ATTORNEYS FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
ANNETTE T. BROGDEN KAREN M. FREEMAN-WILSON
STARKEY & BROGDEN ATTORNEY GENERAL OF INDIANA
Indianapolis, IN Indianapolis, IN
JEFFREY L. UNGERER VINCENT S. MIRKOV
NEWBERY & UNGERER DEPUTY ATTORNEY GENERAL
Topeka, KS Indianapolis, IN
INDIANA TAX COURT
CHIEF INDUSTRIES, INC., )
v. ) Cause No. 49T10-9711-TA-193
INDIANA DEPARTMENT OF STATE REVENUE, )
ON APPEAL FROM THE
INDIANA DEPARTMENT OF STATE REVENUE
October 24, 2000
Petitioner Chief Industries, Inc. (Chief) appeals the final determination of the Indiana Department
of State Revenue (Department) denying Chiefs request for a refund of adjusted gross
income taxes paid by Chief on certain capital gains income for the tax
year ending June 26, 1987 (tax year). In this original tax appeal,
Chief claims that these capital gains do not constitute apportionable business income subject
to Indianas adjusted gross income tax. Chief raises several arguments supporting its
position; however, the Court considers the following issue dispositive: whether certain capital
gains realized by Chief that were generated by Chiefs sales of common stock
of a non-domiciliary corporation constitute adjusted gross income derived from a source within
FACTS AND PROCEDURAL HISTORY
The relevant facts in this appeal are not in dispute.
See footnote Chief was
incorporated in Delaware in 1959 and remains a Delaware corporation. Chiefs commercial
domicile has at all times during its corporate existence been located in Grand
Island, Nebraska. The company has been engaged in the business of
manufacturing and wholesaling, among other things, engineered metal products, commercial steel buildings, agricultural
grain bins and drying equipment, mobile homes, recreational vehicles, electronic signs and waste-water
Since the early 1970s, Chief has operated a manufacturing facility in Rensselaer, Indiana
(Rensselaer facility). The Rensselaer facility was initially part of Chiefs agricultural division.
It has since been converted to manufacture pre-engineered, metal commercial buildings.
Operations at the Rensselaer facility constitute Chiefs exclusive manufacturing activities within Indiana.
From 1972 until May 31, 1984, Chief segregated certain assets into what it
referred to as its automotive division. On May 31, 1984, the automotive
division was incorporated in Delaware as Chief Automotive Systems, Inc. (Automotive).See footnote At
all times during its commercial existence, Automotives commercial domicile, principal corporate offices, and
management and direction staff have also been located in Grand Island, Nebraska.
The automotive division had manufactured and marketed a patented vehicle collision repair and
realignment system; Automotive assumed this same role.
On August 10, 1984, Automotive issued 1,150,000 shares of its previously un-issued common
stock in an initial public offering. All proceeds from the offering went
to Automotive. During the tax year, Chief made two sales of Automotive
common stock: 100,000 shares on July 1, 1986 and 2,645,000 shares on
December 1, 1986.See footnote
For purposes of determining its Indiana adjusted gross income tax liability, Chief reported
its capital gains from sales of its shares of Automotive common stock during
the tax year as nonbusiness income allocable to its commercial domicile, Nebraska.
Following an audit, the Department issued Chief a proposed adjusted gross income tax
assessment for the tax year of $53,390 plus interest. The proposed assessment
resulted from the Departments reclassification of the capital gains generated by sales of
Automotive common stock from nonbusiness to business income.See footnote
Chief protested this assessment. The Department conducted a telephonic hearing on the
protest on October 1, 1991. On April 22, 1992, the Department issued
a Letter of Finding denying Chiefs protest. Chief requested a rehearing on
its protest on May 6, 1992, but the request was denied on May
13, 1992. On or about June 3, 1992, Chief paid the Department
$76,950.35 ($53,390.00 tax plus $23,560.35 interest) for the tax year. It filed
a refund claim on November 23, 1994, requesting reimbursement of the total tax
and interest paid for the tax year plus statutory interest due from the
date of payment.
