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 This document is effective on its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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

Out-of-State Corporations were required to exclude their parent company from their 2013 and 2014 Indiana consolidated returns because the parent company did not have adjusted gross income derived from sources within Indiana and therefore was not eligible to file the Indiana consolidated returns with Out-of-State Corporations. On the second "Throwback" rule issue, for apportionment purposes, the numerator of each member's sales factor was required to include their sales to the purchasers' states where each member - on a separate basis - was not taxable in those purchasers' states.

I. Corporate Income Tax - Imposition - Consolidated Filings and Apportionment.

Authority: 15 U.S.C. § 381; I.R.C. § 63; I.R.C. § 1504; IC § 6-3-1-3.5; IC § 6-3-1-11; IC § 6-3-1-15; IC § 6-3-2-1; IC § 6-3-2-2; IC § 6-3-4-14; 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); Miller Brewing Co. v. Indiana Dep't of State Revenue, 903 N.E.2d 64 (Ind. 2009); 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); Indiana Dep't of State Rev. v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Hunt Corp. v. Department of State Revenue, 709 N.E.2d 766 (Ind. Tax Ct. 1999); Indiana Dep't of Revenue v. United Parcel Service, Inc., 969 N.E. 2d 596 (Ind. 2012); Nw. States Portland Cement Co. v. State of Minn., 358 U.S. 450 (1959); Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768 (1992); Kraft Gen. Foods, Inc. v. Iowa Dep't of Revenue & Fin., 505 U.S. 71 (1992); Indiana Dep't of State Revenue v. Kimberly-Clark Corp., 416 N.E.2d 1264 (Ind. 1981); Wisconsin Dep't. of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992); Univ. of Phoenix, Inc. v. Indiana Dep't of State Revenue, 88 N.E.3d 805 (Ind. Tax Ct. 2017); 45 IAC 3.1-1-38; 45 IAC 3.1-1-111.

Taxpayers protest the exclusion of the parent company from the Indiana consolidated returns for the tax years 2013 and 2014.

II. Corporate Income Tax - Apportionment (Sales) - Numerator - Throwback Sales.

Authority: IC § 6-3-2-1; IC § 6-3-2-2; IC § 6-8.1-5-1; IC § 6-8.1-5-4; 45 IAC 3.1-1-38; 45 IAC 3.1-1-53; 45 IAC 3.1-1-64; Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Sherwin-Williams Co. v. Indiana Dep't. of State Revenue, 673 N.E.2d 849 (Ind. Tax Ct. 1996).

Taxpayers protest that the Department's adjustments - throwing sales Taxpayers made to their purchasers in other states back to Indiana - which increased the numerator of the sales factor of each member of their Indiana consolidated group.

Company M ("Parent"), Sub A, Sub B, and Sub M are out-of-state companies. Sub A, Sub B, and Sub M (collectively, "Taxpayers"; individually, "Taxpayer") have facilities in Indiana and have conducted business in Indiana since the late 1990s. Beginning in the late 1990s through 2012, each Taxpayer filed its own Indiana corporate income tax returns (IT-20 Forms); each Taxpayer individually reported and remitted its Indiana corporate income tax. On the other hand, Parent and its subsidiaries (other than Taxpayers) did not file any Indiana income tax returns during those years. Subsequently after 2012, Taxpayers, Parent, and an additional six (6) affiliates - a total of ten (10) entities - elected to file their Indiana corporate income tax returns for the years 2013 and 2014 on a consolidated basis ("Consolidated Returns at Issue").

In late 2015, the Indiana Department of Revenue ("Department") audited the Consolidated Returns at Issue. Pursuant to the audit, the Department determined that Parent and the six affiliates were not eligible to file Indiana corporate income tax returns on the consolidated basis. The audit thus excluded Parent and the six affiliates from the Consolidated Returns at Issue. The audit further adjusted Taxpayers' apportionment factors recalculating Taxpayers' Indiana income tax liability. As a result, Taxpayers, together as a consolidated group, were assessed additional Indiana corporate income tax for 2013 and 2014.

