Taxpayer is a corporation domiciled outside Indiana.
Taxpayer filed combined Financial Institutions Tax (FIT) returns for the 2005,
2006, and 2007 on behalf of several affiliated corporations.
For 2005 and 2006, Taxpayer was not included as part of the
unitary group in the returns as filed, even though Taxpayer was listed on the
returns as the filing corporation. For 2007, Taxpayer was included as part of
the combined group in the returns as filed.
The Indiana Department of Revenue ("Department")
conducted an audit of Taxpayer which concluded that various subsidiaries
included in Taxpayer's returns should have been excluded, along with various
other adjustments. For 2007, the Department removed Taxpayer from the combined
return. For 2005 and 2006, the Department did not include Taxpayer in the unitary
group.
...
Taxpayer protests the Department's determination that
Taxpayer was not conducting the business of a financial institution in Indiana.
Taxpayer raises two separate issues. First, Taxpayer asserts that its own
activities in Indiana are sufficient to permit inclusion for FIT purposes. In the
alternative, Taxpayer asserts that its ownership of an interest in a limited
partnership that conducts business in Indiana is sufficient to permit its
inclusion.
...
...
Taxpayer asserts that it engaged in various activities which
constituted "transacting business within Indiana." First, Taxpayer
asserts that it owned subsidiaries that conducted business in Indiana.
Second, Taxpayer argues that it held municipal loans from
Indiana each year. Taxpayer's protest states that Taxpayer received between
$34,000 and $69,000 in Indiana municipal bond interest for each year.
Third, Taxpayer assets that it "maintained strong
centralized management" over its subsidiaries, including substantial
planning and support activities on behalf of its subsidiaries, receipt of
dividends, and use of Taxpayer's trademarks by its subsidiaries.
Fourth, Taxpayer states that it had intercompany loans to a
subsidiary otherwise included in the combined FIT return. Taxpayer lists the
loans as having balances of between $740,000,000 and $1,250,000,000 for each
year.
Fifth, Taxpayer argues that it had net intercompany
reimbursed expenses. These expenses totaled between $68,000,000 and $88,000,000
for each year.
Sixth, Taxpayer asserts that it had common officers with its
subsidiaries. In particular, Taxpayer notes that the directors of two Indiana
subsidiaries were also directors of Taxpayer and that these directors
"performed services the benefit of which was in Indiana and conducted
business of [Taxpayer] in Indiana."
Seventh, Taxpayer states that it owned real estate in
Indiana through a limited partnership which held an interest in another limited
partnership.
In this case, Taxpayer has receipts from Indiana, both from
municipal bond interest, as provided under IC § 6-5.5-4-12, and receipts from
its interest in an Indiana limited partnership.
That stated, Taxpayer has established that it is a financial
institution within the meaning of IC § 6-5.5-1-17. The next question is whether
Taxpayer has established that it is "transacting business within
Indiana" as defined under IC § 6-5.5-3-1.
Taxpayer's claimed Indiana employees are directors in both
Taxpayer and Taxpayer's subsidiaries. In this case, it cannot be stated that
the roles of directors of two related corporations–one of which does business
in Indiana–is sufficient to permit Taxpayer to claim that it has "an
employee...conducting business in Indiana" within the meaning of IC §
6-5.5-3-1(2).
Even though Taxpayer performs services on behalf of its
subsidiaries, the services performed appear to not be on behalf of consumers
but rather consists of the management of a group of commonly-owned banks.
Further, even though Taxpayer engages in intercompany loans with its various
subsidiaries, the subsidiaries themselves are not "customers" as
provided under IC § 6-5.5-3-1(6).
Furthermore, even acknowledging that Taxpayer owns an
interest in a limited partnership which (through a second limited partnership)
owns Indiana real estate, Taxpayer itself does not own or lease that Indiana
real property and cannot avail itself of pass through treatment of the
partnership to state that Taxpayer owns Indiana real property.
Taxpayer also notes that its activities are activities which
are permitted under state and federal laws governing bank holding companies and
regulated financial institutions. The Department acknowledges that Taxpayer's
activities are permitted by law for bank holding companies. However, IC §
6-5.5-3-1 provides a different definition for FIT purposes of what constitutes
"transacting business within Indiana." Thus, it is entirely possible
for a bank holding company to conduct permitted business operations in Indiana
and yet not meet the tax definition of "transacting business within
Indiana."
Taxpayer also asserts that its presence in Indiana is at
most minimal compared to its overall operations. The Department acknowledges
that Taxpayer has not arranged its business operations in such a manner to
intentionally avoid or evade Indiana FIT. However, this standing alone does not
require of Taxpayer in a combined FIT with various subsidiaries of Taxpayer.
In summary, Taxpayer has not provided sufficient information
to conclude that it is transacting the business of a financial institution in
Indiana within the meaning of IC § 6-5.5-3-1. Thus, Taxpayer's protest is
denied to the extent that Taxpayer itself is claiming any Indiana activity as a
financial institution.
...
...
In the alternative, Taxpayer asserts that it owns an
interest in a limited partnership ("LP"). LP owns an interest in a
second limited partnership ("LP2"). LP2 leases and operates a
shopping mall in Indiana.
...
...
The "business of a financial institution" is
defined by meeting either one of two tests. The first test is whether a company
is a "holding company, a regulated financial corporation, or a subsidiary
of either" and engaged in activities authorized under state or federal
law. Once this test is met, the company is automatically considered to be a
financial institution, regardless of the actual sources of the company's
income.
