NOTICE: IC § 6-8.1-3-3.5 and IC § 4-22-7-7 require the publication of this document in the Indiana Register. This document provides the general public with information about the Department's official position concerning a specific set of facts and issues. This document is effective as of its date of publication and remains in effect until the date it is superseded by the publication of another document in the Indiana Register.

I. Indiana Individual Income Tax - Indiana Income.

Authority: IC § 6-3-2-1; IC § 6-3-2-2; IC § 6-3-4-8; 45 IAC 3.1-1-25; IC § 6-8.1-5-1; Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); Indiana Dep't. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012); Miller Brewing v. Indiana Dept. of State Revenue, 903 N.E. 2d 64 (Ind. 2009).

Taxpayers protest the proposed assessment for the 2012 tax year, claiming that they properly reported the amount of their income that was subject to the Indiana income tax.

II. Tax Administration - Underpayment Penalty and Negligence Penalty.

Authority: IC § 6-3-4-4.1; IC § 6-8.1-5-1; IC § 6-8.1-10-2.1; Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); Indiana Dep't. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012); 45 IAC 15-11-2.

Taxpayers protest the imposition of the underpayment penalty and the negligence penalty.

Taxpayers (also referred to as "Husband" and/or "Wife") are individuals with a current Florida address. Taxpayers also own real property and tangible personal property, including several automobiles, in Indiana. Husband incorporated an Indiana company in 1999. The company was eventually acquired by a multinational company and became a subsidiary of that multinational company. Husband continued to work for the company as the president of that subsidiary located in Indiana ("Indiana Employer"), whose official filings to the Indiana Secretary of State listed Husband as the president - residing in his Indiana residence - until June 2013. The records of the Indiana Department of Revenue ("Department") also show that Husband during this time continues to serve as the president (a responsible officer) of the Indiana Employer.

In late 2013, Taxpayers filed their married-filing-jointly Indiana income tax return, IT-40 PNR, for the 2012 year ("Return at Issue"), claiming a refund of $2,543. Taxpayers' filing included a W-2 issued by the Indiana Employer, which withheld Indiana State Income Tax, in the amount of $2,542.99. The Department reviewed the return as filed and adjusted the Return at Issue. The Department reclassified the W-2 income as Indiana income and allowed a $1,000 deduction (Schedule C), a $1,268 exemption (Schedule D), and a $2,543 credit (Schedule F) based on the information stated in the box 17 of the Indiana Employer's W-2. The Department's adjustment resulted in a deficiency of Taxpayers' 2012 Indiana income tax. As a result, the Department denied the refund and assessed Taxpayers additional income tax, interest, negligence penalty, and underpayment penalty.

Taxpayers timely protested the assessments. An administrative phone hearing was held, during which Taxpayers' representatives explained the basis for the protest. This Letter of Findings ensues. Additional facts will be provided as necessary.

I. Indiana Individual Income Tax - Indiana Income.

As a threshold issue, all tax assessments are prima facie evidence that the Department's claim for the unpaid tax is valid; the taxpayer bears the burden of proving that any assessment is incorrect. IC § 6-8.1-5-1(c); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007); Indiana Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012). Thus, the taxpayer is required to provide documentation explaining and supporting its challenge that the Department's assessment is wrong. Poorly developed and non-cogent arguments are subject to waiver. Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138, 1145 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480, 486 n.9 (Ind. Tax Ct. 2012).

Also, as to the matter of tax assessments, "each assessment and each tax year stands alone." Miller Brewing v. Indiana Dept. of State Revenue, 903 N.E. 2d 64, 69 (Ind. 2009) (referencing Glass Wholesalers v. Ind. Bd. of Tax Comm'rs, 568 N.E.2d 1116, 1124 (Ind. Tax Ct.1991)). This Letter of Findings addresses Taxpayers' protest of the Department's proposed assessments for the 2012 tax year only. Therefore, Taxpayers' arguments and supporting documents will be discussed and considered in this protest only to the extent they are relevant to the 2012 year.