In response to the audit adjustments, Taxpayers amended their 2013 consolidated return in late 2017, removing the six affiliates from the consolidated group. That amended return consisted of Taxpayers and Parent only in the consolidated group. Taxpayers requested a refund pursuant to their amended return. The Department reviewed the amended return and denied that request.

Taxpayers timely protested a portion of the audit assessments and the refund denial. A hearing was held. This final determination ensues. Additional facts will be provided as necessary.

I. Corporate Income Tax - Imposition - Consolidated Filings and Apportionment.

After reviewing the Consolidated Returns at Issue, the amended 2013 return, and the relevant business records, the Department determined that only Taxpayers (Subs A, B, and M) qualified to file, reporting their Indiana income tax, on a consolidated basis because only Taxpayers had adjusted gross income (or loss) derived from sources within Indiana - a taxable nexus in Indiana - for the 2013 and 2014 years. The Department thus removed Parent and its six (6) subsidiaries from the consolidated group, resulting in additional assessments and a refund denial.

Taxpayers "agreed to exclude . . . six (6) affiliates." Taxpayers, however, contended that the Department erroneously excluded Parent from Taxpayers' consolidated group because Parent had taxable nexus in Indiana and had adjusted gross income derived from sources within Indiana. As such, Taxpayers subsequently amended their 2013 amended return, including Parent in their consolidated filing.

Accordingly, the issue is, for Indiana income tax purposes, whether the Department erroneously excluded Parent, an out-of-state manufacturer, from Taxpayers' consolidated Indiana corporate income tax returns pursuant to Indiana law.

In addition to the audit assessments, the refund denial regarding the 2013 amended return in this case stemmed from the audit's proposed assessments concerning the Consolidated Returns at Issue. Thus, 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). "Each assessment and each tax year stands alone." Miller Brewing Co. v. Indiana Dep't of State Revenue, 903 N.E.2d 64, 69 (Ind. 2009). 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, "all statutes are presumptively constitutional." Indiana Dep't of State Rev. v. Caterpillar, Inc., 15 N.E.3d 579, 587 (Ind. 2014). When an agency is charged with enforcing a statute, the jurisprudence defers to the agency's reasonable interpretation of that statute "over an equally reasonable interpretation by another party." Caterpillar, Inc., 15 N.E.3d at 583.

Indiana imposes a tax on the adjusted gross income of every corporation that has adjusted gross income derived from sources within Indiana. IC § 6-3-2-1(b); IC § 6-3-2-2. To compute the income subject to Indiana corporate income tax, Indiana adopts a multistep process to calculate a corporation's taxable Indiana adjusted gross income. Caterpillar, Inc., 15 N.E.3d at 581. Indiana generally follows the tax principles established in the federal law. IC § 6-3-1-11. Indiana statutes refer to the Internal Revenue Code to efficiently compute what is considered the taxpayer's Indiana income tax. IC § 6-3-1-3.5(b) provides the starting point to determine a corporation's taxable income, stating that the term "adjusted gross income" shall mean, "In the case of corporations the same as 'taxable income' (as defined in Section 63 of the Internal Revenue Code) adjusted as follows . . . ." In determining the taxpayer's Indiana adjusted gross income, Indiana first refers to I.R.C. § 63 as the beginning point. In other words, when used "[i]n the case of corporations," the term "'adjusted gross income' shall mean the same as 'taxable income' (as defined in Section 63 of the Internal Revenue Code)" with certain modifications. IC § 6-3-1-3.5(b).

IC § 6-3-2-2 (applicable during 2013 and 2014), in relevant part, further provides that:

Thus, for Indiana income tax purposes, a "taxpayer" is "any person or any corporation subject to taxation under this article." IC § 6-3-1-15. In this particular case, a corporation that is subject to tax under IC 6-3 - i.e., that has taxable nexus in Indiana - is the corporation that has "adjusted gross income from sources within Indiana." IC § 6-3-2-1(b); IC § 6-3-4-1(3); See Hunt Corp. v. Department of State Revenue, 709 N.E.2d 766, 771 (Ind. Tax Ct. 1999)(explaining that "[i]n order to determine what income is attributable to Indiana, it must be first determined whether the income sought to be attributed is business or non-business income" and applying rules of apportionment or allocation accordingly); see also Indiana Dep't of Revenue v. United Parcel Service, Inc., 969 N.E. 2d 596, 599-603 (Ind. 2012). Therefore, for the corporation to have "adjusted gross income from sources within Indiana," it must have taxable income including either Indiana apportionment factors resulting in deemed Indiana business income (or losses) or nonbusiness income (or losses) that is allocated to Indiana. IC § 6-3-2-2; Hunt Corp., 709 N.E.2d at 781.