The Department did not respond to Chiefs refund claim, so Chief filed an
original tax appeal with this Court on November 20, 1997.See footnote Chief filed
a motion for summary judgment, together with a brief in support thereof, on
June 15, 1998. The Department filed a response brief on August 21,
1998.See footnote Chief responded with a reply brief on September 30, 1998.
The Court conducted a hearing on the summary judgment motion on November 17,
1998. Additional facts will be supplied as needed.
ANALYSIS AND OPINION
Standard of Review
This Court hears the appeal of a taxpayers refund claim de novo and
is bound by neither the evidence presented nor the issues raised below.
See Ind. Code Ann. § 6-8.1-9-1(d) (West 2000); Mynsberge v. Department of State
Revenue, 716 N.E.2d 629, 631 (Ind. Tax Ct. 1999). Summary judgment is
only appropriate where 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); Mynsberge, 716 N.E.2d at 631. Cross motions for summary
judgment do not alter this standard. See Mynsberge, 716 N.E.2d at 631.
Questions of statutory interpretation are particularly amenable to resolution by summary judgment.
Chief asserts that the capital gains it received from sales of Automotive common
stock are not subject to Indianas adjusted gross income tax.
See footnote During the
tax year at issue, Indiana imposed a tax at the rate of three
percent [3%] of adjusted gross income . . . on that part of
the adjusted gross income derived from sources within the state of Indiana of
Ind. Code Ann. § 6-3-2-1(b) (Michie Supp. 1986).
See footnote With
regard to corporations, the General Assembly further defined adjusted gross income derived from
sources within the state of Indiana in relevant part as:
(1) Income from real or tangible personal property located in this state;
(2) Income from doing business in this state;
(3) Income from a trade or profession conducted in this state;
(4) Compensation for labor or services rendered within this state; and
(5) Income from stocks, bonds, notes, . . . and other intangible personal
property having a situs in this state.
Ind. Code Ann. § 6-3-2-2(a) (Michie Supp. 1986).
See footnote Section 6-3-2-2(a) further explains
that only nonbusiness income allocated to Indiana under subsections (h)-(k) and only business
income apportioned to Indiana pursuant to subsection (b) shall be deemed to be
derived from sources within the state of Indiana.
The Court may construe and interpret a statute only if it is unclear
and ambiguous. See Shoup Buses, Inc. v. Indiana Dept of State Revenue,
635 N.E.2d 1165, 1167 (Ind. Tax Ct. 1994). In construing a statute,
the Court strives to determine and give effect to the General Assemblys intent.
See id. at 1168. In general, the best evidence of this
intent is found in the language chosen by the General Assembly. See
Mynsberge, 716 N.E.2d at 632. Words and phrases in a statute
are to be given their plain, ordinary, and usual meaning. See Uniden Am.
Corp. v. Dept of State Revenue, 718 N.E.2d 821, 824 (Ind. Tax Ct.
1999). Statutes are to be construed in the context of the whole act
of which they are a part, giving effect, if possible, to each word
and clause. See Sangralea Boys Fund, Inc. v. State Bd. of Tax
Commrs, 686 N.E.2d 954, 958 (Ind. Tax Ct. 1997), review denied. The
Court endeavors to construe statutes so as to prevent absurd results. See
Uniden, 718 N.E.2d at 828. Finally, a tax imposition statute, such as
the adjusted gross income tax, is to be strictly construed against the imposition
of the tax. See Mynsberge, 716 N.E.2d at 633.
To be subject to Indianas adjusted gross income tax, the capital gains generated
by Chiefs sales of Automotive common stock must have been classified as income
derived from sources within the state of Indiana; this classification must have been
made prior to deciding whether the income was business or nonbusiness income.
Section 6-3-2-2(a) identifies the various Indiana sources from which adjusted gross
income may be derived. Subsection (5) includes income from stocks, bonds, notes
. . . and other intangible personal property having a situs in this
state. At first blush, this provision can be reasonably interpreted two ways.
The clause having a situs in this state may be read to
modify only the term other intangible personal property or to modify each item
of intangible personal property within subsection five, i.e., stocks, bonds, notes, etc.
