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Alabama Department of Revenue v. Downing

Alabama Court of Civil Appeals

July 20, 2018

Alabama Department of Revenue
Patrick Lee Downing

          Appeal from Elmore Circuit Court (CV-15-900208)


         The Alabama Department of Revenue ("the Department") appeals from a judgment of the Elmore Circuit Court ("the circuit court") finding that sales of prepaid authorization numbers for wireless services on cellular telephones were not subject to the sales tax at the time the sales were made and ordering the Department to refund the amount of taxes paid. Because we determine that the sales were subject to the sales tax, we reverse the judgment and remand the cause for further proceedings.

         Facts and Procedural History

         Patrick Lee Downing was the sole member of Downing Enterprises, LLC ("the LLC"), a business that sold, among other products, prepaid authorization numbers allowing access to wireless services on cellular telephones. On December 28, 2011, the Department sent Downing a final assessment of taxes against him, addressing Downing as "the sole member of Downing Enterprises, LLC, a disregarded entity." The final assessment stated that Downing owed $18, 617.86 in taxes plus interest for the sales of the prepaid authorization numbers from September 1, 2008, through June 30, 2011. On August 24, 2013, a petition for a refund was filed with the Department.[1] In the petition, the petitioner's legal name is listed as "Patrick Lee Downing," and the entity that Downing was "doing business as" is listed as "Downing Enterprises, LLC." The Department denied the petition for a refund in a letter addressed to the LLC and its counsel.

         The LLC appealed the denial of a refund to the Department's Administrative Law Division. See § 40-2A-7(c), Ala. Code 1975; § 40-2B-2(g)(2)(a), Ala. Code 1975. The LLC argued that the Department based its tax assessment on statutory provisions that were unconstitutional. The recently created Alabama Tax Tribunal ("the Tax Tribunal") heard the appeal.[2] On June 2, 2015, the Tax Tribunal entered a final order affirming the denial of the request for a refund based on § 40-23-1(a)(13), Ala. Code 1975, as amended by Act No. 2014-336, Ala. Acts 2014 ("the 2014 Act"), effective July 1, 2014.[3] In its order, the Tax Tribunal referred to the LLC as the taxpayer and stated that it did not have jurisdiction to rule on the constitutional challenges but that those challenges could be pursued in an appeal to the circuit court.[4]

         On June 19, 2015, Downing, as "the sole member of Downing Enterprises, LLC, a disregarded entity," filed an appeal of the Tax Tribunal's final order to the circuit court, arguing that the 2014 Act did not have retroactive effect and raising constitutional challenges to § 40-23-1(a)(13) and the 2014 Act. On September 5, 2017, the circuit court conducted a trial. At the trial, Downing testified that he had sold prepaid authorization numbers to access wireless services on cellular telephones.

         On September 14, 2017, the circuit court entered a judgment in favor of Downing, ordering the Department to reimburse him for the amount he had paid in response to the final tax assessment. In the judgment, the circuit court found that the sales of prepaid authorization numbers were not subject to the sales tax at the time that those sales were made.

         On October 26, 2017, the Department filed a notice of appeal to this court. Downing did not file an appellee's brief on appeal. This court has jurisdiction over the appeal pursuant to § 12-3-10, Ala. Code 1975.



         This court requested that the parties submit letter briefs addressing any jurisdictional issues resulting from the discrepancy in the filings made by Downing as an individual and the filings made by his business, the LLC, in the underlying proceedings. See Matthews v. City of Mobile, 182 So.3d 547, 549 (Ala. Civ. App. 2014) ("[T]his court must take notice of jurisdictional issues ex mero motu.").

         In its letter brief, the Department contends that the Tax Tribunal lacked jurisdiction to consider the appeal of the denial of Downing's petition for a refund and that, therefore, the circuit court lacked subject-matter jurisdiction over the appeal of the Tax Tribunal's order. "A judgment entered by a tribunal that lacks subject-matter jurisdiction is void." Alves v. Board of Educ. for Guntersville, 922 So.2d 129, 134 (Ala. Civ. App. 2005). "[A] void decision or judgment will not support an appeal ...." Matthews, 182 So.3d at 551.