Taxpayers, in this instance, filed the Return at Issue, claiming that they are entitled to a refund of $2,543. The Return at Issue stated that Taxpayers' Indiana income was $1,000 for the 2012 tax year. Taxpayers claimed that the W-2 income at issue was not Indiana income because they are Florida residents, and Husband provided his "business advice" to the Indiana Employer from their residence in Florida.

However, upon review the Department determined that Taxpayers erred in reporting their 2012 income. Thus, the Department reclassified Husband's W-2 income as Indiana income that was subject to Indiana income tax. As explained in detail below, this Letter of Findings finds: (1) that whether Taxpayers were Florida residents during 2012 is irrelevant and (2) all publically available information and the verifiable documents provided by Taxpayers demonstrate that Husband worked for the Indiana Employer in Indiana during some portion of the 2012 tax year. Therefore, the Husband's 2012 income from (paid by) the Indiana Employer was income derived from sources within Indiana, which was subject to Indiana income tax.

Indiana imposes a tax "upon the adjusted gross income of every resident person, and on that part of the adjusted gross income derived from sources within Indiana of every nonresident person." IC § 6-3-2-1(a). IC § 6-3-2-2(a) (as in effect for the tax year 2012), which outlines income derived from Indiana source income, in relevant part, states:

In this case, Taxpayers claimed that Husband's W-2 income was not subject to Indiana income tax because they are Florida residents. Taxpayers further asserted that their Indiana income for 2012 was only $1,000, which was a winning (gain) from a purchase of the Indiana Hoosier Lottery. Taxpayers further contended that they were entitled to the $2,543 refund.

Throughout the protest, Taxpayers offered copies of various depositions of witnesses taken for another matter pending before the Indiana Tax Court. Taxpayers stated that, Husband sold his business in 2006. Taxpayers further maintained that they subsequently decided to move and to live in Florida. Nonetheless, Husband continued to provide "business advice" to the Indiana Employer.

Taxpayers further stated that, in mid 2011, after one executive member of the Indiana Employer died unexpectedly, Husband returned to work in Indiana. Taxpayers asserted that, several months after Husband returned to Indiana, the Indiana Employer chose a new replacement as its president. Taxpayers stated that Husband was physically present in the Indiana Employer's office "in 2012 was for a kick-off meeting on the first business day of 2012 to announce the hiring and transition of the duties" to a new president. Taxpayers maintained that Husband only spent a few hours in Indiana to perform the required services. Taxpayers thus maintained that Husband's "several hundred thousand dollars" of W-2 income was not subject to Indiana income tax because he was not required to be physically present at the Indiana Employer's office in Indiana. Rather, Husband provided his "business advice" to Indiana Employer over the phone from their Florida residence. To support their protest, in addition to Husband's W-2s from previous years, Taxpayers submitted documents which include copies of their Florida Real Estate Property Tax Bills for 2011 and 2012, their Florida Driver Licenses, a Golf Membership Certificate of a Florida Golf & Country Club, W-2G Forms for 2012, and documents showing that they removed the homestead credits on their Indiana residence in February 2013.

Upon reviewing Taxpayers' supporting documentation, however, Taxpayers are mistaken. First, Taxpayers have reported the $1,000 lottery winning in their Return at Issue. The Department only adjusted and reclassified Husband's W-2 income as Indiana income for the 2012 tax year. Thus, the issue here is whether Husband's W-2 income paid by (or from) an Indiana company (namely, the Indiana Employer) during the 2012 tax year was Indiana source income and thus was subject to Indiana income tax pursuant to IC § 6-3-2-2(a)(4). Based on the adjustments made by the Department, Taxpayers' residence (or domicile) during 2012 is irrelevant and beyond the scope of this protest.