Thus, section 6-3-2-2(a)(5) is unclear and ambiguous.
The Court finds that the latter interpretation is the most logical. The
Adjusted Gross Income Tax Act of 1963 (the Act), see Ind. Code Ann.
§ 6-3-1-1 (Michie 1984) (amended 1988), is an apportioned tax designed to reach
income from interstate transactions. See Indiana Dept of State Revenue v. Bethlehem
Steel Corp., 639 N.E.2d 264, 266 n.4 (Ind. 1994). As our Supreme
Court has noted, in passing the Act the General Assembly reacted to its
recognition that Indiana was losing revenue because the U.S. Supreme Court had declared
that Indianas unapportioned gross income tax could not constitutionally reach proceeds from interstate
commerce. Id. (citations omitted). As the Supreme Court further observed, Presently,
the gross income tax and the adjusted gross income tax form a single
tax scheme, under which corporations are given a credit on their adjusted gross
income tax liability for gross income taxes paid. Id. (citing Ind. Code
§ 6-3-3-2 (1989)). Thus, the legislatures intent in passing the Act was
to tax those portions of interstate transactions specifically apportioned to Indiana that may
otherwise escape taxation under Indianas gross income tax provisions.
The General Assemblys intent is manifested in the language used in section 6-3-2-2(a).
A plain reading of subsections (1)-(4) indicates that the General Assembly considered
Indiana source income to be income derived from income-producing activities undertaken, performed, or
conducted either in this state or within this state. These phrases clearly
modify each item referenced within each subsection. For example, in subsection (1),
the phrase located in this state modifies both real property and tangible personal
property. Likewise, in subsection (4), the phrase rendered within this state modifies
both compensation for labor and compensation for services. To be consistent throughout
section 6-3-2-2, the pattern must be read to extend to subsection (5).
It would be absurd to read subsection (5) differently than the immediately preceding
four subsections. Therefore, the Court finds that, to be considered income from
a source within Indiana under section 6-3-2-2(a)(5), the income must be generated by
stocks having a situs in Indiana.
The Court has never determined whether intangible personal property has an Indiana source
or tax situs as regards the adjusted gross income tax. However, the
Court has considered the issue in the context of Indiana gross income tax.
See Ind. Code Ann. §§ 6-2.1-1-2 & -2-2 (West 2000) (defining and
imposing gross income tax). Section 6-2.1-2-2(a)(2) imposes the gross income tax upon
the receipt of the taxable gross income derived from activities or businesses or
any other sources within Indiana by a taxpayer who is not a resident
or a domiciliary of Indiana. As noted supra, the gross income and
adjusted gross income provisions form a single tax scheme. But cf. Associated
Ins. Cos. v. Indiana Dept of State Revenue, 655 N.E.2d 1271, 1276 (Ind.
Tax Ct. 1995) (The court is not convinced, however, that the adjusted gross
consolidated filing statute provides any clear insight into the meaning of the gross
income consolidated filing statute.), review denied. The Court finds no reason to
treat a determination of tax situs under the two taxes differently. The
Court has previously applied a three-part test to determine the tax situs of
intangible personal property. See Indiana-Kentucky Elec. Corp. v. Indiana Dept of State
Revenue, 598 N.E.2d 647, 664-65 (Ind. Tax Ct. 1992) (finding that Ohio corporation
was not subject to imposition of gross income tax for its sales of
electricity to Indiana customers, where Ohio corporation had no tax situs within Indiana).
