in-20250917-IR-045250453NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20251818 Individual Income Tax For The Tax Year 2022 HOLDING Individuals established that the Department’s assessment was too high. ISSUE

I. Individual Income Tax – Burden of Proof.

Authority: I.R.C. § 61; I.R.C. § 62; I.R.C. § 162; I.R.C. § 183; IC 6-3-1-3.5; IC 6-3-2-1; IC 6-8.1-5-1; IC 6-8.1-5-4; Indiana Dep’t of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); 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); Treas. Reg. § 1.183-2(b); Internal Revenue Service, Publication 526: Charitable Donations (2022); Internal Revenue Service , Publication 535: Business Expenses (2022). Taxpayers protest the proposed assessment of additional income tax for 2022. STATEMENT OF FACTS Taxpayers (individually, “Husband” and “Wife”) are Indiana residents who timely filed their joint 2022 Indiana Full-Year Resident Individual Income Tax Return (“IT-40”). The Indiana Department of Revenue (“Department”) reviewed Taxpayers’ return and denied business losses that Taxpayers claimed on their federal return pending verification of expenses and income. When Taxpayer provided documents, the Department denied the business losses in full because the Department considered Taxpayers’ activities a hobby rather than a business. Taxpayer timely protested the proposed assessment, and an administrative hearing was held. This Letter of Findings results. Additional facts will be provided as necessary.