Public Law 86-272, ("P.L. 86-272") (codified at 15 U.S.C. § 381) establishes minimum standards for a state to impose "a net income tax on the income derived within such State." Specifically, 15 U.S.C. § 381(a) states, in part:

15 U.S.C. § 381(c) further states:

Accordingly, the assumption is, in every transaction, at least one state has the authority to impose tax on income derived from the sale of tangible personal property. See generally Nw. States Portland Cement Co. v. State of Minn., 358 U.S. 450 (1959); Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768 (1992); Kraft Gen. Foods, Inc. v. Iowa Dep't of Revenue & Fin., 505 U.S. 71 (1992). A state could impose tax on a taxpayer if its activity within the state exceeds "solicitation of orders."

In Indiana Dep't of State Revenue v. Kimberly-Clark Corp., 416 N.E.2d 1264 (Ind. 1981), the court stated that "each case must be judged upon its own merits, with particular emphasis placed upon the totality of a corporation's activities within a state." ld. at 1268. The Kimberly-Clark court found that the nonresident taxpayer did not exceed solicitation of orders for sales in Indiana because it only employed several salesmen who lived in Indiana to perform activities such as, checking inventories, checking shelf facings, and explaining products. Id. at 1266. The court explained that solicitation of orders for sales includes "sundry activities so long as those activities (are) closely related to the eventual sale of a product." Id. (Internal citation omitted). The court concluded that the taxpayer's activities in Indiana were "inextricably related to solicitation" or as "acts of courtesy," and, therefore, the taxpayer was not taxable in Indiana. Id.

The U.S. Supreme Court refined the "mere solicitation" standard in Wisconsin Dep't. of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992). In Wrigley, the taxpayer, a manufacturer of chewing gum, claimed that P.L. 86-272 prohibits Wisconsin from taxing its income because (1) it did not have any office (or real estate) in Wisconsin and (2) its business activities in Wisconsin were within the scope of solicitation of orders and were de minimis. Id. at 235. The Court disagreed and, in relevant part, stated:

Ruling in favor of Wisconsin, the Court thus held that the taxpayer in Wrigley was subject to Wisconsin's net income tax because its business activities in Wisconsin exceeded P.L. 86-272's protection. Id. at 235.

Finally, for Indiana corporate income tax purposes, if a corporation and also its affiliates all have adjusted gross income derived from sources within Indiana, they may consent to report their apportionable income as a group on a consolidated basis pursuant to IC § 6-3-4-14(a), which in relevant part provides "[a]n affiliated group of corporations shall have the privilege of making a consolidated return with respect to the taxes imposed by IC 6-3." Indiana adopts the definition of "affiliated group" outlined in I.R.C. § 1504 with one condition that the entities (namely, members of the affiliated group) must have "adjusted gross income derived from sources within Indiana" under IC § 6-3-2-2. IC § 6-3-4-14(b). "'Adjusted Gross Income derived from sources within the state' means either income or losses derived from activities within the state." 45 IAC 3.1-1-111. In other words, the law is clear: each entity must have - a taxable nexus in Indiana - "adjusted gross income derived from sources within Indiana." IC § 6-3-4-14(a); 45 IAC 3.1-1-111. (Emphasis added).