Second, all publicly verifiable information, such as the Indiana Employer's official filings with the Indiana Secretary of State, listed Husband - residing at his Indiana residence - as its president until June 2013. The publicly verifiable information and Taxpayers' documentation together demonstrated that Husband continued working, as the president, for the Indiana Employer after December 31, 2011, through and including December 31, 2012. Specifically, there is no dispute that Husband was in Indiana and he was at the Indiana Employer's office to perform his duties as the president of the Indiana Employer in early 2012. Taxpayers' supporting documentation also showed that they stayed in Indiana and lived at their Indiana residence for some time in 2012, during which Taxpayers purchased an Indiana Hoosier Lottery ticket and Wife claimed the $1,000 winning in October 2012. Taxpayers provided no verifiable documents to support the assertion that Husband simply offered his "business advice" to the Indiana Employer over the phone from their Florida home during 2012. Rather, Taxpayers' supporting documentation demonstrated otherwise.

Finally, according to its own business records, the Indiana Employer who continued working with Husband throughout 2012, acknowledged its withholding reasonability and withheld Indiana income tax on Husband's W-2 compensation. The Indiana Employer subsequently issued the W-2 to Husband and recorded the "State Income Tax" in box 17 of the W-2 pursuant to IC § 6-3-4-8, because Husband, as the president of the Indiana Employer, worked for and performed his duties in Indiana and received compensation from the Indiana Employer, during the 2012 tax year.

Therefore, based on the information available and/or presented, given the totality of the circumstances, in the absence of other verifiable documentation, in addition to Wife's $1,000 lottery winning, the Department reasonably concluded that Husband's W-2 income paid by the Indiana Employer for 2012 was Indiana source income and was subject to Indiana income tax pursuant to above referenced Indiana law and regulations.

Taxpayers' protest is respectfully denied.

II. Tax Administration - Underpayment Penalty and Negligence Penalty.

As mentioned earlier, all tax assessments are prima facie evidence that the Department's claim for the unpaid tax is valid; the taxpayer bears the burden of proving that any assessment is incorrect. IC § 6-8.1-5-1(c); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007); Indiana Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012). Thus, the taxpayer is required to provide documentation explaining and supporting its challenge that the Department's assessment is wrong. Poorly developed and non-cogent arguments are subject to waiver. Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138, 1145 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480, 486 n.9 (Ind. Tax Ct. 2012).

Taxpayers protested the imposition of the underpayment penalty and negligence penalty.

Taxpayers protested the imposition of the negligence penalty.

Pursuant to IC § 6-8.1-10-2.1(a), the Department may assess a ten (10) percent negligence penalty if the taxpayer:

The Department may waive a negligence penalty as provided in 45 IAC 15-11-2(c), in part, as follows:

Taxpayers claimed that, based on the advice of a tax professional, Husband's W-2 income for the 2012 year was not Indiana source income and thus was not subject to the Indiana income tax. Thus, Taxpayers asserted that the negligence penalty should be abated. However, Taxpayers voluntarily entered into the principal-agent relationship and employed the tax professional to advise and file their tax returns. Thus, Taxpayers, as the principal, remain responsible. Also, Taxpayers were aware that the nature of the income paid by the Indiana Employer was subject to Indiana income tax. Since Taxpayers did not provide sufficient documentation to demonstrate that their failure was not due to negligence, the Department is not able to abate the negligence penalty.

The Department imposed an underpayment penalty because Taxpayers failed to timely remit sufficient amount of their estimated payments of adjusted gross income tax under IC § 6-3-4-4.1(b).

IC § 6-3-4-4.1, in relevant part, states:

In this case, the Department notes that, in Husband's W-2, the Indiana Employer has withheld a reasonable amount of the Indiana income tax for the 2012 tax year. Therefore, the Department agrees that this underpayment penalty is not appropriate and should be abated.

Taxpayers' protest of the negligence penalty, Issue II.A., is respectfully denied. Taxpayers' protest of the underpayment penalty, Issue II.B., is sustained.

For the reasons discussed above, Taxpayers' protest of the Department's proposed assessment for the 2012 tax year, Issue I, is denied.

As to Issue II, Taxpayers' protest of the underpayment penalty is sustained. Taxpayers' protest of the negligence penalty, however, is respectfully denied.