The Indiana Tax Court has granted partial summary judgment to the Indiana Department of State Revenue and a Delaware-based industrial, agricultural and manufacturing business after finding both parties erred in their filing and assessments of 2005 through 2007 tax returns.
After a 2009 audit into the 2005, 2006 and 2007 consolidated tax returns filed for E.I. DuPont De Nemours and Co. and its subsidiaries, the Indiana Department of State Revenue found DuPont had improperly reported net operating losses, interest expense deductions and a research and development expense reduction. Specifically, the audit found DuPont mischaracterized the 2001 sale of the DuPont Pharmaceuticals Company as non-business income and misreported interest expense deductions on loans DuPont received from DuPont Energy Co. and DuPont Global Operations Inc. in 1995, 1999 and 2005.
Accordingly, the revenue department reclassified the gain DuPont received from the sale of DPC as apportionable business income, eliminated the interest expense deductions on the three loans and eliminated a 2007 research and development expense deduction. Each of these adjustments increased DuPont’s adjusted gross income and also reduced the net operating losses the company could carry forward.
The adjustments led to the issuance of proposed assessments against DuPont for an additional $394,490 in liability in 2006 and $376,328 in 2007, plus interest. A $37,627 penalty was also assessed against DuPont for tax year 2007.
DuPont protested the proposed assessments, but the revenue department denied it, prompting the instant appeal in E.I. Dupont De Nemours and Company v. Indiana Department of State Revenue, 49T10-1307-TA-65. On appeal, DuPont claimed the three adjustments were improper, and both parties filed cross-motions for summary judgment.
Specifically, DuPont argued the department’s retroactive adjustments to net operating losses were improper under Indiana Code 6-8.1-5-2, which it claimed prohibited the department from making adjustments tax years before 2005 because those years were outside the statute of limitations. But in a Tuesday opinion, Indiana Tax Court Judge Martha Blood Wentworth disagreed with that reasoning and instead said the accuracy of the NOL deductions in 2005, 2006 and 2007 was contingent upon the accuracy of DuPont’s 2001 NOL calculation.
Thus, because the department’s audits were reviews of accuracy, “it was incumbent upon the Department to examine and perhaps even recalculate the NOL DuPont reported in 2001,” Wentworth said. Further, I.C. 6-8.1-5-2(a) prohibits the issuance of a proposed assessment more than three years after a return is filed, but is silent on whether adjustments may be made in that timeframe, she said.
However, Wentworth disagreed with the reclassification of DuPont’s gains from the 2001 sale of DPC as business income, finding the company’s sale of its subsidiaries was not its regular trade or business, DPC was not an integral piece of DuPont’s business and DuPont and DPC were not unitary.
Wentworth also disagreed with the department’s disallowance of DuPont’s interest expense deductions in 2006 and 2007, finding the subsidiaries were “amply funded” to issue the loans to DuPont and that the interest rates on the loans qualified under the “arm’s-length” standard, thus prohibiting the department from denying the interest expense deductions under I.C. 6-3-2-2(m).
Finally, Wentworth determined DuPont’s 2007 research and development deduction was improper because “Indiana does not provide a specific deduction from the adjustment gross income tax base for R&D expenses” and because DuPont’s choice to take a federal R&D expense credit meant its I.R.C. section 63 taxable income could not include a deduction for the same expenses taken as a federal credit. However, the judge struck down the imposition of a penalty for the 2007 tax year, finding DuPont’s “’differences in its interpretation of the applicable Indiana tax law’ were reasonably based.”
Summary judgment was granted to DuPont on the issues of apportionable business income, intercompany interest deductions and the 2007 penalty, while summary judgment was granted to the department on the issues of the retroactive adjustments and the research and development deduction.