Taxpayer is a corporation doing business in Indiana.
Taxpayer filed a consolidated corporate income tax return on behalf of itself
and two affiliated companies (collectively "Filing Group"; the
affiliates shall be referred to as Member A, and Member B). Member A was the
parent company for both Taxpayer and Member B.
…
The issue is whether Member A and Member B have sufficient
contacts with Indiana to allow the entities to be included in a consolidated
return under IC § 6-3-4-14.
…
For Member A, Taxpayer provided information that purports to
show two alternative sets of facts. For one thing, Taxpayer provided additional
information regarding Taxpayer and Member A's accounting. According to
Taxpayer, the additional information demonstrates that Member A did not have
any actual operations during 2007 and that Taxpayer actually received the
income and incurred the expenses attributable to Member A. Thus, according to
Taxpayer, the accounting issues would result in Taxpayer having actually earned
the combined income and expenses previously reported by Taxpayer and Member A.
In the alternative, Taxpayer provided form W-2s issued by
Taxpayer.
However, according to Taxpayer, the W-2 forms partially
represented payroll attributed to Member A. Taxpayer provided additional
information to apparently attribute the employees provided to Member A's
payroll.
In this case, Taxpayer has provided sufficient information
to establish that Member A's reported operations were in fact a portion of
Taxpayer's actual operations. The tax effect of the combination of operations
is identical to the tax effect of Taxpayer's reporting of Taxpayer and Member A
as part of an Indiana consolidated group. Thus, even though the Department does
not necessarily agree that Member A had nexus with Indiana, Taxpayer's protest
is sustained with regard to Member A.
However, the fact that Taxpayer's protest is sustained in
this case should not be construed as the Department's allowance of incomplete
bookkeeping on the part of taxpayers. Taxpayer's records reflected all
transactions for the tax year in question; however, the internal accounts to
which the relevant expenses were attributed were themselves in error. The
Department acted reasonably in its audit based on the information presented to
the Department's auditor; however, Taxpayer provided information to correct its
own previous error and substantiate its contention that this portion of the
assessment should be abated.
With regard to Member B, Taxpayer stated that Member B's
sales were made solely to Taxpayer. For the years at issue, Taxpayer asserts
that Member B could not refuse product orders or instructions from Taxpayer.
Taxpayer has also provided affidavits regarding Member B's Indiana contacts for
the years in question. Based on the information provided, Taxpayer has provided
sufficient information to conclude Member B's Indiana contacts exceeded the
level of contact required by 15 U.S.C. § 381 (P.L. 86-272), which requires an
out-of-state taxpayer to exceed mere solicitation in order to be subject to
Indiana adjusted gross income taxes.
In this case, Member B has Indiana destination sales.
However, those sales are eliminated because Member B's sole purchaser is in the
same consolidated group as Member B. While the Department recognizes that
inclusion or exclusion of Member B–and similarly situated corporations–each has
merit, the Department is unable to conclude that Taxpayer has met its statutory
burden of demonstrating that the assessment was incorrect.
In the alternative, Taxpayer provided information after the
hearing that purports to show that, if Member B is not included in Taxpayer's
consolidated group, that Taxpayer was entitled to a bad debt deduction under
I.R.C. § 166 for amounts advanced to Member B. Other than a memorandum to the
effect that the bad debt deduction should be permitted, Taxpayer has not
provided documentation–or any other sufficient legal or factual grounds–to
permit an adjustment for the claimed bad debt.
