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Stromberg-Carlson Corp. v. Tax Assessor
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MAINE SUPREME JUDICIAL COURT					Reporter of Decisions
Decision:	2001 ME 11
Docket:	Ken-00-385
Argued:	December 13, 2000
Decided:	January 18, 2001	

Panel:WATHEN, C.J., and CLIFFORD, RUDMAN, DANA, SAUFLEY, ALEXANDER, and
CALKINS, JJ.




STROMBERG-CARLSON CORP. v. STATE TAX ASSESSOR


WATHEN, C.J.


	[¶1] Plaintiff, Stromberg-Carlson Corp., appeals from a judgment
entered in the Superior Court (Kennebec County, Atwood, J.) affirming an
assessment ordered by the State Tax Assessor.  Because the court
misapplied the statute of limitations pertaining to a tax assessment, 36
M.R.S.A. § 141 (1990), we vacate the judgment.
	[¶2]  The undisputed facts may be summarized as follows:  In 1989
and 1990, Stromberg-Carlson Corp. (the taxpayer) reported and paid sales
and use taxes to the State of Maine as required by 36 M.R.S.A. § 1951 (Supp.
2000). The taxpayer reported gross sales on line 1 of the returns and sales
of telephone equipment to Contel Material Management Co. as exempt sales
on line 2a of the returns. It then deducted the exempt sales from the gross
sales to arrive at taxable sales on line 3 of the returns. 
	[¶3]  After an audit of the taxpayer's records in 1994, the State Tax
Assessor assessed the taxpayer with additional sales and use tax, as well as
interest and penalties, on its 1989 and 1990 sales to Contel.  The
assessment was made more than three years but less than six years from the
date the taxpayer originally filed the returns.  The Assessor determined that
the Contel sales were not exempt, as had been reported, and thus should
not have been deducted from gross sales.  As a result, the amount of tax
reported on the returns for the taxable years was less than 50 percent of the
actual liability.  
	[¶4]  The taxpayer sought timely reconsideration of the assessment
with the Assessor pursuant to 36 M.R.S.A. § 151, claiming exemption on the
basis that the Contel sales were for resale pursuant to 36 M.R.S.A. §
1752(11) (1990 & Supp. 2000) and providing a resale certificate. The
Assessor denied reconsideration on the basis that the taxpayer had not
proved that the sales were for resale because the required resale certificate
was dated April 16, 1991, a date after the tax years in question, and that the
requirements for allowing a six-year limitation period were met. The
taxpayer then filed a timely petition for judicial review in the Superior Court
pursuant to 36 M.R.S.A. § 151, 5 M.R.S.A. § 11002 (1989) and M.R. Civ. P.
80C.  The complaint included the taxpayer's assertion that the six-year
statute of limitations requirements had not been met. The parties filed cross
motions for summary judgment as to the limitations claim.  In April 1999
the court entered summary judgment in favor of the State Tax Assessor on
the limitations claim, and the taxpayer appealed.{1}  With the consent of the
parties pursuant to M.R. Civ. P. 75A(f)(1), the Maine Society of Certified
Public Accountants filed an amicus brief.
	[¶5]  The  Superior Court reviews decisions of the State Tax
Assessor de novo. See 36 M.R.S.A. § 151.  In this case there is no factual
dispute, and we review the Superior Court's interpretation of the statute of
limitations directly for errors of law.  See Koch Refining Co. v. State Tax
Assessor, 1999 ME 35, ¶ 4, 724 A.2d 1251, 1252 (citation omitted). The
court determined that, although the statute of limitations ordinarily expires
three years after the date on which the return was filed or required to be
filed, whichever occurs later, see 36 M.R.S.A. § 141(1), an exception to the
rule, providing an extension to six years, applied in this case, see 36
M.R.S.A. § 141(2)(A).  
	[¶6]  The statute provides in relevant part as follows:
	1.  General provisions.  Unless other provided, any
amount of tax which a person declares on a return filed by
him with the State Tax Assessor to be due to the State shall
be deemed to be assessed at the time the return is filed and
shall be payable on or before the date prescribed for filing
the return, determined without regard to any extension of
time granted for filing the return.  When a return is filed, the
State Tax Assessor shall cause it to be examined and may
conduct such audits or investigations as he believes necessary
to determine the correct tax liability.  If he determines that
the amount of tax shown on the return is less than the
correct amount, the State Tax Assessor shall assess the tax
due the State.  No such assessment shall be made after 3
years from the date the return was filed or the date the
return was required to be filed, whichever is later.  At any
time within the appropriate assessment period prescribed by
this section, the State Tax Assessor may make a
supplemental assessment if he finds that any previous
assessment is imperfect or incomplete in any material
aspect.

