ATTORNEYS FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
STEPHEN H. PAUL JEFFREY A. MODISETT
JANET M. CHARLES Attorney General of Indiana BAKER & DANIELS Indianapolis, Indiana
ANGELA L. MANSFIELD
Deputy Attorney General
Indianapolis, Indiana _____________________________________________________________________
CRITERION CATALYST CO., ) ) ) Petitioner, ) ) v. ) Cause No. 49T10-9612-TA-00180 ) DEPARTMENT OF STATE REVENUE, ) ) Respondent. ) _____________________________________________________________________REVENUE _____________________________________________________________________
ON APPEAL FROM A FINAL DETERMINATION OF THE DEPARTMENT OF STATE
NOT FOR PUBLICATION
Workforce. LP also owned all of the technology developed at the Michigan City Plant
and owned all of the inventory produced at the Michigan City Plant. Lastly, LP
recorded on its books the full profit or loss on the sale of catalysts produced at the
Michigan City Plant and recorded on its books all production costs, all administrative
costs and all overhead costs incurred by the Michigan City Workforce in carrying out
Criterion Catalyst was reimbursed by LP in amounts equal to what Criterion Catalyst paid the Michigan City Workforce. Criterion Catalyst also received from LP a $250,000 annual management fee, which did not change according to the production at the Michigan City Plant. Except for this management fee and Criterion Catalyst's distributive share of LP's income, Criterion Catalyst did not realize any direct financial benefit from the efforts of the Michigan City Workforce. In addition, Criterion Catalyst, except in its capacity as general partner of LP, was not engaged in the manufacture, development or distribution of catalysts.
The Department audited Criterion Catalyst's gross income tax returns and issued a notice of proposed assessmentSee footnote 2 for gross income tax and interest on the amounts received by Criterion Catalyst as reimbursement for paying the wages and salaries of the Michigan City Workforce and for contributing to the employee benefit plans of the Michigan City Workforce. Criterion Catalyst filed a timely written protest,See footnote 3
and on March 8, 1995 and October 11, 1995, the Department conducted administrative
hearings on Criterion Catalyst's protest. On June 12, 1996, the Department issued a
letter of findingsSee footnote
upholding the proposed assessment.
On August 26, 1996, Criterion Catalyst paid $253,501.79 to cover the assessment and interest. On November 26, 1996, Criterion Catalyst filed a claim for refundSee footnote 5 of the August 26 payment. On December 6, 1996, the Department denied Criterion Catalyst's refund claim.See footnote 6 On the same day, Criterion Catalyst filed this original tax appeal. On June 11, 1998, Criterion Catalyst filed a motion for summary judgment, and on November 10, 1998, the Court heard the arguments of counsel on that motion. Additional facts will be supplied as necessary.
1053. Cross motions for summary judgmentSee footnote
do not alter this standard. See id.
taxpayer must be a true agent. The second is that the agent must be a mere conduit
through which the funds pass intact, or, in other words, there must be a true pass
through of the income. See Bloomington Country Club, 543 N.E.2d at 3-4. The first
requirement is not an issue in this case. Under Indiana law, a general partner is an
agent for the partnership in the conduct of partnership business, see Ind. Code Ann. §
23-4-1-9(1) (West 1994), and the Department has conceded that Criterion Catalyst is
acting as LP's agent with respect to the payments to, and on behalf of, the Michigan
City Workforce. (Resp't Br. at 4).
At first glance, the second requirement of Ind. Admin. Code tit. 45, r. 1-1-54 would seem to be easily satisfied in this case. Criterion Catalyst pays the wages and benefits of the Michigan City Workforce, a group of workers who work exclusively for LP, and is reimbursed for those payments in exact amounts by LP. However, the Department argues that because the workers at the Michigan City Plant are designated as employees of Criterion Catalyst in the partnership agreement, there is no true pass through of income. Instead, according to the Department, Criterion Catalyst was reimbursed for its own expenses, namely the wages, salaries and benefits of its own employees. See Ind. Code Ann. § 6-2.1-1-10 (West 1989) (amended 1997); § 6-2.1-1- 11 (West 1989); Universal Group Ltd. v. Department of State Revenue, 642 N.E.2d 553, 558 (Ind. Tax Ct. 1994) (UGL III). In addition, the Department continues, Criterion Catalyst, for taxation purposes, is bound by the representations in the partnership agreement and therefore cannot disclaim the employer-employee relationship with the Michigan City Workforce. Criterion Catalyst responds by arguing that the workers at
the Michigan City Plant are employees of Criterion Catalyst in name only and that they
are, in reality, solely employees of LP. See Maurer v. Department of State Revenue,
607 N.E.2d 985, 987 (Ind. Tax Ct. 1993) (substance and not form governs taxability).
Therefore, in Criterion Catalyst's view, the reimbursements are not for Criterion
Catalyst's own expenses and therefore are non-taxable under Ind. Admin. Code tit. 45,
The parties spend a great deal of time discussing whether the workers at the Michigan City Plant are or are not employees of Criterion Catalyst. This is not surprising in light of this Court's decisions in UGL I and UGL III. However, resolution of this factual issue is not proper on a motion for summary judgment. See C & C Oil Co. v. Department of State Revenue, 570 N.E.2d 1376, 1378 (Ind. Tax Ct. 1991). Therefore, for purposes of Criterion Catalyst's summary judgment motion, the Michigan City Workforce will be considered employees of Criterion Catalyst.See footnote 9
In UGL I and UGL III,See footnote 10 this Court dealt with an affiliated group of corporations in the food and beverage flavoring business. In order to avoid duplication of expenses, these affiliated corporations decided to centralize some of their operations by designating one or more of the corporations to act on behalf of the other corporations on a non-profit basis. The expenses for these operations were allocated among the
corporations by formulas that approximated each corporation's use of and benefit from
the services. The corporation or corporations performing the centralized operations
were reimbursed for their expenses by the other corporations.
The taxpayers argued that the reimbursements did not constitute gross income. In rejecting this argument, this Court determined that there was no pass through of income, a requirement of Ind. Admin. Code tit. 45, r. 1-1-54. This Court stated, The reimbursements to the corporations that performed the administrative tasks were reimbursements for those corporations' own expenses, such as paying their employees' wages, not for monies advanced to third parties. UGL III, 642 N.E.2d at 558. This Court also noted that the entire beneficial interest in the reimbursement lies with the parties receiving the reimbursements. Id. See also Ind. Admin. Code tit. 45, r. 1-1- 54(2) (The agent must have no right, title or interest in the money or property received . . . .).
Central to this Court's decision in UGL III that there was no true pass through of income was its determination that the corporate taxpayers did not advance funds on behalf of a principal. In that case, the employees of the corporate taxpayers were to be paid by those corporations regardless of the agreement to centralize functions. As a result, it was simply impossible to conclude that when the corporate taxpayers paid their employees they were doing so on behalf of a principal. The corporate taxpayers were paying their employees not out of their duties as agents (The Court assumed arguendo that the corporate taxpayers were agents.) but rather out of their duties as an employer. In addition, the other members of the affiliated group were not paying the
employees through the corporate taxpayers, but rather they were paying the corporate
taxpayers for the use of the employees.
The Department deduces from UGL III a rule that whenever an agent uses reimbursements to pay its own employees, that reimbursement necessarily constitutes gross income. Empirically speaking, there is merit to this point of view. Undoubtedly, where an agent uses a reimbursement to pay its own employees, in almost every circumstance, that reimbursement will constitute gross income. This results from the fact that in nearly every case, the agent will receive some beneficial interest in the reimbursement because some of the agent's own expenses will be defrayed. See Ind. Code Ann. §§ 6-2.1-1-10, -11. See also Western Adjustment & Inspection Co. v. Gross Income Tax Div., 142 N.E.2d 630, 633 (Ind. 1957) (Court must guard against possibility of reimbursement exemption swallowing up the rule so as to convert gross income tax into net income tax.). However, the Court believes that the Department has confused an application of the law to a specific set of facts with the law itself.
Under Ind. Admin. Code tit. 45, r. 1-1-54(2), reimbursements received by an agent for funds advanced on behalf of a principal do not constitute gross income. That regulation also provides that where an agent receives a beneficial interest in the funds transferred to a third party, the receipt of those funds by the agent constitutes gross income. What these separate statements of the law mean when read together is that the reimbursement must merely restore the agent to the same position that the agent
would have been in had he not made the payment to the third party in the first place.See footnote
Where the reimbursement does not satisfy this strict requirement, the reimbursement
constitutes gross income.
Therefore, the Court must examine whether Criterion Catalyst's receipt of reimbursements restored Criterion Catalyst to the same position it had prior to its payments to, and on behalf of, the Michigan City Workforce. Any analysis of the stipulated facts demonstrates that the reimbursements do so and that those reimbursements therefore do not constitute gross income.
Under the partnership agreement, Criterion Catalyst must pay the wages, associated taxes and benefits of the Michigan City Workforce, a group of employees who work exclusively for LP. Criterion Catalyst is reimbursed in exact amounts for these payments, and these reimbursements do not defray any expenses that Criterion Catalyst would have incurred but for the partnership agreement. In addition, no direct benefit inures to Criterion Catalyst as a result of the labor of the Michigan City Workforce. Consequently, Criterion Catalyst's receipt of funds from LP merely restored Criterion Catalyst to the same position it held before it made payments to, and on behalf of, the Michigan City Workforce. This leads to the conclusion that Criterion Catalyst, as LP's agent, is merely making payments to third parties for which Criterion Catalyst is reimbursed.
transaction. As a result,
under Ind. Admin. Code tit. 45, r. 1-1-54, the reimbursements
by LP to Criterion Catalyst do not constitute gross income.
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