup tax statute." In making the com- putation of the Indiana pickup tax under the former statute, pickup taxes paid to other states are not to be deducted from the allowable federal estate tax credit. The court noted that a parenthetical exclu- sion in the statute rendered it capable of no other construction.^* The effect of the former statute, as so construed, was the imposition of state death taxes that exceeded the allowable federal estate tax credit for state death taxes in cases where an Indiana resident died holding property in another state, which itself levied a pickup tax with respect to property of a nonresident decedent.'* The general theory of pickup taxation simply was inapplicable. The 1976 General Assembly may have rectified that theoretical anomaly in the recodification of inheritance and estate taxes, which replaced the ''I.R.C. § 2036, as amended by Tax Reform Act of 1976. Pub. L. No. 94-555, § 2009(a), 90 Stat. 1893; I.R.C. § 2037; id. § 2038, as amended by Tax Reform Act of 1976, Pub. L. No. 94-455, § 1902(a)(3), 90 Stat. 1804, 1852. "I.R.C. § 2011, as amended by Tax Reform Act of 1976, Pub. L. No. 94-455, § 1902(a)(12)(B), 90 Stat. 1806. '*E.g., IND. Code §§ 6-4.1-11-1 to -2 (1976). '^Indiana has such a provision for nonresident decedents who die holding Indiana property. iND. Code § 6-4.1-ll-2(b) (1976). "355 N.E.2d 414 (Ind. Ct. App. 1976). "Ch. 276, § 1, 1965 Ind. Acts 764 (repealed 1976) (present pickup tax statutes are codified at Ind. Code §§ 6-4.1-11-1 to -6 (1976)). "355 N.E.2d at 416. 1977] SURVEY- TAXATION 295 old article 4 of title 6 of the Indiana Code with a new article 4.1.^° The 1976 enactment was intended to be a codification and restate- ment of applicable or corresponding provisions of the repealed laws, without any substantive changes.^^ The new pickup tax provision, however, does not include the parenthetical exclusion upon which the Purdue National Bank panel seized.^^ Accordingly, it is submit- ted that the Indiana pickup tax is now in line with the general theory of pickup taxation. B. Gross Income Tax 1. Affiliated Corporations. — Section 6-2-l-14(a) of the Gross In- come Tax Act^' provides that affiliated corporations "shall have the privilege of making a consolidated [gross income tax] return."" The statute requires that an affiliated group elect at the time of filing its first annual return whether to file on a consolidated basis.^^ Regula- tion 800 of the Indiana Gross Income Tax Regulations,^' promulgated by the Department of Revenue, provided that when an affiliated group of corporations desired to file a consolidated return the group had to file an election with and receive permission from the Depart- ment prior to the filing of the first quarterly return for that year, or before filing the annual return in cases where no prior quarterly return had been filed. The First District Court of Appeals struck down regulation 800 as exceeding the limits imposed upon the department in its rule-mak- ing capacity in Indiana Department of State Revenue v. Sohio Petroleum Co." The court stated that regulation 800 mandated an affiliated corporation to take action to avail itself of the privilege of '"Act of Feb. 18, 1976, Pub. L. No. 18, §§ 1-2. 1976 Ind. Acts 69-104 (codified at IND. Code 6-4.1-1-1 to -12-11 (1976)). "Pub. L. No. 18, § 3. 1976 Ind. Acts 104. ^Compare Ind. Code § 6-4.1-ll-2(a) (1976) with ch. 276. § 1(a). 1965 Ind. Acts 764 (repealed 1976). ''The statute, Ind. Code § 6-2-l-14(a) (1976), provides in part: Corporations will be deemed to be affiliated within the meaning of this sec- tion if at least eighty per cent (80%) of the voting of one (1) corporation (ex- clusive of directors' qualifying shares, shall be owned by the other corpora- tion. Every corporation affiliated with another, as defined above, shall be deemed to be affiliated with every corporation which is affiliated with such corporation. '*Id. One of the benefits incident to the election of filing a consolidated return is that dividends paid by one member of the affiliated corporate group to another may be eliminated from the group's gross income. Id. Such a provision is. of course, fair and logical in terms of gross income taxation because the taxable entity, the group, has not derived any real income. "Ind. Admin. R. & Regs. § (6-2-l-14)-l (Burns 1976). '''352 N.E.2d 95 (Ind. Ct. App. 1976). 296 INDIANA LAW REVIEW [Vol. 11:292 filing a consolidated return prior to the time set in the statute.** The court noted that insofar as regulation 800 required an affiliated group to obtain permission to file a consolidated return in its first year, it extended the power of the department beyond that granted in the statute. By its very terms, the statute empowers the depart- ment to require prior permission only when an affiliated group, the members of which filed separate returns during the existence of the group, seeks to switch to the consolidated return format or when an affiliated group that had previously been filing on a consolidated basis seeks to have its members file separate returns." 