	2.  Exceptions.
A.  An assessment may be made within 6 years from
the date the return was filed if the tax liability shown
on the return is less than 1/2 of the tax liability
determined by the State Tax Assessor and the
additional liability is attributable to information
which was required to be reported but was not
reported in the return.

B.  An assessment may be made at any time with
respect to a time period for which a fraudulent
return has been filed.

C.  An assessment may be made at any time with
respect to a time period for which a return has
become due but has not been filed. . . .
36 M.R.S.A. § 141 (1990) (emphasis added).

	[¶7]  Thus, in order for the extended six-year limitations period to
apply, two prongs must be met. The parties do not dispute the first prong,
i.e., that the tax liability on the return was less than 50% of the actual
liability determined after the audit.  The issue is whether the second prong
of the statutory requirement was met in this case, i.e., that "the additional
liability is attributable to information which was required to be reported but
was not reported in the return."  The taxpayer and the amicus argue that
the court erred in its interpretation of this statutory requirement, and we
agree.  The court interpreted the language as follows:
The petitioner claims that it reported its sales totally and
accurately and hid nothing.  But there is little difference in
logic between mischaracterization of information and
nondisclosure of information.  The Legislature must have
intended that information in a return be accurate and that
that information, if required, be revealed on the return.  That
being so, inaccurate information on a return is tantamount to
information that either misleads or is improperly disclosed
and runs counter to the cited legislative purpose.  As such, it
is fair to infer that the Legislature authorized an extended
period to make an assessment when a taxpayer disclosed all
information but mischaracterized it. Were it otherwise, a
taxpayer could avoid the six-year limitation period and
escape tax liability by providing information on his/her
return but mischaracterizing it.  Thus, as with the case at
bar, reporting total sales but misidentifying some as exempt
when they were not can fairly be characterized as providing
"information which was required to be reported but was not
reported in the return." 36 M.R.S.A. § 141(2)(A).
Similarly, the Assessor found that although the taxpayer reported the sales
as exempt sales, it "failed to report its actual taxable sales, and that this
failure is information that the taxpayer was required to report on its return,
but failed to do so." Thus, the issue is even more narrowly defined as
whether a disputed mischaracterization of a separate line item, which the
parties do not claim to be fraudulent, is the equivalent of not reporting the
item at all.
	[¶8]  Both sides look to our opinion in Koch Refining Co. v. State Tax
Assessor, 1999 ME 35, 724 A.2d 1251 for guidance.  Although we examined
the requirements of section 141(2)(A) in Koch, we did not address the
distinction at issue in this case, because we looked to the facial
requirements of section 141(2)(A) and rested our decision on the fact that
the taxpayer had not filed a required schedule and thus fell within the
requirement that it had not reported required information.  See id. ¶ 10,
724 A.2d at 1255.  The issue on appeal in Koch was the taxpayer's
contention that it had filed enough information to adequately alert the
Assessor to its actual tax liability so that the information should be "deemed
reported for purposes of section 141(2)(A)" to prevent the six-year period
from applying.  See id. ¶ 9, 724 A.2d at 1254.  We concluded that the
statutory language did not support this construction.  We determined that,
unlike 36 M.R.S.A. § 5270 (1990) that contains additional language "in a
manner adequate to apprise the assessor of the nature and amount of such
item," "section 141(2)(A) contains no language precluding the extension of
the limitations period if  . . . there is information attached to the return that
should alert the Assessor to the fact that there may be a substantial
underreporting of tax liability." Id.  In contrast to Koch, rather than the
information being "deemed reported for purposes of section 141(2)(A)," the
court in this case has "deemed" the information as not reported because it
was inaccurately characterized.
	[¶9]  When construing the language of a statute, we look first to the
plain meaning of the language to give effect to the legislative intent.  See id.
¶ 4, 724 A.2d at 1252-53 (citation omitted). In determining plain meaning,
we "'consider the whole statutory scheme for which the section at issue
forms a part so that a harmonious result, presumably the intent of the
Legislature, may be achieved.'"  Id. (citation omitted). We seek to avoid
absurd, illogical or inconsistent results. See Fairchild Semiconductor Corp.
v. State Tax Assessor, 1999 ME 170, ¶ 7, 740 A.2d 584, 587. Words must be
given meaning and not treated as meaningless and superfluous. See
Handyman Equip. Rental Co. v. City of Portland, 1999 ME 20, ¶ 9, 724 A.2d
605, 607, We have also refused to add language to section 141(2)(A) that
was not there. See Koch, 1999 ME 35, ¶ 9, 724 A.2d at 1254 (rejecting
taxpayer's attempt to read in "in a manner adequate to apprise the assessor
of the nature and amount of such item"); see also UAH-Hydro Kennebec, L.P.
v. State Tax Assessor, 659 A.2d 865, 867 (Me. 1995) (rejecting the
Assessor's attempt to add a requirement to the sales and use tax exemption
