ATTORNEY FOR PETITIONER:    ATTORNEYS FOR RESPONDENT:
DENNIS C. BECKER    STEVE CARTER
BARRETT & McNAGNY, LLP     ATTORNEY GENERAL OF INDIANA
Fort Wayne, IN    Indianapolis, IN
    
    LAUREANNE NORDSTROM
    DEPUTY ATTORNEY GENERAL
    Indianapolis, IN
______________________________________________________________________
     IN THE INDIANA TAX COURT

NORTHEAST INDIANA CHEVROLET        )
DEALERS ADVERTISING                 )
ASSOCIATION, INC.,                  )
                                    )
    Petitioner,                     )
    v.                              )

            ) Cause No. 02T10-0008-TA-93
INDIANA DEPARTMENT OF STATE         )
REVENUE,            )
                )
    Respondent.            )    
______________________________________________________________________

ORDER ON THE PARTIES’ CROSS MOTIONS FOR SUMMARY JUDGMENT


NOT FOR PUBLICATION
August 25, 2004


FISHER, J.
Northeast Indiana Chevrolet Dealers Advertising Association, Inc. (Association) protests the final determination of the Indiana Department of State Revenue (the Department) assessing the Association with additional gross income tax liabilities for the 1994 and 1995 tax years (the years at issue). The matter is currently before the Court on the parties’ cross motions for summary judgment. The sole issue for the Court to decide is whether the Association received funds from General Motors Corporation (GMC) in an agency capacity.
FACTS AND PROCEDURAL HISTORY

GMC created an advertising initiative program (Marketing Initiative) to more effectively advertise GMC vehicles in local markets. As part of the Marketing Initiative, GMC encouraged local automobile dealerships to form and incorporate a Designated Marketing Group (DMG) to “provide a single voice for multiple Dealers in a marketing area.” (Resp’t Mot. for Summ. J., Ex. B at 4.) GMC distributed funds to DMGs equal to one percent of the invoice cost of all GMC vehicles purchased by the DMG’s dealership-members (member-dealers) in any given year.
While GMC did not contract with each DMG regarding the use of the funds, it provided a “Marketing Initiatives Policies and Procedures Manual” (Manual) to DMGs detailing how the Marketing Initiative operated and how funds under the program were to be spent. The Manual provided that no more than one percent of the funds received by DMGs were to be spent on administration; four percent on advertising production; and ninety-five percent on advertising. Furthermore, monies received under the Marketing Initiative were to be spent in the year received, and any remaining funds were to be returned to GMC.
Twenty-two car dealerships located throughout northeast Indiana and northwest Ohio formed a DMG (the Association). The Association was incorporated as an Indiana not-for-profit corporation. See footnote
After conducting an audit, the Department determined that the Association was liable for gross income tax on the funds it received from GMC through the Marketing Initiative during the years at issue. See footnote The Association subsequently protested. In a letter of findings dated February 18, 2000, the Department denied the Association’s protest.
On August 16, 2000, the Association initiated this original tax appeal. The Association filed a motion for summary judgment on June 18, 2001. The Department filed a cross motion for summary judgment on September 4, 2001. This Court heard the parties’ oral arguments on January 14, 2002. Additional facts will be supplied as necessary.
ANALYSIS AND OPINION
Standard of Review

This Court reviews final determinations of the Department de novo. ind. code Ann. § 6-8.1-5-1(h) (West Supp. 2004). Therefore, it is neither bound by the evidence presented nor the issues raised at the administrative level.
. Cross motions for summary judgment do not alter this standard. Williams v. Indiana Dep’t of State Revenue, 742 N.E.2d 562, 563 (Ind. Tax Ct. 2001) (citation omitted).




Discussion


        During the years at issue, Indiana’s gross income tax was imposed on the receipt of:
the entire taxable gross income of a taxpayer who [was] a
resident or a domiciliary of Indiana; and
the taxable gross income derived from activities or
businesses or any other sources within Indiana by a
taxpayer who [was] not a resident or a domiciliary of Indiana.

