in-20250827-IR-045250401NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 02-20241581; 04-20241582 Corporate Income Tax and Sales Tax For the Years 2020 and 2021 HOLDING Taxpayer established that the Department’s adjustments to its income based on a deferred gain were incorrect. Additionally, Taxpayer established that the Department’s use tax assessment on a recreational vehicle was incorrect. ISSUE

III. Tax Imposition – Waiver of Penalty.

Authority: IC 6-8.1-5-1; IC 6-2.1-10-2.1; 45 IAC 15-11-2. Taxpayer requests that the Department waive the penalty associated with an assessment for use tax. STATEMENT OF FACTS Taxpayer is an Indiana company that elects to file its tax returns as an C Corporation (“C-Corp”). The Indiana Department of Revenue (“Department”) conducted an audit of Taxpayer for the 2020 and 2021 tax years that resulted in adjustments to Taxpayer’s income tax and sales tax. Taxpayer disagreed with some of the Department’s audit findings and submitted a protest to that effect. Taxpayer waived its right to an administrative hearing. Shortly after submitting its protest, Taxpayer, with the goal of tolling any accrued interest, paid the assessments that resulted from the audit. This Letters of Findings is written in reliance on information provided by Taxpayer and the Department’s records. Additional facts will be provided as necessary.

I. Corporate Income Tax – Deferred Gain.

DISCUSSION At issue is whether the Department’s adjustments to Taxpayer’s federal adjusted gross income (“FAGI”) to include a deferred gain were correct. As a threshold issue, it is a taxpayer’s responsibility to establish that the existing tax assessment is incorrect. A proposed assessment is prima facie evidence the Department’s claim for the unpaid tax is valid. IC 6-8.1-5-1(c). The burden of proving 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). A taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department’s position is wrong. Further, “[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). Pursuant to IC 6-3-2-1, Indiana imposes a tax on “that part of the adjusted gross income derived from sources within Indiana of every corporation.” For corporations, the starting point for determining Indiana adjusted gross income is the taxpayer’s “taxable income” as defined in I.R.C. § 63, which a taxpayer is directed to enter on their Indiana return before making modifications that are outlined in IC 6-3-1-3.5. Generally, federal law requires a gain from the disposition of property to be included as income. However, I.R.C. § 1031 permits a taxpayer to omit from its income a gain from real property used in a trade or business “if such real property is exchanged solely for real property of a like kind” that is also to be used in a trade or business. In 2018, the United States Congress enacted the Tax Cuts and Jobs Act which limited like kind exchange treatment to exchanges of real property. Pub. L. No. 115-97. The Internal Revenue Service defines “real property” as “land and generally anything built on or attached to it.” IRS Publication 551 (2018). In 2020, Taxpayer exchanged a recreational vehicle (“RV”) for a newer model. Taxpayer received $35,002 for the old RV and the new RV’s fair market value was approximately $175,000. Thus, Taxpayer’s total gain was approximately $210,000. Taxpayer treated the exchange of the RVs as a “like kind exchange” and recognized the $35,002 it received for the old RV as a gain and deferred the $175,000 value of the new RV on its 2021 Indiana Corporate Adjusted Gross Income Tax Return (“Form IT-20”). This was incorrect because in 2020 when the exchange occurred, the Tax Cuts and Jobs Act had been enacted, and Taxpayer was no longer permitted to omit from its income the gain from the exchange because the RV was not considered to be “real property” for the purposes of I.R.C. § 1031. In 2021, Taxpayer sold the new RV it had acquired in the exchange for approximately $120,000. Taxpayer hired a new accounting firm that, while preparing the 2021 Form IT-20, realized that the previous tax preparer erroneously treated the exchange of the RVs as a like kind exchange and deferred the gain under I.R.C. § 1031. Taxpayer’s accounting firm attempted to reconcile the error made in the 2020 tax return. Taxpayer’s representative explained it “made an adjustment to the tax basis of the [new RV], decreasing the tax basis to zero, although RV was never depreciated.” Further, Taxpayer’s representative explained: After reviewing Taxpayer’s argument and the documentation provided, the Department agrees. Though Taxpayer incorrectly treated the exchange of the old RV for the new RV as a like kind exchange on its 2020 Form IT-20, the entire gain was recognized in 2021. In other words, the correct amount of tax has been paid on the transactions involving the new RV, overall. The Department’s assessment for additional Indiana corporate income tax was incorrect. FINDING Taxpayer’s protest as to the assessment for additional Indiana corporate income tax is sustained, and Taxpayer is entitled to a refund of the amount it paid in satisfaction of the assessment.

