Taxpayer protests the reduction of research and development credits which it claimed on its 2007, 2008, and 2009 Indiana AGIT returns, along with the resulting proposed assessments for additional AGIT due for 2007 and 2008 and a reduced refund for 2009. Taxpayer states that the R & D credits were properly claimed and supported. For its calculations, Taxpayer used a base period of an entity ("Entity") which it acquired. The base period years were 1984-88. Taxpayer did not have documentation such as general ledgers or financial statements upon which to base its calculations of the credit it claimed. In the course of determining the amount of its claimed credit, Taxpayer used wage information gathered from one of its employees ("Employee") who had worked for Entity during the base period years which Taxpayer used in its credit calculations. Taxpayer also used information from that same employee to complete the base period sales totals which Taxpayer used in its credit calculations. The Department denied Taxpayer's R & D credits in their entirety based on the determination that Taxpayer was unable to substantiate any of the numbers Taxpayer used to calculate the credits. The Department notes that the burden of proving a proposed assessment wrong rests with the person against whom the proposed assessment is made, as provided by IC § 6-8.1-5-1(c).
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Taxpayer protests that the Department incorrectly disallowed the R & D credits for the years at issue. Taxpayer argues that testimony from an individual with extensive institutional knowledge such as Employee is an acceptable basis for calculating the R & D credit. Taxpayer refers to several court cases which it believes support this position.
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The Department notes that, other than Employee's Social Security report, there is only Employee's institutional knowledge available in the instant case. There is no "testimony," since no one was under oath or penalties of perjury. There is no documentation available. The Department is not convinced that it is required to accept as fact the unsupported estimations of a single person regarding wages paid twenty years earlier to three other employees. As the Union Carbide court explained, the employees themselves testified as to the actual hours they worked on projects which qualified for the R & D credit. Similarly, Employee's Social Security report offers no explanation regarding Employee's activities on qualifying and non-qualifying projects. In the instant case, Employee simply lists his wages and estimates the wages of three other people, but offered no breakdown of how many hours were spent on qualifying projects and how many hours were spent on non-qualifying projects.
Taxpayer also protests the Department's determination that Taxpayer's calculations for base period sales were insufficiently documented. When Taxpayer acquired Entity, Entity supplied a sales report which formed the basis of Taxpayer's base period sales numbers used in the R & D credit calculations. The sales report did not cover all of the years in the base period; therefore Taxpayer used sales estimations from Employee for the 1984 and 1985 base years. The Department notes that the Union Carbide case, the court explained the accounting background and expertise of the person who was responsible for determining Union Carbide's costing of the claim projects.
In the instant case, Taxpayer has used a basic sales report without any supporting documentation and which only covers a portion of the base years used in the R & D credit calculations. Taxpayer supplemented this report with estimations from Employee. Taxpayer has not established Employee's qualifications to make any determinations on sales numbers. The Department is not convinced that it is required to take as fact an unsupported sales report supplemented by the estimates of an employee who had no particular expertise regarding sales figures from twenty years before the estimates were made.
Taxpayer also protests the Department's determination that Taxpayer did not qualify for alternate base period calculations available to start-up companies. The Department's audit report explained that such a method is available to companies with fewer years of operation available to use as base years in R & D calculations, but did not agree to the use of that method. Taxpayer provided alternate calculations using the start-up method, but the Department did not accept the alternate calculations on the basis that Taxpayer would not amend its Federal returns to reflect that it was opting to be treated as a start-up company.
Taxpayer objects that if it had known that the Department would not accept the alternate figures that it would not have gone to the effort and expense of creating them. The Department acknowledges Taxpayer's frustration, but also points out that it has offered the option for Taxpayer to file amended Federal returns. The Department cannot agree to treat a taxpayer under start-up company rules in Indiana while that same taxpayer is treated under standard rules at the federal level.