Ind. Code Ann. § 6-2.1-2-2(a) (West 1994) (repealed 2002). Gross income included “cash, notes, credits, or other property that is received by the taxpayer . . . for the taxpayer's benefit." Ind. Code Ann. § 6-2.1-1-10 (West 1994) (repealed 2002). Further, a taxpayer "received" gross income upon "(1) the actual coming into possession of, or the crediting to, the taxpayer, of gross income; or (2) the payment of a taxpayer's expenses, debts, or other obligations by a third party for the taxpayer's direct benefit." Ind. Code Ann. § 6-2.1-1-11 (West 1994) (repealed 2002).
Nevertheless, taxpayers are not required to pay gross income tax on income they receive in an agency capacity. See U-Haul Co. of Indiana, Inc. v. Indiana Dep’t of State Revenue, 784 N.E.2d 1078, 1082 (Ind. Tax Ct. 2002). The Indiana Supreme Court has defined agency as "the relationship which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act." Dep’t of Treasury v. Ice Service, Inc., 41 N.E.2d 201, 203 (Ind. 1942) (quoting Restatement of the Law of Agency, § 1). Thus, in order to establish that an agency relationship exists, a taxpayer must demonstrate: (1) a manifestation of consent by the principal to the agent; (2) an acceptance of the authority by the agent; and (3) control exerted by the principal over the agent. See Policy Mgmt. Sys. Corp. v. Indiana Dep’t of State Revenue, 720 N.E.2d 20, 24 (Ind. Tax Ct. 1999), review denied. “A principal need merely have the right to control the alleged agent; it does not have to actually exercise control over the agent’s activities.” Id.
The Department’s administrative regulations also recognize that when taxpayers act as agents, they are “mere conduits” for the passing of funds; therefore, they are not liable for tax on those funds. Indeed,
Taxpayers are not subject to gross income tax on income they receive in an agency capacity. However, before a taxpayer may deduct such income in computing his taxable gross receipts, he must meet two (2) requirements:

The taxpayer must be a true agent. . . . [T]he principal must be liable for the authorized acts of the agent.
The agent must have no right, title or interest in the money or property received or transferred as an agent. In other words, the income received for work done or services performed on behalf of a principal must pass intact to the principal or a third party; the agent is merely a conduit through which the funds pass.

Ind. Admin Code tit. 45, r. 1-1-54 (1992 and 1996). Accordingly, when a taxpayer receives income, on behalf of a principal, it must be acting as an agent and have no beneficial interest in the income to avoid the gross income tax. See also Universal Group Ltd. v. Indiana Dep’t of State Revenue, 609 N.E.2d 48, 53 (Ind. Tax Ct. 1993) (“UGL”) (stating that “the incidents of taxation follow the beneficial interest in income. Thus, a person who is a mere conduit for another is generally not taxable on the income received”) (internal quotation and citation omitted), supplemented by, 642 N.E.2d 553 (Ind. Tax Ct. 1994).
The Association alleges that when it received funds through the Marketing Initiative, it received them in an agency capacity. More specifically, the Association asserts that GMC “consented” to the agency relationship in establishing the terms of the Marketing Initiative as outlined in the Manual, and the Association “accepted” the authority to act as GMC’s agent when it agreed to the terms of the Marketing Initiative. See footnote Finally, the Association contends that GMC “controlled” the Association’s activities and an agency relationship was established. The Court, however, disagrees.
The member-dealers of the Association chose to incorporate and form the Association; it was a distinct corporate entity of its own. See Winkler v. V.G. Reed & Sons, Inc., 638 N.E.2d 1228, 1231-32 (Ind. 1994) (explaining that while a corporation can act only through its agents, officers, shareholders, and employees, it is a legal entity separate and distinct from its shareholders and officers). It was the Association’s decision (through its decision-making body) to participate in the Marketing Initiative in order to subsidize its advertising costs. See footnote See UGL, 609 N.E.2d at 54 (stating "reimbursements of a taxpayer's own expenses are receipts of gross income to the taxpayer”). In so doing, GMC did not gain the right to control the Association; under the Marketing Initiative’s terms, GMC never possessed authority over the Association’s actions – it merely retained the right to withdraw the funding it offered at its discretion.
Thus, the terms of the Marketing Initiative do not demonstrate that GMC had the requisite right to “control” the Association. See Policy Mgmt. Sys. Corp., 720 N.E.2d at 24 (stating that “the principal’s control cannot simply consist of the right to dictate the accomplishment of a desired result”). The conditions attached to the advertising were in place to ensure that the funds were “budgeted and utilized in a consistent manner.” (Resp’t Mot. for Summ. J., Ex. B at 5.) Absent additional evidence indicating GMC’s right to control, or specific actions it took to control the Association, the Court cannot conclude that the Association was an agent of GMC.See footnote See Hope Lutheran Church v. Chellew, 460 N.E.2d 1244, 1249 (Ind. Ct. App. 1984) (finding that “the absence of control by the purported principals negate[d] the existence of an actual agency relationship”). Consequently, the Court DENIES the Association’s motion for summary judgment.
The Department contends that it is entitled to summary judgment because even assuming arguendo that the Association was an agent of GMC, the Association has a beneficial interest in the funds it received through the Marketing Initiative. Specifically, the Department claims that
the [Association] was not receiving the funds from [GMC] merely to turn [them] over to a third party. Instead, the [Association] used the funds for the benefit of its members[.] [The Association] made binding commitments with its advertising agency, and made advertising decisions in the best interest of its members[.]