See also First Natl Leasing and Fin. Corp. v. Indiana Dept of
State Revenue, 598 N.E.2d 640, 643-45 (Ind. Tax Ct. 1992) (determining that non-domiciliary
corporations ownership of equipment located in Indiana was remote and incidental to critical
transaction, i.e., lease of the equipment to the corporations wholly owned subsidiary); Uniden,
718 N.E.2d at 828 (noting that Court would likely have applied three-part test
to Ind. Code Ann. § 6-2.1-1-2(c)(6) (West 2000) [defining in part what definition
of gross income does not include] if Court had read the term sources
into statute). Cf. Bethlehem Steel Corp., 639 N.E.2d at 268 (stating that
Supreme Court generally approve[s] of the Tax Courts reading and application of section
6-2.1-2-2(a), in a case dealing with application of gross income statute to sale
of federal tax benefits). The three-part test is as follows:
[T]o determine whether income is derived from an Indiana source, the tax situs,
the court must (1) isolate the transaction giving rise to the income, the
critical transaction, (2) determine whether [the out-of-state taxpayer] has a physical presence in
the taxing state or has significant business activities within the taxing state, a
business situs and (3) determine whether the Indiana activities are related to the
critical transaction and are more than minimal, not remote or incidental to the
total transaction, the tax situs.
Indiana-Kentucky Elec., 598 N.E.2d at 663. CONCLUSION
Applying this test to the present facts, the Court finds that the Automotive
common stock at issue lacked an Indiana tax situs. The critical transactions
are easily identified; they were the two sales of Automotive common stockthe first
(100,000 shares) on July 1, 1986 and the second (2,645,000 shares) on December
1, 1986. In addition, Chief does have a business situs in Indiana;
it owns a facility in Rensselaer that manufactures pre-engineered, metal commercial buildings.
The third step requires a weighing of the undisputed facts. Upon doing
so, the Court finds that Chiefs activities at its Indiana business situs during
the tax year were unrelated to the sales of Automotive common stock.
During the tax year, Chief did not engage in the active trading of
stocks or bonds as a trade or business. The sales of Automotive
common stock were not transactions or activities conducted in the regular course of
Chiefs trade or business. All activities and decisions pertaining to and surrounding
Chiefs sales of Automotive common stock did not take place in Indiana; rather,
these decisions were made by Chiefs Executive Committee located in Grand Island, Nebraska.
No person at the Rensselaer facility either had the ability to or
actually did influence Chiefs decisions to sell its shares of Automotive common stock.
Sale of the common stock did not affect the day-to-day operations of
the Rensselaer facility, and the facility did not directly benefit from the proceeds
of the sales of the common stock. In short, there is no
relationship between the Rensselaer facility and Chiefs sales of its shares of Automotive
common stock. Based on these facts, the Court determines that the critical
transaction in question had, if any, only a minimal relationship to the operations
carried on by Chief at the Rensselaer facility. Any connection between the critical
transaction and the Rensselaer facilitys activities was at best remote. See Indiana-Kentucky
Elec., 598 N.E.2d at 664 (finding generation of electricity in Indiana to be
remote and incidental to critical transaction).
As a matter of law, the Court finds that the capital gains earned
by Chief from its sales of Automotive common stock during the tax had
no tax situs in Indiana. Therefore, income from the stock sales is
not derived from sources within the state of Indiana per section 6-3-2-2(a)(5).
Lacking an Indiana source, the capital gains in question cannot be subjected to
Indianas adjusted gross income tax, as imposed by section 6-3-2-1(b).
For the aforementioned reasons, the Court hereby GRANTS Chiefs motion for summary judgment
and DENIES the Departments cross motion for summary judgment. The Court ORDERS
the Department to refund Chief the amount of tax and interest assessed and
paid during the tax year in the amount of $76,950.35, plus statutory interest.
The Court does not reach the primary issue contested by the parties:
whether the capital gains realized by Chief constituted business or nonbusiness income,
see infra n.5.
The facts are primarily drawn from the Affidavit of Robert G. Eihusen,
filed by Chief on June 15, 1998.
Indiana T.R. 56(E) states that
affidavits supporting or opposing summary judgment shall be made on personal knowledge, shall
set forth such facts as would be admissible in evidence, and shall show
affirmatively that the affiant is competent to testify to the matters stated therein.
See National Assn of Miniature Enthusiasts v. State Bd. of Tax Commrs,
671 N.E.2d 218, 220 n.2 (Ind. Tax Ct. 1996) (reciting same standard).
An affidavit which does not satisfy the requirements of T.R. 56(E) is subject
to a motion to strike, and a defect is waived in the absence
of a motion to strike or other objection. American Management, Inc. v.