2. Exemptions. —Sohio Petroleum also clarified a question regarding an exemption from gross income for purposes of the In- diana Gross Income Tax. Under section 6-2-l-l{m) of the Indiana Code,*" for nonresident individuals and Indiana corporations authorized to and doing business in other jurisdictions, gross income does not include gross receipts received from sources outside of In- diana where the receipts are derived from a trade or business located in and regularly carried on outside of Indiana. For a corpora- tion to qualify for exemption under section 6-2-l-l(m), it must (1) be incorporated under the laws of Indiana, (2) do business in another state, and (3) derive income from sources outside of Indiana." Sohio Petroleum's predecessors in interest were Old Ben Coal Corp., a Delaware corporation having is principal executive office in Illinois; and Old Ben Coal, Inc. and Kings Mine Coal Corporation, both of which were Indiana corporations. The Delaware corporation owned all of the stock of the Indiana corporations. Although the In- diana corporations had their production facilities in Indiana, their management functions were concentrated in the Illinois office of the parent corporation. Old Ben Coal, Inc. owned one-half of the common stock of Algers, Winslow, and Western Railroad (AWW), an Indiana corporation operating in Indiana. Old Ben Coal, Inc. received dividends from AWW in 1970 and 1971 but did not report the dividends as gross income on its consolidated return. The AWW stock certificates were kept at the Illinois corporate offices; therefore, the taxpayers contended that the dividends were exempt from gross income under section 6-2-l-l(m). The taxpayers relied on an older Indiana Supreme Court case'^ in which, on similar facts, certain intangible property was found to ^'IND. Code § 6-2-l-14(a) (1976). =»352 N.E.2d at 98. '"IND. Code § 6-2-l-l(m) (1976). "Indiana Dep't of Revenue v. Frank Purcell Walnut Lumber Co., 152 Ind. App. 122, 128, 282 N.E.2d 336, 340 (1970). '^Miami Coal Co. v. Fox, 203 Ind. 99, 176 N.E. 11 (1931). 1977] SURVEY- TAXATION 297 be so intertwined and affixed to the corporate taxpayer's Chicago of- fice that its "business situs" was in Illinois. That court had conclud- ed that the intangible property came within the operation of the concept that a state cannot impose its personal property tax upon the value of personal property situated outside of that jurisdiction.'^ The Department of Revenue incorporated the personal property tax business situs rule into its gross income tax regulations,^ In Sohio Petroleum, the court of appeals preserved the concep- tual distinction between income and property taxes and refused to apply the portions of the gross income tax instructions incorporating the business situs rule.'^ The court stated that the determinative factor for qualification under the exemption in section 6-2-l-l(m) is the location of the corporation that pays dividends on stock held by an Indiana corporation at its out-of-state principal place of business. 3. Ad Valorem Taxes. — ( a) Property Tax Disaster Reassess- ment —Indiaina. Code section 6-1-26-7'* provides that in case of a disaster that destroys a substantial amount of property within any township, the State Board of Tax Commissioners shall have the area where the losses occurred surveyed and shall order a reassessment of the property. The disaster reassessment procedure is actuated by petition of taxpayers suffering damage by reason of disaster and ap- plies to both real and personal property. Indiana State Board of Tax Commissioners v. Holthouse Realty Corp.^'' considered the state's position that the disaster reassess- ment provision did not apply to taxpayers whose losses had been fully compensated by proceeds from insurance policies. The case arose on the following set of facts. Substantial amounts of property were destroyed by an explosion in Richmond in 1968. Approximately seven months later, several taxpayers petitioned for reassessment of personal property pursuant to section 6-1-26-7 and improvements to real estate that had been damaged by the explosion. In eary 1971, the State Board of Tax Commissioners issued an order that approv- ed certain petitions for reassessment but denied reassessments for those taxpayers whose losses had been fully compensated by in- surance proceeds. In 1972, the aggrieved taxpayers filed their action ''Id. at 114-15. 76 N.E. at 17. "IND. Deft of Rev. Instructions 3-11, 3-12. °°In this regard, the court relied upon Baker v. Compton, 247 Ind. 39, 211 N.E.2d 162 (1965), which held that an appellate court is not required to follow an incorrect in- terpretation of a statute by an agency charged with administering the statute, not- withstanding the axiom that a court should give deference to agency interpretations. 352 N.E.2d at 101. '•Ind. Code § 6-1-26-7 (1976). "352 N.E.2d 535 (Ind. Ct. App. 1976). 298 INDIANA LAW REVIEW [Vol. 11:292 for review.'