For the tax years 2013 and 2014, Taxpayers in this case filed their Indiana income tax returns, which included Parent in their consolidated group. The Department's audit, however, found that Parent had no adjusted gross income derived from sources within Indiana pursuant to Indiana law. The audit noted further that Parent (through its three divisions) does not have payroll or property in Indiana and merely made sales of goods, which were picked up in Ohio or delivered to Indiana by third-party common carriers. These "destination sales" did not exceed solicitation of sales under P.L. 86-272. The audit concluded that Parent was protected under P.L. 86-272. Based on those findings, the audit thus determined that Parent did not have adjusted gross income derived from sources within Indiana and was not subject to income tax in Indiana. As a result, the Department proceeded to remove Parent from Taxpayers' consolidated group because Parent was not eligible to consent to file 2013 and 2014 consolidated returns with Taxpayers in Indiana. The audit report explained, in part:

The Department's audit further determined that Taxpayer's 2013 and 2014 consolidated Indiana income tax returns as filed, which included Parent in the group, did not fairly reflect their Indiana-source income. The Department's audit specifically noted that "[i]nclusion of the losses of Parent in the Indiana consolidated returns for 2013 and 2014 results in a 50[percent] reduction in federal taxable income and a 44[percent] reduction in the apportionment factor."

Throughout the protest process, Taxpayers argued that the Department's audit erred in excluding Parent from their consolidated corporate income tax returns. In addition, Taxpayers asserted that the Department's audit improperly applied an "alternative apportionment" methodology because their 2013 and 2014 consolidated returns, including Parent, fairly represented their business activities in Indiana. Taxpayers claimed, in part:

Taxpayers further asserted that:

Relying on the above-mentioned interpretation, Taxpayers argued that Parent met the two-step requirement because Parent had "business activities" that exceeded P.L. 86-272's protection and had "apportionment factors." In other words, Taxpayers contended that Parent's employees travelled to Indiana, performing various "services" to Sub A and Sub B in Indiana, which exceeded P.L. 86-272's protection; in turn, Parent received "interest income" and "management fees" from Sub A and Sub B through various intercompany transactions - together with receipts from sales of tangible personal property which were delivered to Indiana by third party carriers - were adjusted gross income derived from sources within Indiana. Therefore, Taxpayers maintained that Parent qualified to consent to file the Indiana consolidated returns with Taxpayers.

Upon review, however, Taxpayers' above derivative interpretation is misplaced. As mentioned earlier, to qualify to file Indiana income tax returns on a consolidated basis, a corporation must "have adjusted gross income derived from sources within the State of Indiana." IC § 6-3-4-14(b). "'Adjusted Gross Income derived from sources within the state' means either income or losses derived from activities within the state." 45 IAC 3.1-1-111. Thus, the plain language of IC § 6-3-4-14(b) and 45 IAC 3.1-1-111 clearly requires each of corporations must have "income or losses derived from activities within the state." Taxpayers mistakenly argue that Indiana utilizes "a two-step approach to determine whether an entity derives 'adjusted gross income derived from sources within Indiana' for purposes of joining its affiliates in a consolidated Indiana return." To be included in the consolidated returns of Taxpayers, Parent itself must have adjusted gross income derived from sources - activities which generate income or losses - within Indiana.

The issue thus is whether Parent itself had either income or losses derived from activities within Indiana for the tax years 2013 and 2014. First, in this case, there is no dispute that Parent (through its divisions) had "sales of tangible personal property" where the tangible personal property was picked up in Ohio or delivered to Indiana by various third-party common carriers. None of Parent's divisions had employees in Indiana; and thus, Parent did not have "substantial nexus or physical presence in Indiana." The audit thus correctly noted that Parent's income or losses from those destination sales were not adjusted gross income derived from sources within Indiana pursuant to P.L. 86-272.

Nonetheless, Taxpayers claimed that Parent had "adjusted gross income derived from sources within Indiana" based on two types of intercompany activities: (1) intercompany administrative and management services and (2) intercompany advances or intercompany loans. This decision addresses each as follows:

The Department determined that Parent did not have "adjusted gross income derived from sources within Indiana" by means of providing various intercompany administrative and management services including, but not limited to, "general management," "administration of payroll and benefits," "IT services," and "accounting and tax services" ("Services"). Specifically, the audit noted that Parent was paid or reimbursed - by means of "corporate allocations" without any markups - for expenses incurred when it provided the Services.

