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 This document is effective on its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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

Investment Holding Company was not entitled to an additional interest expense deduction based on an amount of repatriated income - originally deducted on its federal return - which Indiana required be added back for Indiana purposes. There was no Indiana provision permitting Investment Holding Company to claim an additional interest expense deduction based on the amount of repatriated tax "added back" for Indiana purposes.

I. Corporate Income Tax - Interest Expense Adjustment.

Authority: IC § 6-3-1-3.5(b)(13); IC § 6-3-1-11; IC § 6-8.1-5-1(c); Indiana Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480, 486 n.9 (Ind. Tax Ct. 2012); Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Miller Brewing Co. v. Indiana Dep't of State Revenue, 903 N.E.2d 64, 69 (Ind. 2009); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); I.R.C. § 163(j) (2017); I.R.C. § 965; Internal Revenue Service, Forms, Instructions & Publications: IRS Reporting Related to IRC Section 965 on 2017 Returns; Income Tax Information Bulletin 116 (July 2018 revised)(retroactive).

Taxpayer argues the Department erred in assessing additional corporate income tax based on an adjustment to Taxpayer's interest expense deduction.

Taxpayer is an out-of-state investment holding company. Together with its subsidiaries, Taxpayer files for and pays Indiana corporate income tax. Taxpayer filed a 2017 corporate income tax return (IT-20).

In November 2018, Taxpayer filed its 2017 corporate income tax return. On line 6 of that return (under "Modifications for Adjusted Gross Income"), Taxpayer reported an approximately $200 million dollar interest expense deduction. On line 6, Taxpayer labeled the $200 million interest expense deduction as a negative number (for example, "-200,000,000") using "code 115." Taxpayer noted that the code indicates the deduction was for "intangible expenses."

The Indiana Department of Revenue ("Department") adjusted Taxpayer's return recharacterizing the $200 million dollar deduction as an addition modification. The result was reversing the $200 million deduction to a $200 million dollar addition to Taxpayer's Indiana taxable income.

The Department's adjustment to the return resulted in an assessment of additional income tax. Taxpayer disagreed with the Department's adjustment to its 2017 original return and the consequent tax assessment. Taxpayer submitted a protest to that effect, and an administrative hearing was conducted during which Taxpayer's representatives explained the basis for its protest. This Letter of Findings results.

I. Corporate Income Tax - Interest Expense Adjustment.

Taxpayer protests the Department's proposed assessment, stemming from an "add-back" modification on its 2017 Indiana corporate income tax return. Taxpayer asserted that it was entitled to an interest expense deduction - "a subtraction modification on line 6" - under Indiana law because, in 2018, Indiana adopted the federal relevant statutory provisions, I.R.C. §§ 965 and 163(j), which retroactively apply in filing its 2017 Indiana income tax return.

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). "[E]ach 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 her 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).

The issue is whether Taxpayer has established that it is entitled to its originally claimed interest expense deduction and that the Department's assessment was wrong.

Taxpayer cites to Indiana law, IC § 6-3-1-11 (effective January 1, 2018 (retroactive)), for calendar year ending December 31, 2017. The relevant statute provides:

Taxpayer then cites to I.R.C. § 965 requiring it to include "repatriated income" in its reported federal taxable income. The Internal Revenue Service describes the repatriation provision:

However, Taxpayer next states that under IC § 6-3-1-11 Indiana conformed to I.R.C. § 163(j) in effect for the year 2017.

Upon review, Taxpayer is partially correct to the extent that Indiana conformed to I.R.C. § 163(j), but the conformity was not retroactive. With respect to I.R.C. § 965 income, IC § 6-3-1-3.5(b)(13) provides in part:

In other words, if a corporate taxpayer deducted for federal purposes any portion of the repatriated income, IC § 6-3-1-3.5(b)(13) required that the amount of the deduction be "added back" for Indiana purposes. See Income Tax Information Bulletin 116 (July 2018 revised)(retroactive), 20180829 Ind. Reg. 045180354NRA. ("For C corporations . . . the corporation will be required to add back the amount reported by the corporation on the IRC Transition Tax Statement, Line 1."). As an example, if a taxpayer had $100 in repatriated income but reported $80 on its federal return, IC § 6-3-1-3.5(b)(13) required the taxpayer to addback the $20 for Indiana purposes.

With that Indiana addback, in mind, Taxpayer essentially claims that it is now entitled to an additional interest expense deduction of approximately $200 million. In particular, Taxpayer explained:

The interest expense deduction that Taxpayer relies on is found in the federal repatriation provision, I.R.C. § 163(j) (2017), which provides.

I.R.C. 163(j) allows a taxpayer to claim an interest expense deduction based on the amount of repatriated income reported on the taxpayer's federal return. In the example cited above, the taxpayer could claim an interest expense deduction based on the $80 million amount reported on its federal return.

However, there is nothing in either the federal or state provisions which allows an additional interest expense deduction based on the amount Indiana requires be added back. Again, citing to the example provided above, the taxpayer was entitled to claim an interest expense consistent with the $80 amount reported federal return but not with the $20 amount of repatriated income added back for Indiana purposes. Why not? Because Indiana has no provision allowing Taxpayer to claim the additional expense.

Upon further review of the Department's line six adjustment, although Taxpayer may not claim the additional $200 million dollar expense, the Department erred in converting the deduction to an addition. The $200 million dollar deduction may not be a deduction, but it also does not represent additional Indiana income. The Department incorrectly adjusted the -$200 million deduction to +$200 million in additional income; the -$200 million should have been adjusted to "zero."

Not directly related to the interest expense deduction issue, Taxpayer also raises an issue related to the calculation of its net operating losses. As Taxpayer explains, "[I]f the Department concludes that [Taxpayer] is not entitled to the interest expense deduction of [approximately $200 million] [Taxpayer] is entitled to and reserves the right to apply the . . . NOL and credit attributes." Taxpayer apparently argues that it is entitled to apply NOL and credit attributes if its interest expense protest is denied. However, Taxpayer did not provide any further explanation or statutory authority to support its position. Therefore, this Letter of Findings takes no position on Taxpayer's claims to the NOLs and "credit attributes" because those claims are not at issue in the return as filed. Although, Taxpayer provided certain information regarding the NOLs and credit attributes which warrants the Department's further review, in order for the Department to properly consider those NOLs and credits, Taxpayer must file an amended return.

In short, Taxpayer is not entitled to claim the additional $200 million dollars in interest expense deductions. However, the Department erred in converting the disallowed amount to an addition to Taxpayer's taxable income. The Department takes no position on any NOLs and "credit attributes" which Taxpayer may or may not claim in the future. However, of course, the Department will review any additional NOLs and "credit attributes" Taxpayer may decide to submit.

As to Taxpayer's argument that it is entitled to an additional interest expense deduction, Taxpayer's protest is respectfully denied. However, Taxpayer is sustained to the extent that the Department erred in adjusting the claimed expense to reflect additional income.

July 25, 2019