* Two years later the trial court entered judgment for the taxpayers, finding that the statute did not except situations where insurance covered the loss/' The trial court noted that there was no reason to penalize those prudent enough to insure their prop- erty by excepting them from the statutory relief, and if the legislature had so intended, it would have so provided/" After disposing of collateral issues,^^ Judge Lowdermilk's opinion for the First District Court of Appeals set forth the "crucial issue" as being whether the legislature intended to deny statutory relief to taxpayers who have recovered insurance proceeds on property losses. Focusing on the mandatory language of the statute, the court found no need to construe the statute." The clear purpose of the statute being to provide relief in the form of a revaluation of the damaged property and the attendant lesser tax burden, the court was at a loss to see how the incidence of insurance would affect that purpose. The court noted that the statute was designed to provide relief to all taxpayers adversely affected within the meaning of the statute and not to award compensation on account of losses. Accor- dingly, the state's argument was rejected, and the statute was given its intended full scope of coverage. (b ) Valuation of Commingled Fungible Goods. — The Indiana Con- stitution provides: "The General Assembly shall provide, by law, for a uniform and equal rate of property assessment and taxation; and shall prescribe regulations to secure a just valuation for taxation of all property . . . ."*' The Third District Court of Appeals had occa- sion to apply that constitutional provision in Indiana State Board of Tax Commissioners v. Lyon & Greenleaf Co.** The case concerned the 1969 personal property tax return of Lyon & Greenleaf, a federally licensed grain warehouse that stored raw wheat belonging to farmers, other grain elevators, and itself. The raw wheat was kept in common storage facilities in such a manner that wheat belonging to Lyon & Greenleaf was indistinguishable from the ''At that time review was pursuant to ch. 231, § 1, 1963 Ind. Acts 317 (repealed 1975) (present review provision codified at Ind. Code § 6-1.1-15-5 (1976)). '•352 N.E.2d at 537. "The court of appeals had little trouble in finding that there was substantial evidence to support the finding that the board did not order reassessment of the ag- grieved taxpayers property pursuant to ch. 107, § 1, 1969 Ind. Acts 249 (repealed 1976) (current version at Ind. Code § 6-1.1-4-11 (1976)). The trial court's finding that prudent taxpayers carry insurance was found to be erroneous inasmuch as the record contained no evidence to support such a finding. That error was found to be "harmless error" under Ind. R. Tr. P. 61, making reversal unwarranted. 352 N.E.2d at 538. "352 N.E.2d at 539. *'Ind. Const, art. 10, § 1. "359 N.E.2d 931 (Ind. Ct. App. 1977). 1977] SURVEY- TAXATION 299 wheat that it held as a warehouseman. An audit of the 1969 return resulted in a recommendation to the State Board of Tax Commis- sioners that the assessed valuation of Lyon & Greenleafs business personal property be more than tripled. Lyon & Greenleaf invoked ; the then applicable review procedure following the Board's issuance of its "Notice of Assessment."*^ Lyon & Greenleaf based its assessment on a "true cash value" basis, obtaining the value from the State Board of Tax Commis- sioners' Bullentin No. 9, entitled "Assessment of Farm Livestock and Commodities for the Year 1969." The board sought to have the property assessed as inventory because Bulletin No. 9 provided: "All livestock, grain or other farm commodities held, possessed or con- trolled by a dealer or manufacturer shall be assessed as inven- tory . . . ."" The lower of actual or current replacement cost was to provide the value for inventory. On review of the reassessment, the trial court found that the effect of using two different bases — one for the assessment of raw wheat belonging to warehousemen and one for the assessment of raw wheat belonging to farmers — was to assess identical commingled raw wheat held in the same storage ? facility at differing rates depending upon who owned the wheat. That court ruled that the administrative standard, which resulted in ' values for commingled wheat that differed solely on the basis of '^ ownership, constituted an unreasonable classification in violation of article 10, section 1 of the Indiana Constitution.*^ jj In affirming the trial court, the court of appeals began its usi, analysis with an examination of the factors that form the constitu- f^ tional basis of a valid tax law. Those factors, derived from article 10, «»> section 1 of the Indiana Constitution, are (1) uniformity and equality C, in taxation, (2) uniformity and equality as to rate of taxation, and (3) i^ a just valuation for taxation of all property." The court stated that * the purpose of the three requirements is to distribute the burden of taxation on principles of uniformity, equality, and justice. As the "uw case turned on the "classification" question, the court noted that In- diana case law" recognizes that different classes of property may be ^ "The procedure for review of reassessments applicable at the time the dispute in the instant case arose may be found at ch. 231, § 1, 1963 Ind. Acts 317 (repealed 1975) (procedure for judicial review of final determinations of the State Board of Tax Com- missioners now applicable is codified at Ind. Code § 6-1.1-15-5 (1976)). "359 N.E.2d at 933. "Id. "Wright V. Steers. 