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State v. Montani

Supreme Court of Vermont

February 24, 2018

State of Vermont, Department of Taxes
v.
Kenneth C. Montani State of Vermont, Department of Taxes
v.
Thomas A. Tatro State of Vermont, Department of Taxes
v.
Tyre Duvernay State of Vermont, Department of Taxes
v.
Thomas L. Marchant

         On Appeal from Superior Court, Chittenden Unit, Civil Division

          Thomas J. Donovan, Jr., Attorney General, and Elizabeth M. Hannon, Assistant Attorney General, Montpelier, for Plaintiff-Appellant.

          Jean L. Murray and Zachary Lees (On the Brief), Vermont Legal Aid, Inc., Montpelier, for Amicus Curiae Vermont Legal Aid, Inc. and Defendant-Appellee Marchant.

          PRESENT: Reiber, C.J., Skoglund, Robinson, Eaton and Carroll, JJ.

          SKOGLUND, J.

         ¶ 1. The Vermont Department of Taxes appeals from trial court orders in favor of defendants in these consolidated tax-collection cases. The court concluded that the underlying tax debts were invalid because the Department issued its notices of deficiencies or assessments of penalty or interest to defendants more than three years after defendants' tax returns were originally due. The Department argues that the court lacked subject matter jurisdiction to consider the validity of the underlying debts in these collection actions, and that, in any event, it erred in concluding that a three-year limitation period applied. We agree with the Department on both points. We therefore reverse and remand for entry of judgment in the Department's favor for the years covered in the above-captioned cases.

         ¶ 2. We first must review the relevant statutes. As a general matter, Vermont's tax laws are "intended to conform the Vermont personal and corporate income taxes with the United States Internal Revenue Code, except as otherwise expressly provided, in order to simplify the taxpayer's filing of returns, reduce the taxpayer's accounting burdens, and facilitate the collection and administration of these taxes." 32 V.S.A. § 5820(a). When the Commissioner of Taxes believes that a taxpayer has failed to file a required tax return or failed to file a complete return, the Commissioner "may, by written notice to the taxpayer, require that the taxpayer file that return, or an additional supplementary return" that contains information "by which the taxpayer's tax liability may correctly be determined." Id. § 5863. Section 5863 does not provide any time limit on taking such action. Once this notice is provided, a taxpayer has fifteen days in which to file a return. If the taxpayer fails to do so, the Commissioner "may compute the tax liability of the taxpayer with respect to which the return was required to be filed, according to the Commissioner's best information and belief." Id. § 5864(b). The Commissioner must then "notify the taxpayer of his or her deficiency with respect to the payment of that tax liability, and may assess any penalty or interest with respect thereto." Id.

         ¶ 3. When a taxpayer receives a notice of deficiency, or of an assessment of penalty or interest, he or she has sixty days in which to "petition the Commissioner in writing for a determination of that deficiency . . . or assessment." Id. § 5883. If such a petition is filed, the Commissioner then holds a hearing and notifies the taxpayer in writing of the determination concerning the deficiency or assessment. Id. The taxpayer then has the right to appeal the determination to the superior court within thirty days. Id. § 5885. By law, this is a taxpayer's "exclusive remedy" with respect to a notification of deficiency or assessment of penalty or interest. Id. § 5887(a). If a taxpayer fails to pursue this remedy, he or she is "bound by the terms of the notification, assessment, or determination" and cannot "thereafter contest, either directly or indirectly, the tax liability as therein set forth, in any proceeding including . . . a proceeding for the enforcement or collection of all or any part of the tax liability." Id. § 5887(b).

         ¶ 4. Section 5882 of Title 32 is entitled "Time limitation on notices of deficiency and assessment of penalty and interest." It provides that "[t]he Commissioner may notify a taxpayer of a deficiency with respect to the payment of any tax liability, or assess a penalty or interest with respect thereto . . . at any time within three years after the date that tax liability was originally required to be paid." Id. § 5882(a). Section 5882(b) provides exceptions to this rule, including the following: "(1) If the taxpayer fails to file a proper return with respect to any tax liability at the time prescribed for its filing, the notification or assessment may be made at any time before the end of three years after the taxpayer files such a return"; and "(2) If the deficiency is caused by reason of fraud or the willful intent of the taxpayer to defeat or evade this chapter, the notification or assessment may be made at any time."