Taxpayers, to the contrary, contended that the intercompany administrative and management services performed by Parent's employees in Indiana exceed the protection of P.L. 86-272. As such, these intercompany activities - i.e., the Services Parent offered to Sub A and Sub B - supported that Parent qualified to file Indiana consolidated returns with Taxpayers because Parent was paid for these Services performed under the "Management Services Agreement[s]" ("Agreements").

Specifically, Taxpayers contended that both Sub A and Sub B entered into the Agreements with Parent since January 1, 2000. Parent agreed to provide Services; in return, Sub A and Sub B shall pay to Parent "annually an amount equal to [Parent's] cost of providing such Services . . . ." Taxpayers asserted that "[t]o satisfy its contract for corporate services with [Sub A] and [Sub B], [Parent's] personnel regularly entered Indiana to complete its service obligations, especially with regards to information technology and corporate risk services." Taxpayers argued that Parent's employees performed the Services and were activities that exceed P.L. 86-272's protection. Taxpayers thus argued that Parent had adjusted gross income - management fees - derived from sources within Indiana by means of providing Services in Indiana. To support their protest, in addition to the Agreements, Taxpayers offered sample copies of expense reports from Parent's employees, and a summary concerning each employee's Indiana visits during 2013 and 2014.

Upon review, however, Taxpayers are mistaken. As mentioned above, to qualify and consent to file Indiana returns as a consolidated group, each corporation of the affiliated group must have "adjusted gross income derived from sources within Indiana" under IC § 6-3-2-2. IC § 6-3-4-14(b). "'Adjusted Gross Income derived from sources within the state' means either income or losses derived from activities within the state." 45 IAC 3.1-1-111. Taxpayers documented that various employees of Parent spent some time - 51 days in 2013 and 44 days in 2014 - attending a board meeting, offering IT support and training, and facilitating audits in Indiana. However, Taxpayers' supporting documentation demonstrated that Sub A and Sub B "shall pay [Parent] annually an amount equal to [Parent's] cost of providing such Services" and the payments were reimbursements to Parent for costs incurred. Thus, Parent did not have adjusted gross income derived from sources within Indiana because Parent was reimbursed "annually an amount equal to [Parent's] cost of providing such Services." The audit report further explained, in part:

Accordingly, Taxpayers' documentation, including the Agreements and their accounting records, failed to support their assertion that Parent had income by providing Services. In particular, the audit found that, for the tax years at issue, Sub A and Sub B "share[d] of the corporate administrative expenses," reimbursing Parent only for the "expenses without a mark-up" and thus Parent did not have any gross income receipts from those reimbursements. Because Parent did not have income, i.e., profits or gross receipts, attributable to its Services, the Department is not able to agree that Parent had adjusted gross income derived from sources within Indiana by providing its Services to Sub A and Sub B in Indiana. Taxpayers' reliance on the Sub A and Sub B's reimbursements paid to Parent for Services partly performed in Indiana is misplaced.

Even if, for the sake of argument, assuming that reimbursements Parent received was "income by providing the Services" and Parent's business has been providing the Services to its subsidiaries, the income attributable to the Services does not qualify as adjusted gross income derived from sources within Indiana because by providing the Services to Sub A and Sub B, Parent's sales of Services were "[s]ales, other than receipts from intangible property covered by [IC § 6-3-2-2(e)] and sales of tangible personal property." Thus, whether Parent's Services exceeded the protection of P.L. 86-272 is irrelevant and is beyond the scope of this protest issue. In particular, the Indiana Tax Court explained in Univ. of Phoenix, Inc. v. Indiana Dep't of State Revenue, as follows:

In this instance, Taxpayers' supporting documentation demonstrated that, for the tax years at issue, Parent was headquartered in Ohio; Sub A (a Kansas corporation) and Sub B (an Ohio corporation) were commercially domiciled in Ohio. Taxpayers' documents also showed that those Services were provided by Parent at its Ohio headquarters and Parent's employees from Ohio only occasionally visited Sub A and Sub B -51 days in 2013 and 44 days in 2014 - in Indiana. Therefore, given the totality of the circumstances, in the absence of other verifiable supporting documentation, the greater portion of the "cost" incurred by Parent in order to provide the Services is deemed incurred in Ohio. That is, the majority of Parent's income-producing activity is performed in Ohio. The "income by providing the Services" must be sourced to Ohio pursuant to IC § 6-3-2-2(f)(2). Univ. of Phoenix, Inc., 88 N.E.3d at 809, 811-14.

In short, the Department is not able to agree that Parent had adjusted gross income derived from sources within Indiana by providing its Services to Sub A and Sub B in Indiana because Sub A and Sub B merely "share[d] of the corporate administrative expenses," reimbursing Parent only for the "expenses without a mark-up." Parent did not have any gross income receipts from those reimbursements. Even if, arguendo, assuming that Parent received the reimbursements as income by providing a portion of the Services in Indiana, Parent's "income by providing the Services" must be sourced to Ohio pursuant to Univ. of Phoenix, Inc. and IC § 6-3-2-2(f)(2).

Taxpayers further relied on two separately signed "Revolving Promissory Note[s]" ("Notes"), arguing that Parent received "interest income derived from sources in Indiana" because Parent made "intercompany advances" or "intercompany loans" to Sub A and Sub B. Specifically, Taxpayers referenced IC § 6-3-2-2(a)(5) and IC § 6-3-2-2.2(a), claiming that Parent received "interest income" from these "intercompany loans" and that the loans were "secured by real or tangible personal property" of Sub A and Sub B in Indiana. Taxpayers believed that "an intangible consisting of a security interest in the form of an intercompany loan agreement[] acquired business situs within Indiana." Taxpayers further argued that Parent had "business situs due to its security interest in [Sub A] and [Sub B's] receivables and assets with each entity employing the loan as capital in Indiana to support various business activities in the state . . . of Indiana." Taxpayers continued:

Taxpayers thus argued that the "interest income" Parent received from Sub A and Sub B was income derived from sources within Indiana. As such, Parent qualified to join Taxpayers' 2013 and 2014 consolidated returns.

Upon review, the Department is not able to agree. As discussed earlier, Taxpayers' "two-step approach" is mistaken. Specifically, IC § 6-3-4-14 (b) mandates that Parent must first have "adjusted gross income derived from sources within Indiana" to be able to consent to file consolidated returns with Taxpayers. The intercompany "interest income" from the intercompany advances listed on Sub A and Sub B's balance sheet failed to support that Parent had "adjusted gross income derived from sources within Indiana." Additionally, Taxpayers' supporting documents failed to support the intercompany "interest income" from the Notes were "adjusted gross income derived from sources within Indiana." The audit specifically noted, as follows:

• The promissory note between [Parent] and [Sub A] was signed by a single corporate officer representing both parties.

• The promissory note between [Parent] and Sub B was signed by a single corporate officer representing both parties who also signed the [above Promissory Note for Sub A].

• Both promissory notes required payment in full by 1/1/2005.

• Security interest in all assets of the subsidiary were granted to [Parent] by each borrower which is a wholly-owned subsidiary of [Parent].

• Neither Sub A nor Sub B reports a Balance Sheet liability of a note or other debt for which interest would be paid.

In this instance, Taxpayers' supporting documents demonstrated that Parent is an Ohio corporation, Sub A is a Kansas corporation, and Sub B is an Ohio corporation. Each corporation involved in the intercompany transactions in question (i.e., the Notes) is incorporated or commercially domiciled in a state other than Indiana. Both Notes were signed and executed in Ohio. Both Notes also demonstrated that the same individual served as a corporate officer for Parent, Sub A, as well as Sub B. Both Notes further showed that the same individual signed both Notes on behalf of Parent (the lender and the holder of the Notes) and also on behalf of the borrowers, Sub A and Sub B. The Notes stated "[a]ll funds consisting of principal and interest borrowed [] shall be repaid in full before January 1, 2005."

