Taxpayer protests the separation of Sub G from the remainder of Taxpayer's consolidated group. Sub G was formed in late 2007 as an umbrella company for certain foreign operations conducted by Taxpayer. According to the Department's audit, one of Taxpayer's subsidiaries, Sub I, loaned approximately $450,000,000 to Sub G in 2007 to purchase a corporation and that corporation's subsidiaries. Sub I was included as part of Taxpayer's Indiana consolidated income tax return. Taxpayer also loaned Sub G $337,000,000 to purchase a second corporation and the second corporation's subsidiaries.
…While IC § 6-3-1-3.5(b) provides the ordinary computation of a corporation's adjusted gross income, a mechanical application of IC § 6-3-1-3.5(b) and related statutes can result in an unfair reflection of income. For this reason, Indiana enacted IC § 6-3-2-2(l) and (m). Even if IC § 6-3-1-3.5 and other provisions otherwise allow particular deductions, income, or exclusions, in certain case, a more appropriate resolution is an alternative calculation permitted under IC § 6-3-2-2(l) and (m). The issue in this case is whether such alternative calculation is justified in Taxpayer's case.
In 2007, Taxpayer and Sub I entered into loan agreements with Sub G. Absent any other transaction, Sub G incurred $3,900,000 in interest expenses and Taxpayer and/or Sub I reported $3,900,000 in income. The full amount of the deduction is offset by the equal and opposite inclusion of income. In other words, Taxpayer fully included the net effect of the loan payments in its Indiana consolidated return. Thus, for 2007 and any income/payments before the May 12, 2008, assignment of the loan(s) to Sub S, Taxpayer has provided sufficient information to conclude that its income was fairly reflected in its returns as filed.
However, for periods on or after May 12, 2008, the effect of Taxpayer's series of transactions was this: First, Sub G reported a minimum of $40,000,000 of interest expense payable to Sub S. Sub G claimed a $40,000,000 (and perhaps greater) deduction. Sub S is not required to file in Indiana; thus, no income is reported to Indiana for this transaction. Second, Sub S paid a $40,000,000 dividend to Sub I. Sub I reported the $40,000,000 dividend as income; however, Sub I also claimed a $40,000,000 deduction under IC § 6-3-2-12.
The net real-world effect is that Sub G and Sub I had zero net income; however, for tax purposes, Sub G and Sub I were reporting a $40,000,000 loss for Indiana tax purposes. Thus, a transaction with a zero net financial effect became a loss due to Taxpayer's own voluntary actions. Under the facts and circumstances of this case, Taxpayer's Indiana adjusted gross income was not fairly reflected by the inclusion of Sub G in its consolidated group. Taxpayer has not raised any alternative methodologies for remedying the lack of fair reflection of its income; thus, Taxpayer's protest is denied with regard to the inclusion of Sub G after May 12, 2008.
