Taxpayer is an out-of-state corporation that conducts business in Indiana. Taxpayer is a manufacturer of various consumer and industrial products. Taxpayer filed its Indiana adjusted gross income tax returns on a consolidated basis with its subsidiaries and affiliates. Taxpayer filed its 2007 Indiana corporate income tax return on a consolidated basis, including related companies and subsidiaries receiving income from Indiana sources.
The Indiana Department of Revenue ("Department") conducted an audit of Taxpayer for the 2007 tax year. The Department determined that Taxpayer's method of reporting did not accurately reflect income properly sourced to Indiana. As a result of the audit, the Department made several proposed adjustments which resulted in the assessment of additional income tax as well as interest.
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Taxpayer argues that the Department's decision requiring it to file a combined return was incorrect.
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The Department's audit and the 2012 Letter of Findings found that Taxpayer and its related entities shared a unitary relationship, that Taxpayer's consolidated filing did not fairly reflect its Indiana income, and that the only realistic and accurate way of reporting Taxpayer's Indiana income was to require Taxpayer and its affiliates file a combined return.
Taxpayer conducts production operations as one segment of its business; Taxpayer also conducts marketing operations as a second segment of its business. As originally filed, Taxpayer included in its consolidated return primarily its marketing entities. The Department's combined return brought in the production entities. Taxpayer objected on the ground that the production companies had "absolutely nothing to do with Indiana" and that the production companies' revenue was generated by activities and areas "far removed from Indiana."
Both the audit and the 2012 Letter of Findings found that the production and marketing entities shared a "unitary relationship" and that there was a "circular flow of monies" between these two business operations justifying a decision requiring Taxpayer and its related entities to file a combined return.
In considering Taxpayer's objection, the threshold issue is whether the production and marketing entities shared a "unitary relationship" as set out in IC 6-3-2-2 (m). The issue of what constitutes a "unitary relationship" has been addressed by the United States Supreme Court. In conducting a "unitary relationship" analysis, the Court considers whether contributions to income results from functional integration, centralization of management, and economies of scale. This means that the parties exhibit common ownership, common management, and common use or operation. Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425, 438-40 (1980); ASARCO, Inc. v. Idaho State Tax Comm'n, 458 U.S. 307, 317 (1982); F.W. Woolworth Co. v. Taxation and Revenue Dept., 458 U.S. 354, 365 (1982); Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 166 (1983); Allied-Signal, Inc. v. Director, Div. Of Taxation, 112 S.Ct. 2251, 2263-64 (1992).
Taxpayer has provided documentation establishing that the production and marketing sectors conduct interdivisional transactions on an "arms-length" basis, that the transactions are financially and competitively market driven, and that the production and marketing sectors are separately managed. Taxpayer has satisfactorily established that the inter-divisional transactions are not self-serving and are not structured simply as a means of minimizing state tax obligations.
Taxpayer has provided information establishing that the Department's earlier analysis was based on incomplete information, that the two operational segments do not share a unitary relationship, and the decision requiring Taxpayer file a combined return on that basis was premature.
Taxpayer has met its burden under IC 6-8.1-5-1 (c) of establishing the Department erred in requiring that Taxpayer and its affiliates file a combined return.
The Audit Division is requested to revisit the 2007 audit and to make whatever adjustments are necessary and consistent with this Supplemental Letter of Findings.
