NOTICE: IC § 4-22-7-7 permits the publication of this document in the Indiana Register. The publication of this document provides the general public with information about the Indiana Department of Revenue's official position concerning a specific set of facts and issues. The "Holding" section of this document is provided for the convenience of the reader and is not part of the analysis contained in this Supplemental Letter of Findings.

On rehearing, the Department again found that 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 (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 (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 company which conducts business in Indiana. Taxpayer filed Indiana corporate income tax returns reporting its Indiana income.

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.

A Letter of Findings ("LOF") was issued July 25, 2019, sustaining Taxpayer's protest in part and denying it in part. The LOF held that that [sic] the Department erred in adjusting the $200 million deduction to reflect an additional $200 million in income. However, the Department also held that Taxpayer was not entitled to claim an additional interest expense deduction. As explained in the July LOF, "Indiana has no provision allowing Taxpayer to claim the additional expense."

Taxpayer disagreed with the Department's determination and submitted a rehearing request. The request was granted, and a second hearing was conducted during which Taxpayer's representative further explained the basis for its protest. This Supplemental Letter of Findings results.

I. Corporate Income Tax - Interest Expense Adjustment.

Taxpayer disagreed with the Department's determination arguing that the Department erred in denying it an additional $200 million dollars in expenses deductions claimed on its 2017 corporate income tax return.

In its rehearing request, Taxpayer again protests the Department's proposed assessment, stemming from an "add-back" modification on its 2017 Indiana corporate income tax return. Taxpayer asserts 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.

Taxpayer concludes that the Department's administrative determination set out in Letter of Findings 02-20190490 (July 25, 2019), 20191030-IR-045190528NRA, was wrong when the Department found that Taxpayer "was not entitled to an additional interest expense based on an amount of [Taxpayer's] repatriated income . . . ."

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. This Supplemental Letter of Findings incorporates both the statements of law and fact in the July 2019 LOF.

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 relevant part:

(Emphasis added)(P.L. 214-2018, § 2; codified at IC § 6-3-1-3.5(b)(13)).

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 add back 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 additional 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.

Taxpayer asks that the Department take a more holistic approach to the issue citing to the Indiana's conformity to the Internal Revenue Code in general. As explained by Taxpayer:

(Emphasis in original).

However, there is nothing in either the federal or state provisions which allows an additional interest expense deduction based on the specific 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 on its federal return but not with the $20 amount of repatriated income added back for Indiana purposes. Why not? Because Indiana had no provision allowing Taxpayer to claim the additional expense. In this sense, Taxpayer is correct when it points out that "Indiana specifically decoupled from the limitations on deductible business interest expenses under [I.R.C.] § 163(j)(1) for tax years starting after December 31, 2017. However, Indiana is silent as to its treatment of the limitations for tax year 2017." The Department is unable agree that it should now read into that legislative "silence" a remedy which is otherwise unsupported under Indiana law.

The Department must stand by its original determination that it erred in converting the $200 million deduction to an equal amount of additional income. As explained in the July LOF, "As to Taxpayer's argument that it is entitled to an additional interest expense deduction, Taxpayer's protest is respectfully denied."

Taxpayer's protest is respectfully denied.

December 27, 2019