statute).
	[¶10]  In this case, the statute does not specify that all information
must be accurately characterized in order to be considered reported.
Viewed as a whole, the two-prong test in question is an exception to the
three-year statute of limitations that is contained within a general provision
concerning assessment procedures. The general provision establishes the
Assessor's powers and duties to determine and assess the correct tax. The
statute envisions that there may be inaccuracies and thus provides the
Assessor with the authority to examine the returns and to investigate any
potential inaccuracies with an audit.  It also gives the Assessor three years to
do that. See id. The statute then provides limited exceptions to the three-
year rule, including when the taxpayer either (1) does not report
information in the return that is required to be reported, (2) files a
fraudulent return, or (3) fails to file a required return. See 36 M.R.S.A. §
141(2)(A)-(C).{2}  As the amicus argues, there is a common thread in each of
the exceptions, i.e., there is information that is hidden from the Assessor
affecting his ability upon examination of the return to determine whether an
audit should be conducted and requiring more time to make that
determination.
	[¶11]   In this case, the exempted sales were reported separately on
the return, so when the Assessor examined the return, he was placed on
notice that an audit might be required to consider the exemption. This in
fact is the basis for many sales tax audits -- when the taxpayer believes a sale
qualifies as exempt under the many exemptions to the sales tax law and the
Assessor believes it does not qualify for the exemption. See, e.g., 36 M.R.S.A.
§ 1760 (1990 & Supp. 2000) (listing 83 exemptions); 36 M.R.S.A. §
1752(11) (1990 & Supp. 2000) (excluding sales for resale from "retail sale"
and thus from tax); UAH-Hydro Kennebec, L.P. v. State Tax Assessor, 659
A.2d 865 (Me. 1995) (challenging interpretation of exemption); Scott Paper
Co. v. State Tax Assessor, 610 A.2d 275 (Me. 1992) (challenging
interpretation of exemption). This differs significantly from the situation in
which the information is left off the return entirely: for example, if the
taxpayer here had netted the exempt sales with the gross sales and only
reported the net sales on line 1 and no exempt sales on line 2a.  Under that
scenario, the hidden information would affect the Assessor's ability to
determine whether an audit should be conducted.  In this case, the Assessor
could have examined the returns within three years of the filing, learned
that the taxpayer was claiming a significant portion of its sales as exempt,
and conducted an audit to test that claim. 
	[¶12]  If the Assessor's reclassification from non-taxable to taxable is
all that is required to trigger the extended six-year limitation period, it
would lead to the illogical result that all sales tax audits that result in a 50%
understatement would be subject to the six-year limitation. If all information
reported on the return were accurate, then it is difficult to conceive of an
example where both an audit would be required and that audit would result
in a higher assessment, as anticipated by the two requirements of the six-
year exception to the general rule.  There may be a number of indicators on
a return that trigger an audit, such as a high percentage of exempt sales in
the sales tax context, or a high percentage of deductions or business
expenses on an individual income tax return, but if all the information were
accurate, then no error would ever be discovered.  It is also possible that a
return could have all the information reported accurately and have a mistake
in the mathematical calculations, but this type of inaccuracy can be
identified by a facial examination of the return and does not require an audit
or investigation.  To equate mischaracterizing information with failing to
report information is to eliminate the second prong from the extended
statute of limitations provided in section 141.  Although it is reasonable to
assume that the Legislature intended that all information be reported
accurately, it does not follow that if it is inaccurately characterized it is
deemed not reported. 	
	[¶13] The interpretation adopted by the Superior Court undermines
the purpose of the statute of limitations and the balance sought to be
created.  See Myrick v. James, 444 A.2d 987 994 (Me. 1982).  The
limitations period balances the Assessor's need for sufficient information to
correctly assess the taxes against the taxpayer's need to defend itself within
a reasonable time period.  The purpose of the statute, in general, is to
provide eventual repose for potential defendants and to avoid the necessity
of defending stale claims.  See id.  As a "statute of repose, section 141 must
be construed strictly in favor of the bar which it creates. See Harkness v.
Fitzgerald, 1997 ME 207, ¶ 5, 701 A.2d 370, 372.  "[L]imitations statutes
barring the collection of taxes otherwise due and unpaid are strictly
construed in favor of the State." Koch, 1999 ME 35, ¶ 7 n.4, 724 A.2d
1251, 1254 n.4 (citing Bufferd v. Commissioner, 506 U.S. 523, 527 n.6
(1993); Badaracco v. Commissioner, 464 U.S. 386, 392 (1984)).  So
construed, section 141 imposes no burden or hardship on the Assessor
beyond the requirement for an audit within three years of filing the return.
	The entry is:
Judgment vacated,  Remanded to the
Superior Court for an order dismissing
the assessment as barred by 36 M.R.S.A.
§ 141.
   
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