in-20250430-IR-045250176NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20241335 Individual Income Tax For The Year 2022 HOLDING Taxpayer provided documentation showing the Department’s disallowance of business losses 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; IC 6-8.1-5-4; 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). Taxpayer protests the assessment of additional individual income tax. STATEMENT OF FACTS In 2022, Taxpayer was a full-time Indiana resident.  Taxpayer’s Mother had maintained a rental duplex for over thirty years.  As Mother’s health declined, Taxpayer began assisting Mother with managing the duplex, eventually taking over the management duties in full.  Taxpayer later incurred numerous expenses associated with updating and renovating the duplex. For tax year 2022, Taxpayer filed her Form IT-40, including Schedule C, detailing the income and expenses related to the property renovation and rental.  The Indiana Department of Revenue (“Department”) reviewed Taxpayer’s return and requested additional information related to the business income and expenses.  Taxpayer provided additional information, and the Department disallowed the business loss claimed on the return.  As a result, the Department issued a Notice of Proposed Assessment for additional individual income tax.  Taxpayer disagreed and protested the assessment.  The Department discussed the protest with Taxpayer during a telephone call, and Taxpayer provided additional documentation via email.  This Letter of Findings results.  Additional facts will be provided as necessary.

I. Individual Income Tax – Assessment.

DISCUSSION The Department determined that Taxpayer owed additional individual income tax related to tax year 2022.  Taxpayer disagreed with the assessment and initiated a protest.  In support, Taxpayer provided an explanation of events and documentation related to the business’ income and expenses. 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.  Modifications are outlined in IC 6-3-1-3.5(a). Taxpayer explained that in mid-2019, a long-time tenant vacated the duplex, and Taxpayer took over management of the duplex full-time.  After an inspection, Taxpayer was required to update the duplex for it to comply with the updated occupancy rules.  Taxpayer started the duplex rehab projects in 2020; however, due to the Covid-19 pandemic, the process was significantly delayed.  The majority of renovations were not in full swing until 2021 and after.  By mid-2023, the renovations were complete, and the duplex was ready for full-time occupancy again. Taxpayer also explained that there were multiple issues requiring updating and correction.  This included things such as frozen pipes, mold in the crawl space that required remediation, and roof issues.  Taxpayer replaced the roof and made other updates to the interior and exterior.  To expedite the updating process, Taxpayer obtained a general contractor license to oversee the construction process.  She also had to obtain a rental agent license in order to be able to interact with potential renters.  When Taxpayer filed her 2022 individual income tax return, she claimed a deduction of approximately $25,000 related to the business expenses.  The Department disallowed the deduction, and the addback of the loss increased Taxpayer’s adjusted gross income, resulting in an assessment of additional income tax. As requested, and again during the protest review, Taxpayer provided information related to the income and expenses of the duplex.  The documentation provided meets the requirements under IC 6-8.1-5-4(a) as “source documentation” supporting Taxpayer’s business losses for tax year 2022.  Taxpayer has met the burden imposed under IC 6-8.1-5-1(c) showing the Department’s assessment was wrong. FINDING Taxpayer’s protest is sustained. February 28, 2025 Replaces Finding Document at: New