         ¶ 5. The law also describes how the Department can collect unpaid deficiencies and assessments. After a taxpayer is notified of a deficiency and upon assessment against the taxpayer of any penalty or interest under 32 V.S.A. §§ 3202 and 3203, "the amount of the assessment shall be payable forthwith and the amount of the deficiency and assessment shall be collectible by the Commissioner 60 days after the date of the notification or assessment." Id. § 5886(a). The collection action is stayed if the taxpayer engages in the § 5883 appeal process described above. Id. § 5886(a)(1), (2). The law provides that "[a]ny tax liability imposed by this chapter becomes, from the time the tax liability is due and payable, a debt of the taxpayer to the State, to be recovered in an action on this title." Id. § 5891. An action to recover the amount of the tax liability must be brought "within six years after the date the tax liability was collectible under section 5886 of this title." Id. § 5892(a).

         ¶ 6. With this background in mind, we turn to the facts. Each case shares the same basic fact pattern. Defendants Thomas Tatro, Kenneth Montani, and Tyre Duvernay failed to file personal income tax returns for various years and the Department sent a First Notice of Audit Assessment to each that provided the amount of taxes due along with interest and penalties. These notices were issued more than three years after the date that the tax returns should have been filed. Defendants did not appeal the assessments to the Commissioner pursuant to 32 V.S.A. § 5883. The issue before the superior court in each case arose in the context of a collection action brought by the Department.[1] Defendants Tatro, Montani, and Duvernay did not appear or participate in the collection cases or in these appeals. The Department moved for default judgment. The superior court sua sponte raised a statute-of-limitations challenge to the underlying tax assessments.

         ¶ 7. The court held that 32 V.S.A. § 5864, which authorizes the Commissioner to demand that a return be filed, was subject to the time limitations of § 5882, and that § 5882(a) required the Commissioner to notify a taxpayer of a deficiency and any accompanying penalty or interest assessment "within three years after the date that tax liability was originally required to be paid" regardless of whether a return was filed. The court found no applicable exception to this requirement, reasoning that if the Legislature intended to allow the Department unlimited time in which to seek judgments against nonfilers, it would have said so in § 5882. The court dismissed the cases on the basis that the underlying notifications of deficiency or assessments were time-barred with exceptions not relevant here.

         ¶ 8. As to Tatro, the court addressed the Department's motion to reconsider that relied on § 5887, which makes unchallenged deficiency notifications and assessments final and uncontestable. The court concluded that it had jurisdiction to consider the validity of the underlying assessment despite the plain language of § 5887 because it was authorized to decide the collection action. It further reasoned that, while the statute bars a taxpayer from challenging the assessment of a tax liability, it did not expressly deprive the court of its authority to determine if the evidence presented was sufficient to support the result requested by the Department in the collection action, or to determine if the Department had authority to issue a notice of assessment outside of the time provided by § 5882(a). It said that to accept the Department's argument would reduce the court's function to that of a rubber stamp, citing DaimlerChrysler Servs. N. Am., LLC v. Ouimette as support for its position. 2003 VT 47, ¶ 6, 175 Vt. 316, 830 A.2d 38 (concluding that trial court could consider expiration of statute of limitations if "apparent on the face of plaintiff's complaint"). The court also posited that it had not addressed the substance of the assessments; rather, it had ruled that the Department lacked authority to issue the assessment outside of the statutory time limitation.

         ¶ 9. The trial court issued essentially the same decision for Marchant. Marchant failed to file state tax returns for tax years 2001-2007. In 2009, Marchant was notified by letter that his returns had not been filed. Receiving no response, the Department sent First Notice of Audit Assessments with respect to those years. He did not appeal the assessments to the Commissioner. He began remitting payments toward his debt in May 2015. The Department then initiated litigation to keep the debt collectible beyond the limitations period set forth in 32 V.S.A. § 5892 to continue to accept Marchant's payments. In his answer to the complaint, Marchant accepted responsibility for the debt and requested a reasonable ...


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