in-20250827-IR-045250395NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20242668 Individual Income Tax For the 2022 Tax Year HOLDING Individual carried his burden to show that he reported his Schedule C income accurately. ISSUE

I. Individual Income Tax – Burden of Proof.

Authority: I.R.C. § 62; I.R.C. § 162; IC 6-3-1-3.5; IC 6-3-2-1; IC 6-8.1-5-1; IC 6-8.1-5-4; Stinson Est. v. United States, 214 F.3d 846 (7th Cir. 2000); Indiana Dep’t 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, 466 (Ind. 2012); Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480, 486 n.9 (Ind. Tax Ct. 2012); Scopelite v. Indiana Dep’t of Local Gov’t Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Lafayette Square Amoco, Inc. v. Indiana Dep’t of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007); Internal Revenue Service, Topic no. 305, Recordkeeping; Internal Revenue Service, Topic no. 510, Business use of car; IRS Publication 463 (2022); IRS Publication 535 (2022). Taxpayer protests the assessment of additional Indiana income tax due to a partial denial of his Indiana Earned Income Credit. STATEMENT OF FACTS Taxpayer is an Indiana resident who regularly files returns with the Indiana Department of Revenue (“Department”). Taxpayer reported a loss from a business on his 2022 federal Schedule C form, and this loss decreased his federal adjusted gross income. The Department requested documentation from Taxpayer to support the income reported and business expenses claimed, and Taxpayer provided documents. The Department determined that Taxpayer had supported his income amount but not his expenses, and it decreased his expenses to zero. Because this adjustment increased Taxpayer’s FAGI as listed on his Indiana return, the Department issued a Notice of Proposed Assessment for additional income tax. Taxpayer timely protested, and the Department held an administrative hearing. This Letter of Findings results. Additional facts will be provided as necessary.

I. Individual Income Tax – Burden of Proof.

DISCUSSION Taxpayer argues that he properly reported the expenses from his business. The Department asked Taxpayer to provide documentation to corroborate the three largest areas of expense claimed on his Schedule C, and the Department determined that the documents that Taxpayer provided were not sufficient to do so. 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 Dep’t of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007). Where a taxpayer is challenging the Department’s final determination, the taxpayer is required to provide documentation explaining and supporting its challenge. 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). Additionally, “when [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.’” Indiana Dep’t of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Thus, all interpretations of Indiana law contained within this decision are entitled to deference. Indiana imposes a tax on “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. The starting point for determining Indiana income tax is the taxpayer’s federal adjusted gross income as defined in I.R.C. § 62, which taxpayers are directed to enter on their Indiana return before making modifications that are outlined in IC 6-3-1-3.5. 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). 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.” IRS Publication 535 (2022). If a taxpayer purchases tangible personal property, the taxpayer is only allowed to deduct the cost when the taxpayer uses the property for business purposes. Internal Revenue Service, Topic no. 510, Business use of car. A taxpayer may either use actual expenses or standard mileage for a deduction for business use of a vehicle. IRS Publication 463 (2022). However, if a taxpayer claims a standard mileage deduction for a vehicle, they may not claim depreciation expenses for the same vehicle. Id. A taxpayer may also claim a deduction for interest paid on loans taken out to support their trade or business so long as the taxpayer is legally liable for the debt, the taxpayer and lender both intend for the debt to be repaid, and the taxpayer and lender have a “true debtor-creditor relationship.” Id. Internal Revenue Code provisions dealing with deductions, exemptions, and exclusions are “matters of legislative grace.” Stinson Est. v. United States, 214 F.3d 846, 848 (7th Cir. 2000). The taxpayer who claims such deduction must maintain adequate records to substantiate it. See Internal Revenue Service, Topic no. 510, Business use of car; Topic no. 305, Recordkeeping. The Department asked Taxpayer to verify his expenses from three different sources: car and truck expenses, depreciation, and “other.” The Department determined that Taxpayer tried to claim car and truck expenses and depreciation on the same vehicle, which is not allowed. Further, the Department could not determine whether the expenses claimed under “other” were valid because it was unclear from Taxpayer’s documentation what those expenses were. Because the Department did not ask for verification of any other expense categories, the Department will not revisit those categories now. Taxpayer explained at the hearing that he had inadvertently claimed standard mileage and depreciation on the same vehicle. Taxpayer represented to the Department that he would rather the Department reduce the standard mileage claimed to zero and allow him to take the claimed depreciation. Because the Department determined earlier that Taxpayer would be allowed to claim either of these deductions (but not both), the Department will recalculate Taxpayer’s taxes owed using the requested adjustment. Taxpayer also stated that the “other” expense was interest paid on a business loan taken out from a bank, and he provided receipts from the lender showing that he made interest payments in the amount reported. The Department agrees with Taxpayer that he has carried his burden to show that the “other” expense was a valid deduction. Taxpayer carried his burden under IC 6-8.1-5-1 to show that he was entitled to claim both the depreciation expense and “other” expense that he claimed on his return as originally filed. However, Taxpayer was unable to show that he was entitled to claim his car and truck expenses alongside his depreciation expense, so he may not claim a deduction for his car and truck expenses. The Department will recalculate his tax owed by allowing his business income to remain as filed, except for his car and truck expenses, which will be reduced to zero. FINDING Taxpayer’s protest is sustained to the extent that the Department will recalculate his tax owed using the figures detailed above. June 6, 2025 Replaces Finding Document: New