242 Ind. 582, 179 N.E.2d 721 (1962), and Finney v. Johnson, 242 Ind. 465, 179 N.E.2d 718 (1962), were cited by the Lyon & Greenleaf court as establishing the constitutional bases of a valid tax law. 359 N.E.2d at 933. **See Smith v. Stephens, 173 Ind. 564, 91 N.E. 167 (1910); Board of Comm'rs v. Johnson, 173 Ind. 76. 89 N.E. 590 (1909); Clark v. Vandalia R.R., 172 Ind. 409, 86 N.E. 851 (1909); State ex rel Lewis v. Smith, 158 Ind. 543, 63 N.E. 25 (1902). 300 INDIANA LAW REVIEW [Vol. 11:292 necessary in order to achieve a just and uniform taxation. However, such classifications are permissible only when used to achieve uniformity and equality in result,^ and they must be based upon dif- ferences naturally inhering in the subject matter of the legislation." The Board's argument to the court was that a uniform basis of valuation (actual cost) was applied, and that the difference in assess- ed values under the regulatory schemes was due to differences in cost to the farmer, who presumptively had grown the wheat, and the warehouseman, who presumptively had acquired the wheat by sale or exchange. Uniformity in valuation method, however, is not one of the constitutional prescriptions for a valid tax law;^^ instead, as the court noted, the constitution requires a system that will provide a just valuation of all property.^ The court recognized that cost was an appropriate factor to weigh in arriving at a just valuation, but that cost, in itself, is not a condition sufficient to meet the constitu- tional standard." Without setting forth any broad standard of general application for determining what constitutes a "just valuation," the court struck down the valuation system at issue in Lyon & Greenleaf because it placed an artificial distinction on the value of raw wheat. To the court, "[t]he resulting inequities of a system which places differing values on a fungible commodity commingled in the same storage facility are too great to warrant a valuation under such method."^® Lyon & Greenleaf does, however, clearly establish as part of Indiana constitutional tax law the somewhat self-evident proposition that identical property must be assessed at the same tax value. (c) Commerce Clause Exemption — In Indiana State Board of Tax Commissioners v. Philco-Ford Corp.,^^ the First District Court of Appeals upheld a denial of a property tax exemption that Philco- Ford had claimed under the commerce clause exemption to state ad valorem taxes." The case arose on the following set of facts. Philco- ^359 N.E.2d at 934. "M (citing State ex reL Lewis v. Smith, 158 Ind. 543. 580, 64 N.E. 18. 20 (1902)). "See Wright v. Steers, 242 Ind. 582, 179 N.E.2d 721 (1962); Finney v. Johnson, 242 Ind. 465, 179 N.E.2d 718 (1962). "'See Louisville & New Albany R.R. v. State ex rel McCarty, 25 Ind. 177 (1865). ^359 N.E.2d at 934. '"Id. at 935. ='356 N.E.2d 1379 (Ind. Ct. App. 1976). "The exemption claimed by Philco-Ford was permitted by ch. 398, § 2, 1965 Ind. Acts 1244 (repealed 1975) (current version codified at Ind. Code § 6-1.1-10-30 (1976)). That statute provided, in pertinent part: [P]ersonal property of residents or nonresidents of the state placed in the original package in a public or private warehouse for the purpose of transshipment to an out-of-state destination and so designated on the original bill of lading, shall not, while so in the original package in such warehouse. 1977] SURVEY- TAXATION 301 Ford owned certain appliances that were manufactured at its Con- nersville, Indiana plant and then shipped by rail and truck to a warehouse in Muncie, Indiana. The appliances were stored in their original packages, and those that had been shipped by rail were covered by bills of lading listing Muncie as their destination but were further marked, "for storage in transit to an out of state des[tination]." Because shipments out of the warehouse were con- trolled by Philco-Ford's Philadelphia office, which would draw a new bill of lading to cover outgoing items, and because the outgoing shipments generally were pulled from the entire warehouse stock, the lower court recognized that there was no correlation between the number of appliances stored with the original "out of state" bills and the number of appliances that actually reached out of state destinations, even though Philco-Ford intended to put most of its ap- pliances into interstate commerce.^ Philco-Ford claimed exemptions on its property tax returns for the appliances covered by the original bills of lading.