Auto Finance Company May Claim Bad Debt Deductions Despite Repossessions Per Indiana Tax Court

An Indiana Tax Court released a ruling upholding a taxpayer’s refund claims. Case 20T-TA-00017 was an appeal brought by the Indiana Finance Financial Corp in relation to the denial of sales tax refund claims in 2017 and 2018. Oak Motors, a car dealership, sold installment contracts for cars to Indiana Finance (an affiliate) at a discounted price. Because they owned the contracts, when customers defaulted on payments, Indiana Finance repossessed the cars, sold them, and claimed bad debt deductions on their tax returns. The primary focus of the case was the application of market discount rules to these repossessed vehicles.

Though the Department was willing to accept the market discount rules for installment payments, they rejected the application of those rules when applied to repossessed cars. The Department held that the full value of the repossessed property should reduce bad debt deductions, which lead to questions about the Indiana Bad Debt Statute and the exclusions of repossessed property, among other things, from calculations. The Department also attempted to challenge the Court’s precedent supporting the application of market discount rules to repossessed property in two ways. First, claiming IRS code sections should not apply. Second, by arguing this, would allow parties to claim deductions that would exceed actual losses.

However, Indiana Finance argued the Department’s approach was unfairly reducing their refund on sales tax. According to their claim, they had used proceeds from sales to determine fair market value and sought a refund only for the portion they declared on returns as uncollectible receivables following the defaults. Under the federal income tax treatment, which they had applied consistently, the net effect was that the discount portion was considered taxable as income, but the remainder became a non-taxable reduction.

The Court agreed with Indiana Finance, noting that the Indiana Bad Debt Statute only requires a taxpayer to deduct bad debt for income tax purposes and does not carry the requirement to show the claimed deduction is valid. The court also found the Department had not provided evidence for its contentions of overclaimed refunds nor had they established the previous precedent was wrongly decided. Indiana Finance was found to be entitled to the claimed sales tax refunds based on its previous bad debt calculations.

Cases like these highlight the reward for good record keeping on the part of taxpayers and the importance of being aware of tax rulings and laws. Indiana Finance prevailed in part because they were able to provide strong records and arguments for their work. Further, their application of market discount rules was in keeping with the previous rulings and precedents set by Indiana’s Bad Debt Statute. Taxpayers who are diligent in their knowledge and application of laws will typically find themselves in favorable positions when defending claims. (Case 20T-TA-00017, Indiana Financial Corp v. Indiana Department of State Revenue, Indiana Tax Court, decision dated 4 January 2024, signed by Martha Blood Wentworth, Special Judge, Indiana Tax Court)

Posted on January 30, 2024