in-20250528-IR-045250249NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20242125 and 02-20242126 S Corporation and Indiana Individual Income Tax  For the Year 2020 HOLDING Indiana Business Owners failed to provide sufficient information to justify a review of their S Corporation’s depreciation schedule. ISSUE Authority: IC 6-3-1-3.5; IC 6-3-2-1; IC 6-3-4-11; IC 6-8.1-5-1; Indiana Dep’t of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dep’t of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dep’t of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); 45 IAC 15-5-1; IRS Publication 946 (2023); IRS Topic no. 704, Depreciation. Taxpayers and S Corporation protest the Department’s assessment of 2020 individual income tax. STATEMENT OF FACTS Taxpayers are Indiana residents who are shareholders of an Indiana S Corporation. The S Corporation is in the business of manufacturing “custom equipment for food service companies.” More specifically, the S Corporation constructs, sells, and then installs spiral freezer systems. The Indiana Department of Revenue (“Department”) conducted an audit review of the S Corporation’s income tax returns. The Department found that the S-Corp.’s 2020 return “revealed [] areas of noncompliance.” As a result, the Department’s audit “disallowed the federal and state current depreciation on the [S Corporation’s] 2021 Cadillac Escalade for the 2020 tax year.” The adjustment to the depreciation schedule “flowed through” to the Taxpayers’ personal income tax calculation. The Department issued Taxpayers a proposed assessment of approximately $7,500. Taxpayers disagreed with the assessment and submitted a protest to that effect. An administrative hearing was conducted, Taxpayers submitted additional information, that information was reviewed, and this Letter of Findings results. DISCUSSION The issue is whether Taxpayers have met their burden of establishing that the Department’s 2020 individual income tax assessments were incorrect because Taxpayers’  S Corporation was entitled to depreciate the Cadillac Escalade on the S Corporation’s flowthrough income and because Taxpayers were entitled to a review of the Department’s depreciation calculations. In considering both the Department’s audit conclusion and Taxpayers’ own individual contentions, the Department here emphasizes that it is Taxpayers’ responsibility to establish that the income tax assessment was incorrect. As stated in IC 6-8.1-5-1(c), “The notice of proposed assessment is prima facie evidence that the department’s claim for the unpaid tax is valid, including during an action appealed to the tax court under this chapter. The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made.” Indiana Dep’t 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). Consequently, each taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department’s position is wrong. In weighing the Department’s original income tax assessment, the S Corporation’s audit report, the relevant Indiana law, and Taxpayers’ own arguments, the Department bears in mind that “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.’” Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Thus, interpretations of Indiana tax law contained within this decision, as well as the conclusions set out in the S Corporation’s audit report are entitled to deference. The assessments were made in fulfilling the Department’s responsibility set out in IC 6-8.1-5-1(b). That statute defines the Department’s responsibility. “If the [D]epartment reasonably believes that a person has not reported the proper amount of tax due, the [D]epartment shall make a proposed assessment of the amount of the unpaid tax on the basis of the best information available to the [D]epartment.” (Emphasis added). See also 45 IAC 15-5-1. 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(a). To efficiently and effectively compute what is considered the resident/taxpayers’ Indiana income tax, the Indiana statute refers to the Internal Revenue Code. IC 6-3-1-3.5(a) provides the starting point to determine the taxpayers’ taxable income and to calculate what would be his or her Indiana income tax after applying certain additions and subtractions to that starting point, with modifications following. Because they operated an S Corporation, IC 6-3-4-11 imposes on Taxpayers the responsibility for paying Indiana individual income tax on their share of the income earned from their S Corporation. The statute provides in part: IC 6-3-4-11(a) (Emphasis added). Taxpayers’ “share of the income” increased because the Department found that the S Corporation was not entitled to depreciate the full value of a $122,0000, 2021 Cadillac Escalade on its 2020 return. As explained in the audit report, “The [Department] requested that the [S Corporation] submit supporting documentation for how the depreciation was calculated.” In response, the S Corporation “provided a signed purchase invoice dated December 29. 2020, and a title that reflects the purchase date as January 2, 2021.” The  Department disagreed that the S Corporation was entitled to depreciate the full value on the S Corporation’s return. In doing so, the Department cited IRS Publication 946 which provides: The Department also cited Internal Revenue Service Topic 704 which provides: The Department here will set aside the question of whether or not a Cadillac Escalade could be “acquired for use in your trade or business” IRS Publication 946 (2023). The Department did not address whether or not the SUV could be utilized by a company in the business of manufacturing and selling freezers. Instead, Taxpayers sidestep the Cadillac depreciation issue and chose to raise questions regarding the calculation of the depreciation claimed on the S Corporation’s return. As Taxpayer states: In more detail, Taxpayer explains what it regards as the “significant error.” Taxpayer’s argument is incorrect. In reviewing Taxpayer’s depreciation schedule, the Department held that the S Corporation could not fully depreciate the Cadillac in 2020 when the “signed purchase invoice [was] dated December 29, 2020, and [the] vehicle title [] reflected the purchase date as January 2, 2021.” The Department adjusted the federal depreciation schedule and only then calculated the amount of bonus depreciation. Taxpayer’s detailed objection above would be correct if the Department had not made the adjustment, it did. The Department did what it is required to do under IC 6-8.1-5-1(b) and made the adjustment. That decision renders Taxpayer’s calculation objection moot. IRS Publication 946 (2023) and IRS Topic no. 704, Depreciation limit Taxpayer’s ability to fully depreciate the $122,000 vehicle in one year and requires Taxpayer to depreciate the capital expenditure “over a number of years” and “deduct a part of the cost every year until you fully recover its cost.” Id. Taxpayer has not challenged the Department’s adjustment to the Cadillac depreciation as explained in the audit report. Instead, the purported calculation error calls upon the Department to allow Taxpayer to set aside the federal guidance on the matter and depreciate the $122,000 Cadillac in a single year. FINDING Taxpayer’s protest is respectfully denied. March 28, 2025 Replaces Finding Document at: New