Taxpayer is a parent corporation doing business in Indiana
and other states. Taxpayer files its Indiana adjusted gross income tax returns
on a consolidated basis with its subsidiaries. Taxpayer filed its 2007 and 2008
Indiana corporate income tax returns on a consolidated basis. In particular,
Taxpayer included two subsidiaries (Sub L and Sub G) on these returns.
The Indiana Department of Revenue ("Department")
determined that Taxpayer had included Sub L in its consolidated Indiana
adjusted gross income tax returns despite the Department's contention that Sub
L did not have Indiana source income and excluded Sub L from the consolidated
returns. Further, the Department determined that Sub G's inclusion in
Taxpayer's consolidated income tax return resulted in an unfair reflection of
Taxpayer's overall income. Thus, the Department separated Sub G from the
remainder of Taxpayer's consolidated return and determined Sub G's tax
separately from the remainder of Taxpayer.
…
At rehearing, Taxpayer indicated that Sub L had nonbusiness
income allocable to Indiana. Taxpayer provided Internal Revenue Service
adjustments that shifted certain foreign dividend income from Taxpayer to Sub
L. However, even assuming this income was nonbusiness income, the income was
dividends from a foreign subsidiary of Sub L. Under the legal interpretation
most favorable to Taxpayer, the dividend income would have been included and
then deducted in its entirety from Sub L's income pursuant to IC § 6-3-2-12.
Thus, Sub L did not have nonbusiness income sufficient to permit inclusion of
Sub L in its consolidated return.
Alternatively, Sub L stated that it in fact had payroll in
Indiana. In particular, Sub L stated that it paid a portion of the compensation
for executives common to Taxpayer and Sub L. In support of this assertion,
Taxpayer provided internal accounting documents reflecting reimbursements from
Sub L to Taxpayer.
…
Indiana provides, pursuant to 45 IAC
3.1-1-49, that unemployment tax payment on behalf of employees is the
presumptive basis for determining payroll location of those employees. However,
Indiana law is silent as to the attribution of employer for payroll purposes.
Based on the information available in the Department's
records, Taxpayer appears to have served as the common paymaster for any
compensation remitted on behalf of Sub L. Taxpayer has not stated that any FICA
taxes or unemployment taxes were remitted under Sub L's federal tax
identification number. While the Department recognizes the reimbursement
arrangement between Taxpayer and Sub L and also recognizes that the
Department's holding in this case has potential ramifications beyond this case,
the Department cannot say that its proposed assessment is incorrect.
…
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.
In 2008, the loans were amended and consolidated into one
loan agreement with Sub I. The same day the amended and restated loan agreement
was executed, the loan was assigned to yet another entity, Sub S. As part of
the assignment of the loan to Sub S, Sub I received "Preferred Equity
Certificates" in Sub S. Sub S was not included in Taxpayer's Indiana
consolidated income tax return.
Sub G deducted $3,900,000 in interest expense in 2007 and
$52,500,000 in 2008. For 2008, Sub I received a $40,000,000 dividend from Sub
S. While the dividend from Sub S was included in Sub I's federal taxable
income, Sub I claimed a foreign dividend deduction for the $40,000,000 dividend
pursuant to IC § 6-3-2-12.
The Department's audit, asserting that the inclusion of Sub
G had the effect of not fairly reflecting Taxpayer's adjusted gross income,
cited to IC § 6-3-2-2(l) and (m) as its reason for removal of Sub G.
...
Taxpayer also asserts that the Department is treating its
loan agreement in a different manner than if Sub G had borrowed the money from
an unrelated third party. In this particular case, Sub G is domiciled in
Indiana. Sub G paid interest to Sub S. If the interest had been paid to a
third-party lender, the lender would have reported the interest income and
would have attributed the interest paid by Sub G to Indiana under either IC §
6-3-2-2.2(c) or IC § 6-5.5-4-6. In this case, Sub S did not file an Indiana
adjusted gross income tax or a financial institutions tax return. Thus, in this
case, absent a return from Sub S reporting Indiana income and Indiana receipts,
the Department's determination in the audit and the original Letter of Findings
was proper.
Taxpayer raised additional issues related to the
Department's determination in the audit and the original Letter of Findings.
The Department restates its reasoning as set forth in the original Letter of
Findings.
The earlier Revenue
Ruling in this matter may be found here:
