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ATTORNEYS FOR PETITIONER:         ATTORNEYS FOR RESPONDENT:
STEPHEN H. PAUL                  JEFFREY A. MODISETT
JANET M. CHARLES                 Attorney General of Indiana BAKER & DANIELS                  Indianapolis, Indiana
Indianapolis, Indiana
                             ANGELA L. MANSFIELD
                            Deputy Attorney General
                            Indianapolis, Indiana      _____________________________________________________________________

IN THE
INDIANA TAX COURT _____________________________________________________________________

CRITERION CATALYST CO., ) ) ) Petitioner, ) ) v. ) Cause No. 49T10-9612-TA-00180 ) DEPARTMENT OF STATE REVENUE, ) ) Respondent. ) _____________________________________________________________________

ON APPEAL FROM A FINAL DETERMINATION OF THE DEPARTMENT OF STATE

REVENUE _____________________________________________________________________

February 2, 1999

NOT FOR PUBLICATION

FISHER, J.
    Criterion Catalyst Co. appeals a final determination of the Department of State Revenue denying Criterion Catalyst a refund of gross income tax it paid for the tax years 1988 through 1991.

FACTS AND PROCEDURAL HISTORY
         The parties have stipulated to the facts occurring during the tax years at issue. Criterion Catalyst Limited Partnership (LP) is a joint venture established in 1988 between Shell Polymers and Catalyst Enterprises, Inc., LP Catalyst Holdings, Inc., Mivida Corp., and Criterion Catalyst. LP (as may be inferred from the names of its partners) is engaged in the business of producing catalysts.See footnote 1 Criterion Catalyst is the sole general partner of LP . As the sole general partner of LP, Criterion Catalyst is responsible for operating the affairs and business of LP.
    LP has a catalyst manufacturing facility (contributed by one of its limited partners in exchange for that partner's interest in LP) in Michigan City, Indiana (Michigan City Plant). Under the partnership agreement establishing LP, the workers at the Michigan City Plant (Michigan City Workforce) are designated as employees of Criterion Catalyst and are deemed to be under Criterion Catalyst's control. Criterion Catalyst paid the salaries and wages of the Michigan City Workforce as well as state and federal employment taxes and also remitted payments on behalf of the Michigan City Workforce to American Cyanamid (a parent corporation of one of LP's partners) in accordance with the Michigan City Workforce's employee benefit plans.
    However, the Michigan City Workforce performed its work exclusively for LP. In addition, LP furnished and owned all of the tools, materials, and equipment used by the Michigan City Workforce and incurred the costs of training the Michigan City

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 LP's operations.
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 4 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.

ANALYSIS AND OPINION
Standard of Review
The Court reviews the final determination of the Department de novo and is not bound by the evidence or the issues raised at the administrative level. See Ind. Code Ann. § 6-8.1-9-1(d) (West Supp. 1998); Hyatt Corp. v. Department of State Revenue, 695 N.E.2d 1051, 1052-53 (Ind. Tax Ct. 1998), review denied. Summary judgment is only appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. See Ind. T. R. 56(C); Hyatt Corp., 695 N.E.2d at

1053. Cross motions for summary judgmentSee footnote 7 do not alter this standard. See id.

Discussion
The issue to be decided is whether the reimbursements received by Criterion Catalyst were subject to the gross income tax. In Indiana, it has long been settled that receipts by an agent on behalf of a principal are not subject to gross income tax so long as the agent is a mere conduit through which the funds pass intact. See Department of Treasury v. Ice Serv., Inc., 41 N.E.2d 201, 203-04 (Ind. 1942); Bloomington Country Club v. Department of State Revenue, 543 N.E.2d 1, 3 (Ind. Tax Ct. 1989). In addition, under this rule, reimbursements for funds an agent has advanced to third parties on behalf of a principal does not constitute gross income.See footnote 8 See Universal Group Ltd. v. Department of State Revenue, 609 N.E.2d 48, 54 (Ind. Tax Ct. 1993) (UGL I) (citing Gross Income Tax Div. v. Indiana Associated Tel. Co., 118 Ind. App. 669, 82 N.E.2d 539, 542 (1948); Rho Co. v. Department of Revenue, 782 P.2d 986, 989-90 (1989)). The Department has adopted this rule in its regulations. See Ind. Admin. Code tit. 45, r. 1-1-54 (1996). Criterion Catalyst contends that the reimbursements for its payments to, and on behalf of, the Michigan City Workforce fall within the ambit of this rule.
Ind. Admin. Code tit. 45, r. 1-1-54 contains two requirements. The first is that the

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, r. 1-1-54.
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 11 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.

Therefore, this case is far different from UGL III. In UGL III, the employees performed work for the particular taxpayer as well as for the entire affiliated group. Therefore, the taxpayer received a benefit from its own employees' labor. Additionally, in UGL III, the reimbursements defrayed expenses that the taxpayers receiving the reimbursements otherwise would have incurred. Without the agreement to centralize functions, the taxpayers receiving reimbursements from the other affiliated corporations under that agreement would have had to incur the full cost of paying their employees. The reimbursements allowed them to pay less than that full cost. The reimbursements therefore constituted gross income.
The only similarity between this case and UGL III is that the agent had an employer-employee relationship with the third party. This similarity, however, does not dictate that the cases be treated the same. Although Criterion Catalyst is liable as an employer for the wages, associated taxes and benefits of the Michigan City Workforce, the existence of liability between the agent and a third party does not, in and of itself, alter the pass through nature of the transfer from the principal to the third party through the agent. In addition, to find the existence of an employer-employee relationship between Criterion Catalyst and the Michigan City Workforce dispositive misses the point. For purposes of the gross income tax, the issue is not whether Criterion Catalyst employs the Michigan City Workforce, but rather whether Criterion Catalyst receives any interest in the funds paid by LP through Criterion Catalyst to the Michigan City Workforce. See UGL III, 642 N.E.2d at 558. The evidence designated to the Court demonstrates that, as a matter of law, Criterion Catalyst receives no interest from this

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.

CONCLUSION
For the aforementioned reasons, Criterion Catalyst motion for summary judgment is GRANTED, and the Department's cross motion for summary judgment is DENIED.

Footnote: 1A catalyst is a substance that alters the speed of a chemical reaction without being consumed in the chemical reaction.

Footnote: 2See Ind. Code Ann. § 6-8.1-5-1(a) (West Supp. 1998); Horrall v. Department of State Revenue, 687 N.E.2d 1219, 1221 (Ind. Tax Ct. 1997), review denied.

Footnote: 3See Ind. Code Ann. § 6-8.1-5-1(c) (West Supp. 1998).

Footnote: 4See Ind. Code Ann. § 6-8.1-5-1(e) (West Supp. 1998).

Footnote: 5See Ind. Code Ann. § 6-8.1-9-1(a) (West Supp. 1998).

Footnote: 6For a discussion of the ability of a taxpayer to protest an assessment and then pay the tax and initiate a refund claim, see City Securities Corp. v. Department of State Revenue, No. 49T10-9505-TA-00049, slip op. at 4-6 (Ind. Tax Ct. Dec. 30, 1998).

Footnote: 7In its response to Criterion Catalyst's motion, the Department requested that summary judgment be entered in its favor. Under Indiana Trial Rule 56(B), a court may grant summary judgment to any party once one party has moved for summary judgment. See City Securities Corp., No. 49T10-9505-TA-00049, slip op. at 3 n.1; Miles, Inc. v. Department of State Revenue, 659 N.E.2d 1158, 1161 (Ind. Tax Ct. 1995). Therefore, the Department's request will be treated as a motion for summary judgment.

Footnote: 8If this were not the case, the timing of the payment by the principal to the agent would dictate the taxability of that payment.

Footnote: 9This relieves the Court of having to evaluate the Department's argument that Criterion Catalyst is bound by the representation in the partnership agreement.

Footnote: 10This Court's opinions in UGL I and UGL III dealt with the same case. UGL I was decided on a motion for summary judgment. UGL III represented this Court's final decision on the case.

Footnote: 11This statement should not be read to undermine the rule that “[t]he gross income tax is applicable regardless of any profit being involved.” Western Adjustment & Inspection Co., 142 N.E.2d at 633 (citing Walgreen Co. v. Gross Income Tax Div., 225 Ind. 418, 75 N.E.2d 784 (1947)).

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