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 This document is effective as of its date of publication and remains in effect until the date it is superseded by the publication of another document in the Indiana Register. The "Holding" section of this document is provided for the convenience of the reader and is not part of the analysis contained in these Letters of Findings.

Shareholders provided sufficient documentation to demonstrate that the Department's proposed assessment was incorrect in part and correct in part

I. Corporate Income Tax–Calculation.

Authority: IC § 6-3-1-3.5; IC § 6-8.1-5-1; I.R.C. § 179; I.R.C. § 168; Indiana Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); 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. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); 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); 2012 IT-20S - Indiana S Corporation Income Tax Booklet; Commissioner's Directive 19 (August 2003); Black's Law Dictionary 394 (9th ed. 2009).

Taxpayers protest the denial of a claimed subtraction from Indiana adjusted gross income.

Taxpayers are shareholders of a Chapter S Corporation ("S-Corp"). S-Corp is a car dealership operating in Indiana. The Indiana Department of Revenue ("Department") audited the S-Corp for the tax years 2011-2013. The Department adjusted S-Corp's return. Because Taxpayers elected pass through treatment, Taxpayers' individual returns were therefore adjusted. Taxpayers protest the proposed assessment and the adjustments. An administrative hearing was conducted and this Letter of Findings results. Further facts will be supplied as required.

I. Corporate Income Tax–Calculation.

As a threshold issue, it is the Taxpayers' responsibility to establish that the existing adjusted gross income tax assessment is incorrect. As stated in IC § 6-8.1-5-1(c), "The notice of proposed assessment is prima facie evidence that the department's claim for the unpaid tax is valid. The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made." Indiana Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007). Thus, a taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department's position is wrong. Further, when an agency is charged with enforcing a statute, the courts defer to the agency's reasonable interpretation of that statute "over an equally reasonable interpretation by another party." Indiana Dep't of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Thus, interpretations of Indiana tax law contained within this decision, as well as the preceding audit, are entitled to deference. 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).

An S Corporation-such as Taxpayers' dealership-is "[a] corporation whose income is taxed through its shareholders rather than through the corporation itself." Black's Law Dictionary 394 (9th ed. 2009); see also, I.R.C. §§ 1361-62. Pursuant to IC § 6-3-1-3.5, the Indiana income tax rules piggyback on the federal income tax statutes and regulations. Therefore, the federal rules and case law are generally applicable to determine an individual shareholder's tax liability. Furthermore, any additional income received by the S-Corp as a profit passes through to the individual shareholders as income.

The Department adjusted Taxpayers' returns because S-Corp failed to properly add back the excess I.R.C. § 179 deduction taken on the Federal 1120S return for the years 2011 and 2012. The audit report cited to IC § 6-3-1-3.5(a)(19) stating that, ". . . any taxpayer that placed Section 179 property (as defined in Section 179 of the Internal Revenue Code) must add-back the Section 179 deductions in a total amount exceeding twenty-five thousand dollars."

Taxpayers argue that the assessments stem from a prior return preparer's failure to properly account for Section 179 depreciation. Specifically, Taxpayers state "[The] prior accountant netted Section 179 depreciation adjustments with the regular Federal/Indiana adjustment instead of reporting the differences on their respective lines on Form IT-20S. Attached is an e-mail from the prior accountant explaining the differences and how they reported them on the corporate income tax returns for 2011 and 2012." Taxpayers explain that the components of the Federal and Indiana depreciation differences were netted on the Indiana corporate tax return. The email went on to break down the Federal and Indiana depreciation expenses including Section 179 and "bonus depreciation."

To determine a taxpayer's Indiana adjusted gross income, Indiana begins with a taxpayer's federal taxable income, subject to modifications provided under IC § 6-3-1-3.5(a). During the hearing, Taxpayers provided documents modifying Taxpayers' claimed expenses pertaining to depreciation of certain real and personal property. Taxpayers' claims rely on adjustments to federal adjusted gross income allowed under Sections 167, 168, and 179 of the Internal Revenue Code.

IC § 6-3-1-3.5 states in relevant part(s):

I.R.C. § 179 for the relevant years, provides in relevant part:

Bonus depreciation is defined under I.R.C. § 168(k), which states in relevant part:

To determine how to calculate Taxpayers' Indiana Adjusted Gross Income Tax ("AGIT") the Department looks to S Corporation Income Tax Booklet and Commissioner's Directive 19, 26 Ind. Reg. 3762 (August 2003).

Although the years at issue are 2011 and 2012 the 2012 IT-20S - Indiana S Corporation Income Tax Booklet is substantially similar to the 2011 IT-20S booklet for Addback for bonus depreciation and I.R.C. § 179 excess expense. The 2012 IT-20S - Indiana S Corporation Income Tax Booklet states in relevant part:

• Addback for bonus depreciation - An amount attributable to bonus depreciation in excess of any regular depreciation that would be allowed if an election under IRC Section 168(k) had not been made as applied to property in the year that it was placed into service should be added or subtracted. Taxpayers who own property for which additional first-year special depreciation for qualified property was allowed in the current taxable year or in an earlier taxable year must add or subtract an amount necessary to make their adjusted gross income equal to the amount computed without applying any bonus depreciation. This includes 50[percent] bonus depreciation. The subsequent depreciation allowance is calculated on the state's stepped-up basis until the property is disposed. Enclose a statement explaining any adjustment. (3-digit code: 104)

• Addback for Section 179 expense excess - Enter any IRC Section 179 adjustment claimed for federal tax purposes that exceeds the amount recognized for state tax purposes. (3-digit code: 105).

In addition, Commissioner's Directive 19 provides further guidance to taxpayers on how taxpayers are to calculate bonus depreciation as defined under I.R.C. §168.

Taxpayers' explanations and documentation are sufficient to show how the previous preparer calculated Taxpayers' original returns. Taxpayers also provided previous returns along with depreciation schedules. Taxpayers' documentation shows the Department's assessment is incorrect; however, Taxpayers' documentation and explanation do not reflect the changes they want to change to the proposed assessment. In this instance, the adjustments will be for the entity's return based on its audit report (Control Number 531010) and the shareholders' proposed assessments will be adjusted accordingly in a supplemental audit. Taxpayers provided their previous returns to show no depreciation expenses under I.R.C. §§ 168(k) and 179 were taken in previous years. For 2011 the Department incorrectly allowed Taxpayers' reported deduction of $6,694 in bonus depreciation. In the depreciation schedules provided by Taxpayers, there is no indication of bonus depreciation taken. Therefore, the Department will remove the $6,694 addback. However, the Department's adjustment of the $23,033 as an addback for I.R.C. § 179 deprecation taken on the 2011 federal return is correct. For 2012, Taxpayers were able to show that they did take $8,000 in bonus depreciation on the 2012 federal return. Therefore, the $21,205 bonus deprecation is incorrect and needs to be adjusted to $8,000. The I.R.C. § 179 addback was proper for 2012.

Taxpayers were able to provide federal returns and depreciation schedules to prove that the proposed assessments are correct in part and incorrect in part. The Department will conduct a supplemental audit based on the above calculations for each shareholder.

Taxpayers' protest is sustained in part subject to a supplemental audit.