Taxpayers claimed that although the Notes required that they be "repaid in full before January 1, 2005," the loans continued throughout the tax years at issue. However, as the audit noted that "[n]either Sub A nor Sub B report[ed] on its Balance Sheet any Notes or other liabilities for which interest would be paid." Taxpayers simply referred to the Notes, the trail balance of each company, and their federal returns, Line 18. In particular, the Notes were signed by the same individual who represented the lender and also the borrowers at the same time as the intercompany transactions. Thus, there is a rebuttable presumption that those intercompany transactions were not arms-length. Additionally, in Taxpayers' original Indiana consolidated returns, Sub A and Sub B did not claim these interest expense deductions in their returns and Parent did not report the interest income in the returns. Without contemporaneously verifiable records to support their claimed "interest income" from those intercompany loans (and advances), the Department is not able to agree that Parent had interest income from sources within Indiana. Without "adjusted gross income derived from sources within Indiana," Parent is prohibited from giving its consent to join Taxpayers' group.

Further arguendo, assuming that Parent received the interest income which was business income and might be apportionable to Indiana, IC § 6-3-2-2.2(a) specifically states "[i]nterest income . . . from assets in the nature of loans or installment sales contracts that are primarily secured by or deal with real or tangible personal property are attributable to this state if the security or sale property is located in  Indiana." (Emphasis  added). Taxpayers' Notes demonstrated the intercompany loans did not meet this requirement. The Notes stated that Sub A and Sub B granted to Parent "a continuing security interest in and to all of the assets of [Sub A and Sub B], including without limitation, all accounts receivable, inventory, contract rights, general intangibles, warehouse receipts . . . ." As such, the Department is not able to agree that the "assets . . . are primarily secured by or deal with real or tangible personal property" as required (Emphasis added). In short, even assuming that Parent received interest income which might be apportioned pursuant to IC § 6-3-2-2(a)(5), Taxpayers' supporting documents failed to establish that Parent's "[i]nterest income . . . from assets in the nature of loans . . . that are primarily secured by or deal with real or tangible personal property . . . [that] the security or sale property is located in Indiana" - the statutory requirements outlined under IC § 6-3-2-2.2(a). (Emphasis added).

Given totality of the circumstances, in the absence of other verifiable supporting documentation, the Department is not able to agree that Parent had interest income through intercompany loans or intercompany advances. Even if, assuming that Parent had interest income through those intercompany transactions, Parent did not have "adjusted gross income derived from sources within Indiana."

In conclusion, the audit properly excluded Parent from Taxpayers' Indiana consolidated returns pursuant to the above-mentioned Indiana law because Parent did not have "adjusted gross income derived from sources within Indiana and did not qualify to consent to join Taxpayers' consolidated group. Taxpayers' supporting documentation demonstrated that even though Sub A and Sub B paid Parent for Services and intercompany loans (or advances), but those payments were reimbursements or cost-sharing, which were not income to Parent.

Even if, arguendo, Parent received the payments as income, Parent did not have "adjusted gross income derived from sources within Indiana" because the income must be sourced to Ohio pursuant to the above-mentioned Indiana law. As such, Parent remained ineligible to join Taxpayers' consolidated group.

Finally, since Parent did not qualify to file with Taxpayers on a consolidated basis, Parent must be excluded from Taxpayers' consolidated group. In other words, for both 2013 and 2014 years, Parent's income from Services and intercompany loans (or advances) as well as sales receipts were required to be removed from the formulary apportionment of Taxpayers' consolidated returns. As such, the issue of "alternative apportionment" becomes moot.

Taxpayers' protest is respectfully denied.

II. Corporate Income Tax - Apportionment (Sales) - Numerator - Throwback Sales.

The audit adjusted Taxpayers' numerator of their sales factor because Taxpayers had Indiana-origin sales to states in which Taxpayers "(1) [were] not filing income, franchise/privilege taxes or (2) [were] not subject to income tax on a separate basis." As a result, the audit applied the "Throwback" rule, which increased the numerator of each member of Taxpayers' sales factor for apportionment purposes. Taxpayers argued that those sales should be excluded from their numerator for apportionment purposes and the "Throwback" rule is not applicable.

As discussed in Part I, the taxpayer bears the burden of proving that any assessment is incorrect. IC § 6-8.1-5-1(c). The taxpayer thus 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).

