in-20260930-IR-045260326NRA: LETTER OF FINDINGS: 01-20251605

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20251605 Individual Income Tax For The Year 2021 HOLDING Married couple showed the Department's assessment of additional income tax was incorrect. ISSUE

I. Individual Income Tax – Assessment.

Authority: IC 6-3-1-3.5; IC 6-3-2-1; IC 6-3-2-2; 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); IRS Topic no. 409, Capital Gains and Losses. Taxpayers protest the assessment of additional individual income tax. STATEMENT OF FACTS Taxpayers are a married couple filing jointly and were Indiana residents during the tax year at issue. For tax year 2021, Taxpayers filed an Indiana Full-Year Resident Individual Income Tax Return ("Form IT-40"). The Indiana Department of Revenue ("Department") later received information that Taxpayers had underreported their federal adjusted gross income. Due to this discrepancy, the Department increased Taxpayers' Indiana adjusted gross income, which resulted in a Notice of Proposed Assessment for additional individual income tax. Taxpayers protested and requested resolution with a hearing. The Department discussed the matter with Wife and learned that Husband passed away while the protest was pending. Wife agreed to waive the administrative hearing. This Letter of Findings results and is based on information provided as part of the protest and a review of the Department's records. Additional facts will be provided as necessary.

I. Individual Income Tax – Assessment.

DISCUSSION The Department determined that Taxpayers owed additional income tax after receiving information related to a federal discrepancy. The Department adjusted Taxpayers' return and increased their federal adjusted gross income and Indiana adjusted gross income. The increase resulted in an assessment for additional income tax. Taxpayers disagreed and protested the assessment. Taxpayers explained that they were unsure why their federal record showed a gain of $98,000 when Husband had a Capital Loss Carryover of approximately $60,000. As a threshold issue, it is the taxpayer's responsibility to establish that the existing tax assessment is incorrect. A proposed assessment is prima facie evidence that the Department's claim for the unpaid tax is valid. IC 6-8.1-5-1(c). The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made. Id.; See e.g., 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). An assessment, including taxpayer's penalty assessment, is therefore presumed valid. A taxpayer must provide documentation explaining and supporting that the Department's position is wrong. Additionally, "[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). Indiana imposes a tax "upon the adjusted gross income of every resident person, and on that part of the adjusted gross income derived from sources within Indiana of every nonresident person." IC 6-3-2-1(a). IC 6-3-2-2(a) outlines what is income derived from Indiana sources and subject to Indiana income tax. There is a presumption that a taxpayer files his/her federal income tax return as required by the Internal Revenue Code. Thus, to effectively compute what is considered a taxpayer's Indiana income tax, Indiana law refers to the Internal Revenue Code. IC 6-3-1-3.5 provides a starting point in determining a taxpayer's taxable income and calculating what would be his/her Indiana income tax after applying certain additions and subtractions, with any necessary modifications following. These Indiana modifications are outlined in IC 6-3-1-3.5(a). Property owned for personal and investment purposes is a capital asset. Examples include items like household furnishings or stocks/bonds held as an investment. When a capital asset is sold, the difference between the adjusted basis in the asset and the amount realized from the sale is a capital gain or capital loss. IRS Topic no. 409, Capital Gains and Losses, https://www.irs.gov/taxtopics/tc409 (last visited July 7, 2006). A capital gain results if an asset is sold for more than the adjusted basis and a capital loss if the asset is sold for less than the adjusted basis. Id. Capital gains and losses are classified as long-term or short-term. If the asset was held for more than one year, the gain or loss is long-term. If the asset is held for less than one year, the gain or loss is short-term. Id. A few exceptions to this rule exist; however, the exceptions are not relevant to this protest. If capital losses exceed capital gains, the amount of the excess loss that can be claimed to lower a taxpayer's income is the lesser of $3,000 or the total net loss shown on Schedule D (Form 1040) that is filed with a federal tax return. The loss is then claimed on Line 7a of the corresponding Form 1040 at the federal level. If a net capital loss is more than the limit, the loss can be carried forward to later years. Id. In this instance, Taxpayers reported a Capital Loss Carryover on their federal return for approximately $60,000. This Carryover reduced Taxpayers' Indiana adjusted gross income reported on Form IT-40 for tax year 2023. The Department later received information that Taxpayers' federal adjusted gross income was incorrectly reported on their federal return and adjusted Taxpayers' Indiana adjusted gross income accordingly. Taxpayers protested the adjustments and provided a copy of their federal return, federal Record of Account, and Indiana return. The Department's adjustments and subsequent assessment were correct based on the information received at the time the Department conducted its review. However, further review shows that Taxpayers correctly reported their Capital Loss Carryover on their federal return, which directly impacted their Indiana adjusted gross income as reported on Form IT-40. The reported federal discrepancy was actually due to a federal processing error because the carryover was reported as a positive amount instead of a negative amount. Documentation provided by Taxpayers confirms that their federal return was incorrectly processed. As such, the Department's adjustments and proposed assessment were based on information which was ultimately incorrect. The Department will update Taxpayers' account. Taxpayers have met the burden under IC 6-8.1-5-1(c) showing the Department's assessment was wrong. FINDING Taxpayers' protest is sustained. July 15, 2026 Replaces Finding Document: New