^' On appeal. Judge Lowdermilk stated that the appliances did not move into the stream of interstate commerce until they were shipped or actually committed for shipment to an out of state location. Ship- ment of the goods and storage of the goods in the Muncie warehouse were held to be preparations for entry into the stream of interstate commerce because some of the goods could have been — and indeed some were — sold or otherwise disposed of in Indiana.®" Because the statutory exemption is limited to the compass of the commerce clause, the court upheld the board's denial of the claimed exemp- tion." be subject to tax imposed by this act. ... In construing this action, goods, wares, and merchandise shall be exempt only to the extent that they are ex- empt from ad valorem taxes under the commerce clause of the Constitution of the United States. "356 N.E.2d at 1381. Some of the appliances obviously were transmitted to In- diana destinations. "The Board of Tax Commissioners denied the exemptions, but, on review, the Delaware Superior Court found that the warehouse storage was part of the movement in interstate commerce and concluded that the board acted arbitrarily and capriciously in denying the exemptions. Id "The court relied upon Minnesota v. Blasius, 290 U.S. 1, 12 (1933), in which the Court ruled that property is subject to the taxing power of the states when it has come to rest within a state and may be disposed of at the pleasure of its owner either within or without that state. "The court also rejected Philco-Ford's contention that the claimed exemption in their case was controlled by a case from the previous year that was based upon similar facts. Whirlpool Corp. v. State Bd. of Tax Comm'rs, 338 N.E.2d 501 (Ind. Ct. App. 1975), noted in Allington, Taxation, 1976 Survey of Recent Developments in Indiana Law, 10 Ind. L. Rev. 340, 358 (1976), because the result in Whirlpool was based on an acquiescence theory which had no application to the issues in Philco-Ford. Further- 302 INDIANA LAW REVIEW [Vol. 11:292 4. Sales Taxes. —In Indiana Department of State Revenue v. Associated Beverage Co.,*'^ the First District Court of Appeals held that a manufacturer who purchases empty bottles for the purpose of filling them with its product, in order to sell its bottled product to the public, purchases the bottles for resale and not for its own use. Therefore, such purchases are exempt from state gross retail (sales) tax under the resale exemption.** Another exemption to the state sales tax is extended to the sale, storage, use, or other consumption in Indiana of tangible personal property or service that is directly consumed in the rendering of public transportation of persons or property." In Indianxi Depart- ment of State Revenue v. Indianapolis Transit System, Inc.,*'^ the First District Court of Appeals found that the foregoing exemption applied to a city's charter bus service. In so ruling, the court re- jected the department's argument that the bus charters were leases of tangible personal property and therefore subject to tax under In- diana Code section 6-2-1-38(1),** which makes leases by all persons ex- cept public utilities subject to tax. Deciding whether the charter system created a lessor-lessee relationship was a question of fact dependent upon possession and right to control.*^ The indicia of a lease were found not to be present as the court recognized a distinc- tion between charters and leases.** more, the court rejected Philco-Ford's claim that a regulation exempted the property from tax. The regulation, State Board of Tax Commissioners Regulation No. 16 (1966), however, stated in § 1.7 that it was not to be extended to provide exemptions beyond those required by the commerce clause. Additionally, the court noted that Philco-Ford had failed to satisfy § 1.6 of the regulation, which defined the statutory term "original package." That definition required the original bill of lading to include a designation that the package is committed for transshipment to an out of state destina- tion. The court stated that Philco-Ford had failed to satisfy the requirements in that the original bills of lading did not commit the appliances to definite out of state loca- tions but instead listed Muncie as their destination with the additional designation, "for storage in transit to an out of state des." 356 N.E.2d 1382-83. In light of the court's focus in Philco-Ford, the practical reading of the case calls for strict compliance with the statute and the departmental regulations in order to assure coverage under the exemption. •=^353 N.E.2d 544 (Ind. Ct. App. 1976). "IND. Code § 6-2-l-39(b)(9) (1976). "M § 6-2-l-39(b)(4). "356 N.E.2d 1204 (Ind. Ct. App. 1976). "iND. Code § 6-2-1-38(1) (1976). "356 N.E.2d at 1209-10. In regard to the right to control question, the court enumerated the following factors, gleaned from an Oregon case, Thomas v. Foglio, 225 Ore. 540, 358 P.2d 1066 (1961), as helpful in resolving the issue: (1) employment of the driver, (2) right to direct movement of the bus, (3) obligation to pay costs and repairs, (4) obligation to pay fuel costs, (5) responsibility of garaging the vehicle, and (6) pay- ment of insurance and license fees. "356 N.E.2d at 1210. 