Also, as discussed in Part I, "Indiana imposes a tax on every corporation's adjusted gross income derived from sources within Indiana. [IC § 6-3-2-1(b).] In cases where a corporation derives business income from sources both within and without Indiana, the 'adjusted gross income derived from sources within the state of Indiana' is determined by an apportionment formula." Sherwin-Williams Co. v. Indiana Dep't. of State Revenue, 673 N.E.2d 849, 851 (Ind. Tax Ct. 1996). That formula operates by multiplying taxpayer's total business income by the sales factor for "all taxable years beginning after December 31, 2010." IC § 6-3-2-2(b)(5).

The "sales factor" consists of a fraction, "the numerator of which is the total sales of the taxpayer in [Indiana] during the taxable year, and the denominator of which is the total sales of the taxpayer everywhere during the taxable year." IC § 6-3-2-2(e).

The basic rule for calculating the sales factor is found at IC § 6-3-2-2. IC § 6-3-2-2(e) provides that "[s]ales of tangible personal property are in this state if . . . (2) the property is shipped from an office, a store, a warehouse, a factory, or other place of storage in this state and . . . (B) the taxpayer is not taxable in the state of the purchaser." IC § 6-3-2-2(n) provides that "[f]or purposes of allocation and apportionment of income under this article, a taxpayer is taxable in another state if: (1) in that state the taxpayer is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax; or (2) that state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not." Therefore, in order to properly attribute income to a foreign state, a taxpayer must show that one of the taxes listed in IC § 6-3-2-2(n)(1) has been levied against him or that the state has the jurisdiction to impose a net income tax regardless of "whether, in fact, the state does or does not." Id.

Throughout the protest process, Taxpayers claimed that, to calculate the numerator of the sales factor, the audit erred in throwing some of Taxpayers' sales to their purchasers' states back to Indiana. Taxpayers argued that under the "Indiana's throwback rule," "[a] taxpayer either needs to show that one of the enumerated taxes could have been levied against the taxpayer or that a state or other jurisdiction has the ability to impose a net income tax, whether it actually does or not." Taxpayers continued:

Upon review, however, Taxpayers are mistaken. Specifically, Taxpayers erred in believing that for Indiana income tax purposes, each member of their consolidated group is "taxable in another state" because "a taxpayer is subject to tax merely by having sales into the jurisdiction" and "[n]o proof of actual payment of the tax is necessary under the Indiana throwback rule . . . ." In particular, Taxpayers were required to "keep books and records so that the department can determine the amount, if any, of the person's liability for that tax by reviewing those books and records . . . [which] include all source documents necessary to determine the tax . . . ." IC § 6-8.1-5-4(a).

As discussed above, in order to properly attribute income to a foreign state, the taxpayer must show that one of the taxes listed in IC § 6-3-2-2(n)(1) has been levied against him or that the state has the jurisdiction to impose a net income tax. For 2013 and 2014, Taxpayers are required to document and demonstrate that each member of their consolidated group - on a separate basis - was doing business and therefore was "taxable in the state of the purchaser." In other words, P.L. 86-272 is one part of the test (determining whether a taxpayer is taxable in the state of the purchaser) because states are constitutionally prohibited from imposing taxes on any taxpayer when the taxpayer's activities in those states are either de minimis or mere solicitation of orders. 45 IAC 3.1-1-38(7). Thus, to remove those sales from the numerator of the sales factor, each member of Taxpayers must be taxable in those states of their purchasers. To that end, Taxpayers must demonstrate that each member of their consolidated group was doing business in those states or jurisdictions and was therefore taxable - "net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax" - in those states or jurisdictions. Simply asserting that Taxpayers were taxable in other states "merely by having sales into the jurisdiction" without verifiable supporting documentation is not sufficient. Thus, those sales originated from Taxpayers' Indiana facilities were required to be thrown back to Indiana for apportionment purposes.

In short, given totality of the circumstances, in the absence of other verifiable supporting documentation, when members of Taxpayers' consolidated group were not taxable in the states of their purchasers, Taxpayers were required to throw back those sales in the numerator of each member's sales factor in the numerator for apportionment purposes.

Taxpayers' protest is respectfully denied.

Taxpayer's protest of the Issue I and Issue II is respectfully denied.

December 20, 2018