I. Individual Income Tax – Burden of Proof.

DISCUSSION Taxpayers argue that Wife’s activities — that is, her efforts to become an established author — constitute a business under federal law, and further that they properly reported their business expenses and income to the Department. The Department denied the loss that Taxpayers claimed on their federal Schedule C because the Department determined that Taxpayers were not engaged in a business but rather a hobby. IC 6-8.1-5-4(a) requires that “[e]very person subject to a listed tax must keep books and records so that the [D]epartment can determine the amount, if any, of the person’s liability for that tax by reviewing those books and records. The records [] include all source documents necessary to determine the tax, including invoices, register tapes, receipts, and canceled checks.” The person also “must allow inspection of the books and records and returns by the [D]epartment or its authorized agents at all reasonable times.” IC 6-8.1-5-4(c). When the person subject to the listed tax fails to keep books and records, under IC 6-8.1-5-1(b), the Department “shall make a proposed assessment of the amount of the unpaid tax on the basis of the best information available to the [D]epartment” if the Department “reasonably believes that a person has not reported the proper amount of tax due.” 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). Importantly, “each tax year stands alone.” Miller Brewing Co. v. Indiana Dep’t of State Revenue, 903 N.E.2d 64, 69 (Ind. 2009). The taxpayer is required to provide documentation to explain and support his or her challenge. When an agency is charged with enforcing a statute, jurisprudence defers to the agency’s reasonable interpretation of that statute “over an equally reasonable interpretation by another party.” Indiana Dep’t of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). 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). Indiana imposes an adjusted gross income tax on all residents. IC 6-3-2-1. An Indiana resident taxpayer’s income is determined by starting with the federal adjusted gross income and making certain adjustments. IC 6-3-1-3.5. The Indiana statute refers to the Internal Revenue Code to compute what is considered the taxpayer’s Indiana income tax. I.R.C. § 61(a) provides that gross income includes “all income from whatever source derived[.]” A taxpayer who is in a trade or business may be able to claim deductions “which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.” I.R.C. § 62(a)(1); I.R.C. § 162. As a threshold issue, the taxpayer must not be an employee when he carried on the trade or business. “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.” Internal Revenue Service, Publication 535: Business Expenses (2022). A taxpayer may not claim deductions for an activity that is not engaged in for profit. I.R.C. § 183(a). An activity is considered not to be engaged in for profit based on “all facts and circumstances with respect to the activity . . . [and] [n]o one factor is determinative[.]” Treas. Reg. § 1.183-2(b). There are nine factors that “should normally be taken into account” when determining whether an activity is engaged in for profit: (1) whether the taxpayer conducts the activity in a businesslike manner; (2) whether the taxpayer has expertise in the field or consults with experts who do; (3) how much time and effort the taxpayer expends on the activity; (4) whether the taxpayer expects to earn a profit at some point; (5) whether the taxpayer has successfully run a business before; (6) whether the taxpayer continues to sustain “losses . . . beyond the period which customarily is necessary to bring the operation to profitable status[;]” (7) whether the taxpayer’s anticipated or hoped-for profit is proportional to the losses incurred and investment made; (8) whether the taxpayer’s financial situation suggests that the activities are truly engaged in for profit; and (9) whether the activity has “recreational or personal elements[.]” Id. The Department cited three reasons to support its position that Wife’s activities were not engaged in for profit. First, the Department determined that the expenses claimed were not “reasonable and expected” for the scope of the business, because the expenses were eight times larger than the income generated. Second, the Department stated that Taxpayers are “gainfully employed,” and their income is much higher than the income generated by these activities. Third, the Department stated that Wife’s charitable donations of books showed that she did not have a profit motive. The Department cited the nine factors in Treasury Regulation § 1.183-2(b) in its communications with Taxpayer. In their written statement, Taxpayers addressed seven of the nine enumerated factors in Treasury Regulation § 1.183-2(b). Wife stated that she keeps accurate records and spends significant time promoting her books, including taking time off of her regular job to do so. Taxpayer also submitted documents showing that she has a contract with a professional publishing company to produce her books and stated that her publishing company sells her books through various intermediaries. Based on the thorough records that she submitted to the Department, the Department agrees that Taxpayer conducts her activity in a businesslike manner. Further, because Wife has a contract with a professional publishing company, the Department agrees that she consults with experts in her chosen field. Taxpayers stated that Wife takes significant time off of work, and that she incurs significant expenses promoting her books, including donating books to nonprofits who pass them along to people in Wife’s target audience, traveling to literary conventions at her own expense, hiring a professional illustrator to provide artwork for her books, and performing book readings across the region. Further, Taxpayers stated that they had taken out loans to pay for some of these expenses. Wife argued at the hearing that she thought it would be illogical to incur expenses like these for a hobby, and that the fact that she took on debt supports the idea that she expects to earn a profit. Taxpayers presented documentary evidence supporting these statements. Based on these documents and statements, the Department agrees that Wife expends significant time on her activities commensurate with a profit motive, and the Department agrees that Wife has taken actions which show that she expects to earn a profit eventually. Wife stated at the hearing that she had been pursuing a career as an author for one year as of tax year 2022. She stated that she has never made a profit during this time. The Department does not consider this to be “beyond the period which customarily is necessary to bring the operation to profitable status” for someone trying to become an author for profit. Wife stated at the hearing that, although she and her husband have comfortable salaries from their regular jobs, they are not so well-off that the amounts expended are easy for them to lose. Taxpayers stated that the money Wife spent on her activities would otherwise have gone towards paying for their children’s college educations. The Department agrees that this shows that Taxpayers’ financial situation does not imply that Wife’s activities are not engaged in for profit. Finally, the Department notes that federal guidance permits a deduction for donations of inventory — that is, property sold in the course of a taxpayer’s business. Internal Revenue Service, Publication 526: Charitable Donations (2022). Taxpayer stated at the hearing that she purchased her own books from the publisher and donated them to various nonprofits, who passed them along to her target audience. Taxpayer stated that she did so with the intent to advertise her skills as an author to her target audience and to build goodwill. The Department agrees that donations in this context do not suggest that Taxpayer had no profit motive in conducting her activities. Taxpayers have presented substantial evidence, including ledgers, receipts, and contracts, supporting her claim that she treats her activities as a writer like a for-profit business. The Department agrees that Taxpayers have carried their burden to show that their activities qualify as “a trade or business” for which expenses may be deducted. While the Department was correct that there are differences between qualified business activities and hobby activities, in this case Taxpayer has established that the expenses claimed on Taxpayers’ Schedule C did qualify as business expenses under I.R.C. § 62(a)(1), I.R.C. § 162, and Treasury Regulation § 1.183-2(b). The Department's reasoning in determining that Taxpayers’ activities were a hobby and not a business was based on those activities not qualifying as business activities. Taxpayer has met the burden of proving the proposed assessment wrong, as provided under IC 6-8.1-5-1(c). However, the claimed expenses discussed above did not constitute all expenses listed on the Schedule C, and some of Taxpayers’ claimed expenses were allowable business expenses and some were not. The Department will review the return and Schedule C and will apply the qualifying expenses. The Department will then issue a revised assessment. FINDING Taxpayers’ protest is sustained. The Department will review Taxpayers’ documents and will apply deductions for the allowable business expenses. July 11, 2025 Replaces Finding Document: New