"Judgments entered without subject-matter jurisdiction can 'be set aside at any time as void, either on direct or on collateral attack.' International Longshoremen's Ass'n v. Davis, 470 So.2d 1215, 1217 (Ala. 1985), aff'd, 476 U.S. 380, 106 S.Ct. 1904, 90 L.Ed.2d 389 (1986). In Sustainable Forests, L.L.C. v. Alabama Power Co., 805 So.2d 681 (Ala. 2001), our supreme court stated:
"'"'Unless the trial court has before it a justiciable controversy, it lacks subject matter jurisdiction and any judgment entered by it is void ab initio.' Ex parte State ex rel. James, 711 So.2d 952, 960 n. 2 (Ala. 1998)(citing Stamps v. Jefferson County Bd. of Educ., 642 So.2d 941, 945 (Ala. 1994); Luken v. BancBoston Mortg. Corp., 580 So.2d 578 (Ala. 1991); Wallace v. Burleson, 361 So.2d 554, 555-56 (Ala. 1978))."'
"805 So.2d at 683 (quoting Hunt Transition & Inaugural Fund, Inc. v. Grenier, 782 So.2d 270, 272 (Ala. 2000))."

Alves, 922 So.2d at 134.

         The Department argues that the Tax Tribunal lacked jurisdiction over the proceedings before it because, it says, the LLC did not have standing to appeal to the Tax Tribunal the denial of the petition for a tax refund that it asserts was filed by Downing. The Department asserts that only Downing was the proper party to appeal the denial of that petition for a refund. In his letter brief, Downing argues that no jurisdictional impediment precluded the underlying proceedings because, he says, for tax purposes, there is no distinction between him and the LLC.

         Generally, "a corporation is a distinct entity, to be considered separate and apart from the individuals who compose it ...." Moore & Handley Hardware Co. v. Towers Hardware Co., 87 Ala. 206, 210, 6 So. 41, 43 (1889). The Department, however, acknowledges that the LLC has only one member, Downing, and that a single-member LLC is treated as a "disregarded entity" for state-tax purposes. For state-tax purposes, single-member LLCs "are disregarded as entities separate from their sole owner, the taxpayer," if the company is also disregarded for federal-income-tax purposes. Sustainable Forests, LLC v. Alabama Dep't of Revenue, 80 So.3d 270, 272 (Ala. Civ. App. 2011). See § 40-18-1(9), Ala. Code 1975 (defining a "disregarded entity" for state-income-tax purposes as "[a]ny entity which is disregarded for federal income tax purposes"); and § 40-14A-1(g), Ala. Code 1975 (defining a "disregarded entity" for the purpose of state business-privilege and corporation-shares taxes as "[a] limited liability company that is disregarded for purposes of federal income tax ..."). Regarding federal income taxes, 26 C.F.R. § 301.7701-2(a) provides, in relevant part: "A business entity with only one owner is classified as a corporation or is disregarded; if the entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner."[5] Because the LLC meets the definition of a disregarded entity for federal-income-tax purposes, the LLC is disregarded as a separate entity and its sole member, Downing, is treated in the same manner as a sole proprietor for state-tax purposes.

         The Department's Revenue Procedure 98-001(3)(a) provides:

"For purposes of the taxing statutes in Title 40, Code of Alabama 1975, all LLCs which, pursuant to Act 97-920, include both single member and multiple member LLCs organized on or after January 1, 1997, will be classified as they are classified for federal income tax purposes under the Internal Revenue Service's 'check-the-box' regulations."

         See § 40-2A-5(a), Ala. Code 1975 (regarding authority to issue revenue rulings and revenue procedures). Therefore, the Department is bound to consider the LLC as a disregarded entity for the purposes of the procedure for ...

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