1977] SURVEY- TAXATION 303 5. Tax Procedure— The Federal Tax Injunction ^cf. — There is a longstanding federal judicial policy against interfering in matters of state taxation.'* That policy has been codified in the Tax Injunc- tion Act of 1937 J° which precludes federal district courts from en- joining, restraining, or suspending the assessment, levy, or collec- tion of a state tax in cases "where a plain, speedy and efficient remedy may be had in the courts of such State."" The effect of the Act is to divest the district courts of jurisdiction over claims for equitable relief against state taxing authorities when the aggrieved taxpayer has a "plain, speedy and efficient remedy" in his state judicial system.'^ The fact that an aggrieved taxpayer brings his claim under the Civil Rights Act of 1871" does not affect application of the Tax Injunction Act;^* and contrary to the general rule of not requiring exhaustion of state remedies in section 1983 cases,^^ when the Tax Injunction Act is applicable all available state administrative and judicial remedies must be exhausted before a federal court may entertain a section 1983 claim based upon state tax law.^* As Chief Judge Eschbach stated in Green v. Klinkofe,'''' the cen- tral issue in a case where the Tax Injunction Act is called into ques- ;' tion is whether the state courts provide "a plain, speedy and effi- cient remedy" to the aggrieved taxpayer. In Green, the United States District Court for the Northern District of Indiana had occa- "See Great Lakes Dredge & Dock Co. v. Huffman, 319 U.S. 293 (1943); First Nat'l l,^ Bank v. Board of County Comm'rs, 264 U.S. 450 (1924). ^ '»28 U.S.C. § 1341 (1970). f "Id. *** "In other words, when applicable, the Tax Injunction Act effectively ousts a ,,5,, federal court of jurisdiction and mandatorily forecloses the court from granting relief. « Kimmey v. H.A. Berkheimer, Inc., 376 F. Supp. 49, 53 (E.D. Pa. 1974), a//'d, 511 F.2d ^: 1394 (3d Cir. 1975). *v The jurisdictional bar of the Tax Injunction Act has been construed to apply to actions for declaratory relief as well as to actions for equitable relief. See 28 East Jackson Enterprises, Inc. v. Cullerton. 523 F.2d 439 (7th Cir. 1975), cert, denied, 423 ^e! U.S. 1073 (1976); Aluminum Co. of America v. Department of Treasury, 522 F.2d 1120 (6th Cir. 1975); Gray v. Morgan, 371 F.2d 172 (7th Cir. 1966), cert, denied, 386 U.S. 1033 **' (1967); City of Houston v. Standard-Triumph Motor Co., 347 F.2d 194 (5th Cir. 1965), cert, denied, 382 U.S. 974 (1966). ''42 U.S.C. § 1983 (1970). "See. e.g., Hickman v. Wujick, 488 F.2d 875 (2d Cir. 1973); Bland v. McHann, 463 F.2d 21 (5th Cir. 1972), cert, denied, 410 U.S. 966 (1973); Gray v. Morgan, 371 F.2d 172 (7th Cir. 1966), cert, denied, 386 U.S. 1033 (1967). "See McNeese v. Board, of Educ, 373 U.S. 668 (1963). See generally Note, Ex- haustion of State Administrative Remedies Under the Civil Rights Act, 8 IND. L. Rev. 565 (1975). "See. e.g.. Northern Natural Gas Co. v. Wilson, 340 F. Supp. 1126 (D. Kan. 1971), aff'd, 405 U.S. 949 (1972); Delaware, Lackawanna & W. R.R. v. Kingsley, 189 F. Supp. 39 (D.N.J. 1960). "422 F. Supp. 1021 (N.D. Ind. 1976). 304 INDIANA LAW REVIEW [Vol. 11:292 sion to consider the adequacy of the state remedy vis-a-vis tax- payers aggrieved by the provisions of the Indiana Gross Income Tax Act, which authorize tax collectors to levy upon the property of delinquent taxpayers without a prior adjudication of tax liability.^* Plaintiff contended the provisions violated his fourteenth amend- ment rights to due process and equal protection and sought equitable and declaratory relief.^* In Indiana, the exclusive statutory method of obtaining review of tax assessment is through payment of the tax and a claim for refund.** The Indiana Administrative Ad- judication Act excepts decisions of the Department of Revenue and the State Board of Tax Commissioners from its general review pro- visions." The plaintiff contended that he was indigent and unable to pay the tax and to invoke the statutory refund procedure. In a similar situation where an Illinois taxpayer was unable to pay the tax due, the Seventh Circuit ruled that the Illinois refund procedure*^ was unavailable.