(Resp’t Mot. for Summ. J. at 11-12.) Accordingly, the Department concludes that the funds the Association received from GMC are taxable to the Association as gross income. The Court agrees.
Under the Marketing Initiative, “[a]ll marketing, merchandising and advertising activities must be paid for by the DMG and must be designed to benefit all member Dealers to be allowable.” (Resp’t Mot. for Summ. J., Ex. B at 6 (emphasis added).) Thus, it was the Association that determined in which media outlets to promote the advertisements, as well as what vehicles to promote in the advertisements. (See Pet’r Br. in Supp. of Mot. for Summ. J. at 5.) This freedom to tailor advertisements best suited to the Association’s member-dealers’ needs promoted the purpose of the Marketing Initiative in the first place. Indeed,
[the] underlying premise of the [Marketing] Initiative is that Dealers know best their local markets. Thus [while GMC] provides financial support[,] [] the Dealers can choose to supplement it and are free to develop appropriate marketing and advertising within broad guidelines. Consequently, within the guidelines, Dealers decide what is best and execute at the local level.

(Resp’t Mot. for Summ. J., Ex. B at 6.)
It is clear to the Court that the Association and its member-dealers were the beneficiaries of the advertising. See footnote Therefore, the Department was correct in assessing gross income tax on the monies the Association received from GMC under the Marketing Initiative. Accordingly, the Court GRANTS the Department’s motion for summary judgment.

CONCLUSION

For the above stated reasons, the Court DENIES summary judgment for the Association and GRANTS summary judgment in favor of the Department.
SO ORDERED this 25th day of August, 2004.


            _____________________________
             Thomas G. Fisher, Judge
            Indiana Tax Court


Distribution :

Dennis C. Becker
BARRETT & McNAGNY, LLP
215 E. Berry St.
P.O. Box 2263
Fort Wayne, IN 46801

Steve Carter
Attorney General of Indiana
By: Laureanne Nordstrom
Deputy Attorney General
Indiana Government Center South, Fifth Floor
402 West Washington Street
Indianapolis, Indiana 46204-2770    


Footnote: GMC terminated the Marketing Initiative in March 1999; the Association dissolved shortly thereafter.

Footnote: The Department found the Association liable in the amount of $24,341.00, plus interest.

Footnote: The Court finds it speculative at best, based on the language in the Manual, that GMC “consented” to an agency relationship.

Footnote: GMC also offered these “advertising subsidies” to dealerships not participating in a DMG. ( See Resp’t Mot. for Summ. J., Ex. B at 11.) Thus, the formation and incorporation of a DMG was not a prerequisite to participating in the Marketing Initiative.

Footnote: The Court notes that GMC included a disclaimer in the Manual specifically stating that it “is not responsible for any DMG[’s] . . . use or disbursement of DMG Support . . . provided under the Initiatives.” (Resp’t Mot. for Summ. J., Ex. B at 3.) Thus, it appears that GMC specifically intended to avoid assuming the liability for actions of DMGs. In an agency relationship, however, “the principal must be liable for the authorized acts of the agent.” Ind. Admin. Code tit. 45, r. 1-1-54 (1992 and 1996).

Footnote: The Association claims it had no beneficial interest in the income it received through the Marketing Initiative because “[its] members could not and did not receive any of the funds GMC gave to the Association. . . . [The Association wa]s pass[ing] through [the funds it received] as payment to third parties for the expenses of GMC.” ( See Pet’r Reply to Resp’t Resp. to Pet’r Mot. for Summ. J. at 7-8.) The Court, however, fails to follow the Association’s logic: first, members of the Association were not entitled to directly receive any funds given to the Association – money given to the Association was a corporate asset; secondly, advertising expenses were incurred by, billed to, and paid for by the Association – not GMC; lastly, “the gross income tax is applicable regardless of any profit being involved.” Universal Group Ltd. v. Indiana Dep’t of State Revenue, 609 N.E.2d 48, 53 (Ind. Tax Ct. 1993) (internal quotation and citation omitted), supplemented by, 642 N.E.2d 553 (Ind. Tax Ct. 1994).