MIF Realty, L.P., 666 N.E.2d 424, 429 n.2 (Ind. Ct. App. 1996).
In his eight-page affidavit, Eihusen neither states that his declarations are made on
personal knowledge nor explains the basis for his statements, e.g., whether he is
an employee or an officer of the company. However, because the Department
did not object to or move to strike the affidavit (and, in fact,
relies upon the affidavit in its response brief), the Court finds that any
defects in the affidavit have been waived.
Chief owned 100% of Automotives 2,500,000 shares of common stock at the
time the company was incorporated.
Footnote: Chief indicates that, from August 10, 1984 to May 17, 1985, it
owned 68.5% of Automotives outstanding common stock. On May 18, 1985, Chief
sold 1,100,00 shares of its Automotive common stock, reducing its ownership interest to
1,400,000 shares or 38.3% of the outstanding common stock. According to a
chart provided by Chief, a three-for-two stock split occurred on March 7, 1986,
increasing Chiefs total number of shares to 2,100,000 while keeping its ownership percentage
at 38.3%. After the sale of 100,000 shares on July 1, 1986,
Chief owned 2,000,000 or 37.9% of Automotive common stock. Another three-for-two stock
split took place on November 3, 1986, giving Chief ownership of 3,000,000 shares
of Automotive common stock. Chiefs percentage of common stock remained 37.9%.
Finally, following its sale of stock on December 1, 1986, Chief owned 355,000
shares of Automotive common stock, reducing to 4.3% its ownership percentage.
Footnote: Business income is defined as income arising from transactions and activity in
the regular course of the taxpayers trade or business and includes income from
tangible and intangible property if the acquisition, management, and disposition of the property
constitutes integral parts of the taxpayers regular trade or business.
Ann. § 6-3-1-20 (West 2000). Nonbusiness income means all income other than
business income. Ind. Code Ann. § 6-3-1-21 (West 2000).
Normally, this Court lacks subject matter jurisdiction to consider appeals in cases
where the Department has not issued a final determination.
See Ind. Code
Ann. § 33-3-5-2(a)(1) (West 1996). However, the General Assembly provides an exception
to this requirement in refund appeal suits. Indiana Code Ann. § 6-8.1-9-1(c)
(West 2000) confers jurisdiction on this Court to hear an appeal when the
taxpayer has waited at least 181 days (and less than three years) but
has received no determination from the Department regarding his claim for refund .
. . . City Sec. Corp. v. Department of State Revenue, 704
N.E.2d 1122, 1125 (Ind. Tax Ct. 1998). Because Chief filed the present
appeal more than 181 days but less than three years after filing its
refund claim with the Department, the Court has subject matter jurisdiction to consider
this original tax appeal.
Although not captioned as a cross motion for summary judgment, the Departments
response brief requests that summary judgment be entered in its favor. Pursuant
Ind. T.R. 56(B), summary judgment may be granted to the non-moving party.
Therefore, the Court will treat the Departments request as a cross motion
for summary judgment. See Hunt Corp. v. Department of State Revenue, 709
N.E.2d 766, 767 n.5 (Ind. Tax Ct. 1999).
Adjusted gross income, as regards corporations, means the same as taxable income
(as that term is defined by 26 U.S.C. § 63), with certain modifications.
See Ind. Code Ann. § 6-3-1-3.5(b) (Michie Supp. 1986) (subsequently amended).
Effective July 1, 1987, the rate of tax increased from three percent
to three and four-tenths percent.
See P.L. 390-1987(ss), § 37; Ind. Code
Ann. § 6-3-2-1(b) (West 2000).
The current version of section 6-3-2-2(a)(5) omits the phrase having a situs
in this state and replaces it with if the receipt from the intangible
is attributable to Indiana under section 2.2 of this chapter.
Ann. § 6-3-2-2.2 (West 2000), effective January 1, 1990, discusses when income from,
among other things, certain loans, sales contracts and dividends is attributable to Indiana.