II. Sales and Use Tax – Recreational Vehicle Purchase.

DISCUSSION As previously noted, all tax assessments are prima facie evidence that the Department’s claim for unpaid tax is valid. It is a taxpayer’s responsibility to establish that the existing tax assessment is incorrect. IC 6-8.1-5-1(c). Indiana imposes an excise tax called “the state gross retail tax” or “sales tax” on retail transactions made in Indiana. IC 6-2.5-2-1(a); 45 IAC 2.2-2-1. A person who acquires property in a retail transaction is liable for the sales tax on the transaction. IC 6-2.5-2-1(b). Indiana also imposes a complementary excise tax called a “use tax” on “the storage, use, or consumption of tangible personal property in Indiana if the property was acquired in a retail transaction, regardless of the location of that transaction or of the retail merchant making that transaction.” IC 6-2.5-3-2(a). “Use” means the “exercise of any right or power of ownership over tangible personal property.” IC 6-2.5-3-1(a). The use tax is a functional equivalent to the sales tax. See Rhoade v. Indiana Dept. of State Revenue, 774 N.E.2d 1044, 1047 (Ind. Tax Ct. 2002). Tangible personal property purchased in Indiana and “stored, used, or otherwise consumed in Indiana is subject to Indiana use tax for such property, unless the Indiana state gross retail tax has been collected at the point of purchase.” 45 IAC 2.2-3-4. IC 6-2.5-3-6 provides further guidance on the collection of use tax on the use, storage, or consumption of tangible personal property acquired in a retail transaction. The person liable for the use tax shall pay the use tax to the Department or, in the case of a vehicle, to the titling agency when the person applies for a title for the vehicle. IC 6-2.5-3-6(c) and (d)(1). The Department conducted a sales tax audit of Taxpayer’s sales records for the 2020 and 2021 tax years and determined that “[T]axpayer purchased a [recreational vehicle] without the payment of sales tax at the time of purchase or accrued use tax.” Subsequently, the Department issued an assessment for use tax on the recreational vehicle (“RV”). Along with its protest, Taxpayer provided a receipt from the Indiana Bureau of Motor Vehicles that reflects that Taxpayer remitted sales tax at the time it titled the RV. The Department erred when it issued an assessment for use tax on the vehicle. FINDING Taxpayer’s protest as to the use tax assessment for the RV is sustained, and Taxpayer is entitled to a refund of the amount it paid in satisfaction of the assessment.

III. Tax Imposition – Penalty.

DISCUSSION As previously noted, all tax assessments, including penalty and interest, are prima facie evidence that the Department’s claim for unpaid tax is valid. It is a taxpayer’s responsibility to establish that the existing tax assessment is incorrect. IC 6-8.1-5-1(c). IC 6-8.1-10-2.1(a)(3) requires that a ten percent penalty be imposed if a tax deficiency results from a taxpayer's negligence. IC 6-8.1-10-2.1(a)(2) also requires a ten percent penalty if a taxpayer “fails to pay the full amount of tax shown on the person's return on or before the due date for the return or payment.” IC 6-8.1-10-2.1(d) states that, “If a person subject to the penalty imposed under this section can show that the failure to . . . pay the full amount of tax shown on the person's return . . . or pay the deficiency determined by the [D]epartment was due to reasonable cause and not due to willful neglect, the department shall waive the penalty.” 45 IAC 15-11-2(b) defines negligence as “the failure to use such reasonable care, caution, or diligence as would be expected of an ordinary reasonable taxpayer.” Negligence is to “be determined on a case by case basis according to the facts and circumstances of each taxpayer.” Id. 45 IAC 15-11-2(c) provides that in order to establish “reasonable cause,” the taxpayer must demonstrate that it “exercised ordinary business care and prudence in carrying out or failing to carry out a duty giving rise to the penalty imposed . . . . ” After an audit of Taxpayer’s sales records, the Department determined that Taxpayer had purchased a booth and an advertising stand and failed to remit sales or accrued use tax at the time of purchase. Taxpayer agrees with the Department that it did not remit sales or use tax on this purchase. Taxpayer argues that the assessment of use tax for the 2020 tax year was proper, but requests that the Department abate any associated penalties due to Taxpayer’s showing of good faith. In reviewing the audit report, Taxpayer had approximately $7.5 million dollars of total sales in 2020. The only item in 2020 that it failed to pay use tax on was a booth and advertising stand it purchased for approximately $2,500. The Department agrees that Taxpayer’s failure to remit use tax on the purchase of the booth and advertising stand was due to a misunderstanding and was not negligence on Taxpayer’s part. Taxpayer demonstrated that it made a large number of sales in 2020 of which all but one were correctly reported. Taxpayer exercised ordinary business care and prudence as defined under 45 IAC 15-11-2(c). FINDING Taxpayer’s protest as it relates to the imposition of penalty is sustained, and Taxpayer is entitled to a refund of the penalty amount it remitted to the Department. SUMMARY Taxpayer’s protests pertaining to Indiana corporate income tax and sales and use tax is sustained. Due to Taxpayer’s payment of the assessments relating to the audit in order to prevent the accrual of interest, Taxpayer is entitled to a refund to the extent described herein. May 1, 2025 Replaces Finding Document: New