** If the analysis ended at that point, the jurisdictional bar of the Tax Injunction Act would have been inapplicable because plaintiff would not have had "a plain, speedy and efficient" state remedy through which he could raise his constitutional claim. The court, however, looked to the Indiana state courts to determine whether they had jurisdiction to hear the civil rights claim and grant the relief sought. Although the court noted that no reported decisions recognized that a federal civil rights claim pursuant to 42 '«IND. Code § 6-2-1-18 (1976). ''The case arose on the following set of facts. Plaintiff was an Allen County resi- dent who had failed to pay an alleged gross income tax assessment. Plaintiff alleged that he was unable to pay the tax. The defendants were the administrator of the Gross Income Tax Division of the State Department of Revenue, the Division itself, the Sheriff of Allen County, and the Clerk of Allen County. Plaintiff alleged that the Department of Revenue issued two collection warrants against him pursuant to IND. Code § 6-2-l-18(b) (1976), which were subsequently filed with the Allen County Clerk and entered into the judgment docket of the circuit court of that county. Under the statute, the sheriff is directed to levy upon any property of the delinquent taxpayer once the warrant is entered in the record. Id. Because such actions were authorized to be taken without any kind of hearing, plaintiff challenged the statute on procedural due process grounds. He further contend- ed it violated the equal protection clause in that tax debtors to the state, unlike deb- tors to private parties, are denied a hearing prior to the entry of judgment. Making the requisite claims of irreparable injury and inadequate remedy at law, plaintiff sought declaratory and injunctive relief against the statute and its enforcement. 422 F. Supp. at 1023-24. '"iND. Code § 6-2-1-19 (1976). "M § 4-22-1-2. "III. Ann. Stat., ch. 120, § 675 (Smith-Hurd Supp. 1975-1976). »'28 East Jackson Enterprises. Inc. v. Cullerton, 523 F.2d 439, 441 (7th Cir. 1975), cert, denied 423 U.S. 1073 (1976). 1977] SURVEY- TAXATION 305 U.S.C. § 1983 could be brought in the state courts,** it noted that there is concurrent state and federal jurisdiction over section 1983 claims*^ and concluded that "[i]n view of the 'harmonious relation' which exists between the state and federal courts," Indiana courts would entertain plaintiffs federal constitutional claim/' The court stated that an Indiana court may enjoin a statutory scheme made exclusive where the scheme itself violates due process.*^ Thus, plain- tiff had a state remedy sufficient to invoke the jurisdictional bar of the Tax Injunction Act. In an unreported decision,** the United States District Court for the Southern District of Indiana ruled that the statutory procedure for review of assessment of the value of tangible personal property*® as supplemented by standard appellate review provisions*** provided "a plain, speedy and efficient remedy" for a taxpayer claiming denial of equal protection in personal property tax assessments. C. Legislative Developments During the survey period, thirty-eight public laws were enacted under title 6 of the Indiana Code. Thirty-one of the laws were enacted during the First Regular Session of the 100th General Assembly, and seven of the laws were passed during the Special Session of the 100th General Assembly on May 23, 1977. Although many of the new laws are of only narrow specialized interest," or "422 F. Supp. at 1026. '"/d at 1026 n.l2 (citing Davis v. Towe, 379 F. Supp. 536 (E.D. Va. 1974); Luker v. Nelson, 341 F. Supp. Ill (N.D. 111. 1972)). "•422 F. Supp. at 1026 (quoting Bowles v. Heckman. 224 Ind. 46. 55, 64 N.E.2d 660, 663 (1946)). ''Id. at 1027. "Sacks Brothers Loan Co. v. Cunningham, No. IP 77-140-C (S.D. Ind. May 13, 1977). **IND. Code § 6-1.1-15-1-13 (1976). "The final administrative determination by the State Board of Tax Commis- sioners is reviewable by the circuit or superior court of the county in which the pro- perty is located. Id. § 6-1.1-15-5. The decision of the circuit or superior court is reviewable by the Indiana Court of Appeals, Ind. R. App. P. 4, and, on transfer, by the Indiana Supreme Court, Ind. R. App. P. 11. Should there be a result adverse to the tax- payer in the highest state court and should federal constitutional issues be implicated in that result, resort may then be had in the United States Supreme Court by appeal or by certiorari, as the case may be. 28 U.S.C. § 1257(2), (3) (1970). "'E.g., Ind. Code § 6-1.1-36-7 (Supp. 1977) (State Board of Tax Commissioners may compromise the amount of property taxes, interest, and penalties assessed against a bankrupt railroad); id. § 6-5-8-7 (savings and loan association excise tax to be distributed on the basis of deposits to all taxing districts in which the association has offices); id. § 6-6-6.5-21 (aircraft excise tax collected in Allen County allocated to county board of aviation commissioners aviation fund); id. §§ 6-7-1-28.1 to -32.1 (cigarette tax distribution formula); id. § 6-9-1-5 (St. Joseph County hotel and tourist camp tax in- Btlj, 306 INDIANA LAW REVIEW [Vol. 11:292 are of no real significance to tax law in general,*'' most of the new acts are comment worthy, either merely to alert the reader to their existence or to highlight the provisions of the new laws under their various subject matters. Of general note, the legislature repealed the Multistate Tax Compact.®* The intangibles tax law was recodified without substan- tive change in a new article 5.1 of title 6." The County Adjusted Gross Income Tax Law was amended so as to provide a new levy limit on ad valorem property taxes for counties utilizing an adjusted gross income tax in the budget year when such tax is repealed.'