ATTORNEY FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
DENNIS C. BECKER STEVE CARTER
BARRETT & McNAGNY, LLP ATTORNEY GENERAL OF INDIANA
Fort Wayne, IN Indianapolis, IN
DEPUTY ATTORNEY GENERAL
INDIANA TAX COURT
NORTHEAST INDIANA CHEVROLET )
DEALERS ADVERTISING )
ASSOCIATION, INC., )
) Cause No. 02T10-0008-TA-93
INDIANA DEPARTMENT OF STATE )
ORDER ON THE PARTIES CROSS MOTIONS FOR SUMMARY JUDGMENT
NOT FOR PUBLICATION
August 25, 2004
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. (Respt
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 DMGs 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.
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.
The Association subsequently protested. In
a letter of findings dated February 18, 2000, the Department denied the Associations
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 Dept of State Revenue, 742 N.E.2d 562, 563 (Ind. Tax
Ct. 2001) (citation omitted).
During the years at issue, Indianas gross income tax was imposed on the
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 Dept 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." Dept 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 Dept 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 agents activities. Id.
The Departments 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 Dept
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 GMCs agent when it agreed to the terms of the Marketing
Finally, the Association contends that GMC controlled the Associations 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 Associations decision (through its decision-making body) to participate in the
Marketing Initiative in order to subsidize its advertising costs.
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 Initiatives terms, GMC never
possessed authority over the Associations 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 principals 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. (Respt Mot. for Summ. J., Ex.
B at 5.) Absent additional evidence indicating GMCs 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 Associations 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[.]
(Respt 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. (Respt 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 Petr Br. in Supp. of Mot. for Summ. J.
at 5.) This freedom to tailor advertisements best suited to the Associations
member-dealers needs promoted the purpose of the Marketing Initiative in the first place.
[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.
(Respt 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.
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 Departments motion for summary
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
Dennis C. Becker
BARRETT & McNAGNY, LLP
215 E. Berry St.
P.O. Box 2263
Fort Wayne, IN 46801
Attorney General of Indiana
By: Laureanne Nordstrom
Deputy Attorney General
Indiana Government Center South, Fifth Floor
402 West Washington Street
Indianapolis, Indiana 46204-2770
GMC terminated the Marketing Initiative in March 1999; the Association dissolved shortly
Footnote: The Department found the Association liable in
the amount of $24,341.00, plus
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
See Respt 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.
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.
(Respt 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).
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 Petr Reply to Respt Resp.
to Petr Mot. for Summ. J. at 7-8.) The Court, however, fails
to follow the Associations 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 Dept 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).