in-20250430-IR-045250180NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20241727 Individual Income Tax For The Year 2020 HOLDING Individual established that the Department’s assessment of additional Indiana income tax was overstated. ISSUE

I. Individual Income Tax – Net Operating Loss.

Authority: I.R.C. § 62; IC 6-3-1-3.5; IC 6-3-2-1; IC 6-3-2-2; IC 6-8.1-5-1; Indiana 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 Department’s assessment for additional Indiana income tax. STATEMENT OF FACTS Taxpayer is an Indiana resident who regularly files an Indiana individual income tax return. Taxpayer, as a result of a business operation, had a net operating loss (“NOL”) from a previous year. Taxpayer attempted to carry forward the NOL at the federal level for the 2020 tax year. On his 2020 Indiana return, Taxpayer reported his federal adjusted gross income (“FAGI”) as a negative number due to the NOL before adding back the NOL, as required by Indiana law. In 2024, Taxpayer received a letter from the Indiana Department of Revenue (“Department”) indicating that his 2020 FAGI was understated on his Indiana return. The Department adjusted Taxpayer’s FAGI to match what was reported on Taxpayer’s federal return and issued a proposed assessment for individual income tax due on the unreported income. Taxpayer disagreed and submitted a protest to that effect. An administrative hearing was held, and this Letter of Findings results. Additional facts will be provided as necessary.

I. Individual Income Tax – Net Operating Loss.

DISCUSSION After reviewing information related to his Indiana Individual Tax Return (“Form IT-40”), the Department determined that Taxpayer had underreported his FAGI and owed additional Indiana income tax on the unreported income. Taxpayer disagreed and protested the assessment. In support, Taxpayer provided copies of his 2020 federal tax return transcript, 2020 U.S. Individual Income Tax Return (“Form 1040”), 2020 federal Record of Account, and 2020 Form IT-40. 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. Consequently, a taxpayer must provide documentation explaining and supporting that the Department’s position is wrong. See 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). 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.’”  Indiana 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.” IC 6-3-2-1. IC 6-3-2-2(a) outlines what qualifies as income derived from Indiana sources and subject to Indiana income tax. The starting point for determining Indiana income tax is the taxpayer’s FAGI as defined in I.R.C. § 62, which a taxpayer is directed to enter on their Indiana return before making modifications that are outlined in IC 6-3-1-3.5. Where a taxpayer reports an NOL on their federal return, IC 6-3-1-3.5(a)(16) requires the taxpayer to “[a]dd an amount equal to any deduction allowed under Section 172 of the Internal Revenue Code (concerning net operating losses).” In other words, Indiana requires a taxpayer to “add back” any amount taken as a federal NOL on their Form IT-40. In reviewing Taxpayer’s documentation related to the 2020 tax year, it appears he reported a negative FAGI on his Form 1040 due to the claimed NOL. Taxpayer then reported that same FAGI on his Form IT-40, and as required by statute, added back the NOL. However, based on Taxpayer’s federal Record of Account, Taxpayer’s NOL was disallowed at the federal level, and his FAGI was corrected to approximately $42,000. The Department, upon discovering the FAGI discrepancy, adjusted Taxpayer’s FAGI on his Form IT-40. When the Department did so, it failed to remove the addback. This was incorrect. Because Taxpayer’s NOL was disallowed federally, he was no longer required to addback the amount of the NOL on his Form IT-40. The Department will adjust Taxpayer’s return to include his correct FAGI and remove the addback associated with the disallowed NOL. Taxpayer is still liable for any amount of the assessment that remains due to the underreported FAGI. FINDING Taxpayer’s protest is sustained to the extent that the assessment for additional Indiana individual income tax was overstated. February 10, 2025 Replaces Finding Document at: New