in-20250430-IR-045250178NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20241408 Indiana Individual Income Tax For The Tax Year 2018 HOLDING The Department made a mistake when it increased the prorated amount of Out-of-State Individual’s Indiana income amount from the amount originally reported. ISSUE

I. Indiana Individual Income Tax – Indiana Source Income.

Authority: IC 6-3-1-13; IC 6-3-2-1; IC 6-8.1-5-1; 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); Merriam-Webster, https://www.merriam- webster.com/dictionary/proration. Taxpayer protests the Department’s proposed assessment of additional Indiana income tax. STATEMENT OF FACTS Taxpayer resides outside Indiana but has income attributable to business activity in Indiana. Taxpayer filed a 2018 Indiana “Part-Year and Full-Year Non-Resident” (IT-40PNR) income tax return. Accompanying the return was a Schedule K-1 reporting Taxpayer’s income attributable to Taxpayer’s shareholder interest in his multi-state business. The Indiana Department of Revenue (“Department”) reviewed the return and determined that Taxpayer had failed to report all his Indiana income. Taxpayer originally reported approximately $54,000 in Indiana income. The Department adjusted that amount after finding Taxpayer had received approximately $13,000,000 in unreported income. The income adjustment resulted in an assessment of approximately $522,000 in additional Indiana income tax, penalty, and interest. To that end, the Department issued Taxpayer a “Notice of Proposed Assessment” dated October 3, 2023. The letter explained the basis for the assessment. The notice indicated that Taxpayer was being assessed approximately $420,000 in tax, $42,000 in penalties, and $60,000 in interest. Taxpayer contacted the Department requesting a further explanation. The Department responded in a letter – addressed to Taxpayer’s representative –dated April 26, 2024. The letter provided: Taxpayer disagreed with the Department’s decision and submitted a protest to that effect. An administrative hearing was conducted by telephone during which Taxpayer’s representative explained the basis for the protest. This Letter of Finding is based on Taxpayer’s 2018 tax return as filed, documents provided during the course of the protest, and information Taxpayer submitted following the phone hearing.

I. Indiana Individual Income Tax – Indiana Source Income.

DISCUSSION The issue is whether Taxpayer has met his burden of establishing the Department made a mistake when it adjusted the prorated amount of his Indiana income and made a second mistake when it assessed the additional tax, interest, and penalty. The Department points out that it is Taxpayer’s responsibility to establish that the income tax assessment is wrong. 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. The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made.” 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). Consequently, a taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department’s position is wrong. In considering Taxpayer’s 2018 return, the Department’s adjustments to that return, Taxpayer’s arguments, and the relevant law, 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 are entitled to deference. IC 6-8.1-5-1(b) requires of the Department as follows: 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). Nonresident is “any person who is not a resident of Indiana.” IC 6-3-1-13. Taxpayer originally reported the “proration from Schedule A” as .004 percent. The Department changed the .004 percent to 100 percent. “Proration” means to “assess proportionately.” Merriam-Webster, https://www.merriam- webster.com/dictionary/proration (Last visited August 24, 2024). In this instance, the term refers to that portion of Taxpayer’s nation-wide income which was attributable to his S Corporation’s activities conducted within this state. According to the information contained in his K-1, his Indiana schedule A Indiana income was $54,000 compared to $13,000,000 total AGI confirming the originally reported .004 proration. Simply put, the Department’s calculation was wrong. Taxpayer’s protest is sustained, and the Department is obligated to correct the error. FINDING As to the proration calculation, Taxpayer’s protest is sustained. February 26, 2025 Replaces Finding Document at: New