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 This document is effective on its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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 this Letter of Findings.

Real Estate Investment Trust ("REIT") provided sufficient documentation to show that it is not a Captive REIT. Therefore the Department's assessment is incorrect. Since the assessment is incorrect the penalty assessment is also incorrect.

I. Corporate Income Tax - Captive REIT.

Authority: IC § 6-3-1-3.5; IC § 6-3-1-34.5; 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); Indiana Dep't of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); I.R.C. § 856; I.R.C. § 857.

Taxpayer protests the assessment of income tax.

II. Tax Administration - Penalty.

Authority: IC § 6-8.1-10-1(a); IC 6-8.1-10-2.1(d); 45 IAC 15-11-2(b); 45 IAC 15-11-2(c).

Taxpayer protests the penalty assessed.

Taxpayer is a REIT operating in Indiana. Taxpayer filed a corporate income tax return with the Indiana Department of Revenue ("Department"). Taxpayer filed an amended Indiana return reporting its net income prior to payment of dividends and claimed a deduction for dividends paid by Taxpayer. However, the Department subsequently disallowed the deduction and treated that amount as an addback because the Department deemed Taxpayer to be a Captive REIT which is required to addback dividends distributed to shareholders.

Upon review, the Department adjusted line one of the IT-20 to be zero, which was Taxpayer's federal taxable income. However, the Department did not adjust the addback for dividends paid by a captive REIT. These adjustments resulted in an assessment for Taxpayer. Taxpayer protested the assessment, a hearing was held, and this Letter of Findings results.

I. Corporate Income Tax - Captive REIT.

The Department would like to first address the procedural posture of this issue. The Department disagreed with Taxpayer's amended return and assessed Taxpayer for additional tax due. The assessment went to Taxpayer as a Demand Notice. No Proposed Assessment was sent to Taxpayer prior to the Demand Notice. The Department is notified that it did not follow the process described in IC 6-8.1-5-1. After the Department amended Taxpayer's return, the Department should have issued a "proposed assessment" rather than a "demand notice" for the tax due difference. The "proposed assessment" allows Taxpayer to protest the assessment or pay it within 60 days of the assessment. IC § 6-8.1-5-1(d). By going straight to a "demand notice for payment," Taxpayer was not afforded the statutory right to protest.

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. Also, when courts examine "a statute that an agency is 'charged with enforcing . . . [the courts] defer to the agency's reasonable interpretation of [the] statute even 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) (internal citation omitted).

Taxpayer protests the imposition of corporate income tax. In particular, Taxpayer argues that it is not a captive REIT and thus should not be required to add back the dividends paid to its owners.

I.R.C. § 856 permits entities meeting certain ownership and operation tests to be classified as REITs for federal tax purposes.

. . .

This Taxpayer has provided sufficient documentation to show that it meets these tests.

I.R.C. § 857(b)(1) imposes a tax on the "real estate investment trust taxable income" at the rates otherwise provided for C corporations. I.R.C. § 857(b)(2) provides that "real estate investment trust taxable income" is the taxable income of a REIT, with several modifications. One of the modifications under I.R.C. § 857(b)(2)(B) is a deduction for dividends paid.

Indiana law requires certain REITs to add back dividends paid; this provision is currently codified at IC § 6-3-1-3.5(b)(10). This provision requires a REIT to:

IC § 6-3-1-34.5 provides that:

In this case, Taxpayer has provided sufficient documentation to show it is not a Captive REIT. To be considered a Captive REIT, a REIT must meet the tests set forth under IC § 6-3-1-34.5(a)(1), (a)(2), and any one of the criteria set forth under (a)(3). Taxpayer does not meet the criteria for (a)(2) and (a)(3) and therefore do not meet the definition of a Captive REIT under IC § 6-3-1-34.5. Taxpayer has met its burden and described under IC § 6-8.1-5-1(c).

Taxpayer's protest is sustained.

II. Tax Administration - Penalty.

Taxpayer requests the penalty be abated. IC § 6-8.1-10-2.1 provides that:

The regulation which controls the application of penalty is 45 IAC 15-11-2(b), which states:

Taxpayer's protest is sustained.

Taxpayers established that they do not owe the tax assessment, as discussed in Issue I. Taxpayers have been sustained on their protest of the imposition of assessed income tax, therefore, the issue of penalty and interest assessed is moot.