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 This document is effective as of its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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

Individuals did not establish that they had no additional Indiana income during the tax years. Therefore, the Department's assessments for additional Indiana income tax were not proven incorrect. Penalties were abated.

I. Income Tax–Imposition.

Authority: IC § 6-3-2-1; IC § 6-8.1-5-1; Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007).

Taxpayers protest the imposition of Indiana individual income tax.

II. Tax Administration–Penalty.

Authority: IC § 6-8.1-10-2.1; 45 IAC 15-11-2.

Taxpayers protest the imposition of penalties.

Taxpayers are a married couple and are Indiana residents. As the result of a sales tax audit of a business ("Business") owned by Taxpayers covering the tax years 2013, 2014, and 2015, the Indiana Department of Revenue ("Department") determined that the business had additional income from underreported sales. The Department issued proposed assessments for additional sales tax and interest to Business. Since the business was a pass-through entity, the additional income from the additional sales was passed to Taxpayers. The Department therefore issued proposed assessments for additional Indiana individual income tax, penalties, and interest for the tax years. Separately, Business protested the proposed assessments of sales tax on the grounds that no additional sales had occurred. Business' protest was denied in Letter of Findings 04-20170160. In the instant Indiana individual income tax protest, Taxpayers protested that the business did not underreport sales and that there was no additional income to pass-through to them. An administrative hearing was held via telephone and this Letter of Findings results. Further facts will be supplied as required.

I. Income Tax–Imposition.

Taxpayers protest that they did not have additional Indiana individual income during the tax years 2013-15. The Department based its determination that additional tax was due on the determination that Business had underreported sales during those years and that the additional sales resulted in additional income which passed-through to Taxpayers. Taxpayers based their protest of the individual income tax assessments on the ground that Business did not have additional sales or income to pass-through to them.

As a threshold issue, it is the Taxpayer's responsibility to establish that the existing 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 Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007). Consequently, a taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department's position is wrong. Further, "[w]hen [courts] examine a statute that an agency is 'charged with enforcing. . .[courts] defer to the agency's reasonable interpretation of [the] statute even over an equally reasonable interpretation by another party.'" Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Thus, all interpretations of Indiana tax law contained within this decision, as well as the audit, shall be entitled to deference.

The Department refers to IC § 6-3-2-1(a), which states:

Therefore, if a taxpayer has income derived from sources in Indiana, that income is subject to income tax. In this case, the Department determined that Taxpayers had additional income via income which flowed through from Business.

Taxpayers base their protest in this case on Business' protest in a separate case. The Department held a separate hearing and wrote a separate Letter of Findings for Business' protest. The Department denied Business' protest in Letter of Findings 04-20170160. Therefore, since the Department has denied Business' protest and since Taxpayers' protest is wholly dependent on the outcome of Business' protest, Taxpayers' protest is also denied. Taxpayers have not met the burden of proving the proposed assessments wrong, as required by IC § 6-8.1-5-1(c).

Taxpayers' protest is denied.

II. Tax Administration–Negligence Penalty.

Taxpayers protest the imposition of penalties pursuant to IC § 6-8.1-10-2.1. Penalty waiver is permitted if the taxpayer shows that the failure to pay the full amount of the tax was due to reasonable cause and not due to willful neglect. 45 IAC 15-11-2(b) clarifies the standard for the imposition of the negligence penalty as follows:

The standard for waiving the negligence penalty is given at 45 IAC 15-11-2(c) as follows:

Taxpayers protest the Department's assessment of penalties. Taxpayers state that they at all times exercised the level of reasonable care, caution, and diligence expected of an ordinary taxpayer. After review of the documentation and analysis provided in the protest process, the Department agrees with Taxpayer's position. While Taxpayer has not been sustained on the imposition of Indiana individual income tax in Issue I above, Taxpayers also established that Business had been audited before with no changes and so Taxpayers thought that Business was in compliance with its Indiana tax duties. Therefore, waiver of penalties is warranted under 45 IAC 15-11-2(c).

Taxpayer's protest to the imposition of penalties is sustained.

Taxpayer is denied in Issue I regarding the imposition of Indiana individual income tax. Taxpayer is sustained in Issue II regarding the imposition of penalties.