The second test is an income-based test. To meet this test,
a company must derive eighty or more percent of its gross income from certain
specified sources.
Taxpayer is a federally regulated bank holding company and
thus is "transacting the business of a financial institution" as
required for IC § 6-5.5-2-8(1). The issue is whether LP and/or LP2 have
"an activity or activities that would constitute the business of a
financial institution if transacted by a corporation."
In this particular case, LP and LP2 are not organizations
described in IC § 6-5.5-1-17(d)(1). LP2 leases space at a shopping mall and
operates a shopping mall. LP2's activities are not considered leases "that
[are] the economic equivalent of the extension of credit" or any other
activity described in IC § 6-5.5-1-17(d)(2). LP's activities consist solely of
owning LP2, and likewise do not meet the requirements of IC § 6-5.5-1-17(d)(2).
Thus, LP and LP2 do not meet the requirements of "transacting the business
of a financial institution" required for inclusion of the partnership
under IC § 6-5.5-2-8(2), even though Taxpayer's ownership of LP and LP2 is
permitted under Indiana and federal law. However, Taxpayer's interest in LP is
sufficient to permit taxation under IC § 6-3 (adjusted gross income tax).
Taxpayer cited to two Letters of Finding, Letter of Findings
18-20100720 (January 24, 2012) and Letter of Findings 18-20110569 (January 24,
2012), both found at 20120328 Ind. Reg. 045120120NRA, which Taxpayer stated
stands for the proposition that its interest in LP and/or LP2 is sufficient to
permit inclusion for financial institutions tax purposes. However, in the
Letters of Finding cited by Taxpayer, the partnership in question was itself
engaged in the business of a financial institution as defined by IC §
6-5.5-1-17. In this case, LP and LP2 are not engaged in the business of a
financial institution, and thus the Letters of Findings cannot be used to
permit Taxpayer's inclusion based solely on its ownership of LP and LP2.
...
...
Taxpayer protests the amount eliminated as a result of the
removal of one subsidiary. Taxpayer acknowledges that the subsidiary should not
have been included in Taxpayer's combined return. Based on the elimination of
the subsidiary, the Department's audit report removed the subsidiary's receipts
from Taxpayer's combined group's receipt denominator. However, Taxpayer asserts
that a substantial portion of those were intercompany receipts and therefore
already eliminated. The issue is whether Taxpayer has met its burden of proving
that the proposed assessment is wrong rests with the person against whom the
proposed assessment is made, as required under IC § 6-8.1-5-1(c).
Based on the information presented by Taxpayer at hearing,
the Department is unable to accept Taxpayer's assertions. However, Taxpayer has
provided sufficient information to conclude that a portion of the subsidiary's
receipts may have previously been eliminated and thus an appropriate adjustment
may be required. Thus, the Department will review Taxpayer's assertions and
make any appropriate adjustments in a supplemental audit.
...
...
Taxpayer protests a claimed mathematical error in computing
its receipts denominator. In particular, for 2005, Taxpayer asserts that it
reported one amount for receipts ("Per Return Receipts"), while the
audit removed a portion of those receipts ("Adjustments"). The difference
is "Per Audit Receipts," which was to be used as the receipts
denominator for apportionment purposes. However, according to Taxpayer, the
amount listed as Per Audit Receipts was not equal to this difference. Instead,
according to Taxpayer, the Per Audit Receipts listed in the audit report was
equal to the Per Return Receipts minus Adjustments minus an additional amount
of roughly $34,600,000. The issue is whether Taxpayer has met its burden of
proving that the proposed assessment is wrong rests with the person against
whom the proposed assessment is made, as required under IC § 6-8.1-5-1(c)
In reviewing the audit report, Taxpayer is correct that
there is a mathematical error in the audit report. However, the
individually-listed numbers in the Per Audit Receipts column add up to the
listed total. The individually-listed numbers in the Per Return Receipts do not
add up to Taxpayer's self-reported total receipts.
Nevertheless, the audit does list two separate numbers for
the appropriate adjustment to be made to the denominator. Taxpayer has not
provided sufficient information to conclude that the auditor erred.
Nevertheless, Taxpayer has provided sufficient information to conclude that
another review of the appropriate adjustment to the receipts denominator is
justified. Thus, the Department will review Taxpayer's assertions and make any
appropriate adjustments in a supplemental audit.
...
...
Taxpayer protests a claimed error in allocating its net
operating losses available for carryforward.
...
...
In this case, the Department's audit prorated $95,000,000 of
Indiana loss. Based on the information contained in the Department's audit
report, it is not clear how the Department derived the $95,000,000 loss. Though
Taxpayer has not provided sufficient information to conclude that the
$95,000,000 loss was incorrect or that an alternative amount of net operating
loss was correct, Taxpayer has provided sufficient information to conclude that
further review of the amount of net operating loss for 2007 is justified. The
exact net operating loss available (and the proration thereof) will be
determined upon supplemental audit.
Though not addressed at hearing, the Department's audit
listed apparently inconsistent receipts for one affiliated corporation in 2007
for purposes of prorating net capital losses and net operating losses, even
though IC § 6-5.5-2-1 requires proration of both based on the Indiana receipts
for the unitary group for the year in which the loss is incurred. Thus, it
appears that the Department should have used the same Indiana receipts for
prorating net capital losses and net operating losses.
In addition, the receipts listed for the same affiliated
corporation for all three years appear inconsistent with the receipts used for
apportionment purposes prior to elimination. The Department's audit division
shall look at any attribution of net capital losses and make any appropriate
adjustments to the proration of the losses.