* The former requirement that a County Adjusted Gross Income Tax be effective for four full years before it could be rescinded was repealed and replaced by a new rescission procedure providing that such a tax may be rescinded in the first six calendar months of a year.®* Now, in the year of rescission, calendar basis taxpayers are to pay one-half of the tax that would have been due for a full year, and fiscal year taxpayers are to pay a pro rata share of the tax that would have been due but for the rescission.'^ The retirement income credit against county adjusted gross income taxation was reworded to conform to the language of section 37 of the Internal Revenue Code.'« The legislature also undertook a relatively comprehensive overhaul of the taxation and registration laws applicable to aircraft in Indiana." One of the provisions of the 1977 Act made occasional sales of registered aircraft subject to the state sales tax.^"" A new valuation system based upon age and classification was enacted.'" creased to 5%); id. §§ 6-9-3-1, -4 (Clark, Floyd, Monroe, Knox, and Marion County hotel- motel taxes); id. §§ 6-1.1-19-1 to -2 (amending Pub. L. No. 47, § 1, 1975 Ind. Acts 385) (manner of computing school corporation property tax levies modified). ^'E.g., Ind. Code §§ 9-7-5.5-1 to -10 (Supp. 1977) (personalized license plates); id §§ 6-7-1-12, -28.1; 7.1-4-3-1 (excise taxes on cigarettes and liquor increased to help fund police and firemen's pension funds). 'Tub. L. No. 90, § 1, 1977 Ind. Acts 467 (repealing Ind. Code §§ 6-8-9-101 to -1307 (1976)). The Supreme Court recently upheld the constitutionality of the Multistate Tax Compact under the compact clause, U.S. Const, art. I, § 10, cl. 3; the commerce clause, id. § 8, cl. 3; and the fourteenth amendment, id. amend. XIV. United States Steel Corp. V. Multistate Tax Comm'n, 46 U.S.L.W. 4115 (U.S. Feb. 21. 1978). aff'g, 417 F. Supp. 795 (S.D.N.Y. 1976) (3-judge court). "Ind. Code §§ 6-5.1-1-1 to -9 (Supp. 1977) (previously codified at id, §§ 6-5-1-1 to -5-1 (1976)). •"M §§ 6-3-3.1-1 to -5 (amending id, §§ 6-3.5-1-1 to -12 (1976)). "M §§ 6-3.5-l-6(a) (repealing id. § 6-3.5-1-6 (1976)). "/d. § 6-3.5-l-6(b). (c). "/d § 6-3.5-1-2 (amending id. § 6-3.5-1-2 (1976)). "Pub. L. No. 87, 1977 Ind. Acts 438 (codified in scattered sections of Ind. Code §§ 6-6-6.5-, 6-2-1- (Supp. 1977)). '°°IND. Code § 6-2-l-38(q) (Supp. 1977). ""/d § 6-6-6.5-13. 1977] SURVEY- TAXATION 307 The number of classes of aircraft was increased from two— piston- driven, and non-pressurized and other — to four."*^ Also of general note is Public Law Number 82/°^ wherein the legislature engrafted provisions of the Adjusted Gross Income Tax Act"* — those dealing with auditing of returns, assessment and collection of tax liability, examination of taxpayer books and records, refunds, statutes of limitation, hearings, legal proceedings, maintenance of records by the Department of Revenue, and confidentiality of returns — onto the Occupation Income Tax Act/°^ 1. Death Taxes.— Only one bill was enacted into law during the survey period that directly affects state death taxation."* Although much of the new law worked mere technical, language-oriented changes on previously existing statutes,"^ several of the sections enacted substantive changes in the law worthy of a deeper canvass. The inheritance tax exemption for property interests transferred to a surviving spouse was increased from $15,000 to $60,000,"' while the inheritance tax rates for property transferred to Class B and C transferees were increased."' The new law also extended to county assessors the power to consent to the transfer of personal property belonging to a resident decedent."" Formerly, that power rested ex- clusively with the Department of Revenue."^ The same section of the law mandates the Department of Revenue to notify the county assessor of the county in which a resident decedent dies of any con- sent to transfer that it issues."^ The safety box inventory statute was streamlined by one section of the new law;"' the same section also added a new provision requiring life insurance companies to notify the Department of Revenue within ten days after life in- surance proceeds are paid to a resident decedent's estate."* The new law also relieved personal representatives of the requirement of at- ^"Hd. § 6-6-6.5-13(a) The new classes are: (A) Piston-driven, (B) Piston-driven, and Pressurized, (C) Turbine driven or other powered, and (D) Home-built, Gliders, or Hot Air Balloons. '"•Pub. L. No. 82. 1977 Ind. Acts 413 (codified at Ind. Code §§ 6-3.5-3-11.5, -14 (Supp. 1977)). '"Ind. Code §§ 6-3-1-1 to -7-3 (1976). "7d. § 6-3.5-3-11.5 (Supp. 1977) (amending id. §§ 6-3.5-3-1 to -13 (1976)). '"•Pub. L. No. 6, 1977 Ind. Acts 87 (Special Sess.) (codified in scattered sections of Ind. Code § 6-4.1- (Supp. 1977)). ""'E.g., Ind. Code §§ 6-4.1-1-4, -4-1, -4-7, -12-1 (Supp. 1977). ""/d § 6-4.1-3-8. '~/d § 6-4.1-5-l(c), (d). ""/d. § 6-4.1-8-4(a), (b). '"See, id. § 6-4.1-8-4 (1976) (amended 1977). "7