in-20250326-IR-045250119NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20241827 Individual Income Tax For the Years 2020 and 2021 HOLDING Individual Shareholder established that the Department’s assessment of additional Indiana individual income tax was incorrect. ISSUE

I. Individual Income Tax – Pass-Through Income.

Authority: I.R.C. § 61; I.R.C. § 62; I.R.C. § 1361; I.R.C. § 1362; IC 6-3-1-3.5; IC 6-3-2-1; 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); 45 IAC 3.1-1-66; Black’s Law Dictionary (11th ed. 2019). Taxpayer protests the proposed assessments of additional Indiana individual income tax resulting from an audit of an S-corporation for which he is the sole shareholder. STATEMENT OF FACTS

I. Individual Income Tax – Pass-Through Income.

Taxpayer is the sole shareholder of an Indiana S Corporation (“S-Corp”). The Indiana Department of Revenue (“Department”) conducted an audit of the S-Corp for the 2020 and 2021 tax years. As a result of the audit, the Department determined that the S-Corp’s bank deposits exceeded the amount of gross receipts reported by the S-Corp on its federal income tax return. The Department adjusted the S-Corp’s gross receipts to reconcile the difference between the bank deposits and gross receipts. This adjustment resulted in an increase to Taxpayer’s individual tax liability. S-Corp protested the Department’s adjustments to its gross receipts. Letter of Findings 02-20241550; 03-20241549; 04-20241548 address the S-Corp’s protest of the income tax audit and the related sales tax audit and withholding tax audit. Taxpayer disagreed with the assessments and submitted a protest to that effect. Taxpayer waived his right to a hearing. This Letter of Findings is written in reliance of information provided by Taxpayer and the Department’s records. Additional facts will be provided as necessary. DISCUSSION Taxpayer protests the assessments for additional Indiana individual income tax for tax years 2020 and 2021. The assessments arose due to an adjustment to the income of an S-Corp for which Taxpayer is the sole shareholder. In support of his protest, Taxpayer provided deposit summaries, balance sheets, transaction detail sheets, and reconciliation detail sheets for the relevant tax years As a threshold issue, it is a taxpayer’s responsibility to establish that the existing tax assessment is incorrect. A proposed assessment is prima facie evidence the Department’s claim for the unpaid tax is valid. IC 6-8.1-5-1(c). The burden of proving 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). A taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department’s position is wrong. Further, “[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…” IC 6-3-2-1. The starting point for determining Indiana income tax is the taxpayer’s federal adjusted gross income (“FAGI”) as defined in I.R.C. § 62. Adjusted gross income means “in the case of an individual, gross income minus the following deductions…” I.R.C § 62. I.R.C. § 61 defines “gross income” as “all income from whatever source derived, including…[g]ross income derived from business....” Indiana taxpayers are directed to enter their FAGI on their Form IT-40 before making the modifications outlined in IC 6-3-1-3.5. An S-Corp, such as Taxpayer’s company, is “[a] corporation whose income is taxed through its shareholders rather than through the corporation itself." Black’s Law Dictionary (11th ed. 2019); see also; I.R.C. § 1361-62. Pursuant to 45 IAC 3.1-1-66, “[c]orporations electing Subchapter S status under Internal Revenue Code §1372…are exempt from adjusted gross and supplemental net income tax on all income….” It further notes, “Subchapter S corporation shareholders are taxed on their distributive shares of income at the individual income tax rate.” Therefore, the S-Corp’s income flows through to Taxpayer. The Department noted in its S Corporation income tax audit report that, “[s]ince the bank deposits were not able to be reconciled to gross receipts[,] an adjustment will be made for the additional income.” Taxpayer argues that some of the transactions that are recorded as income or income offsets do not affect the bank account. Further, he argues that other deposits are not actual sales but are instead vendor refunds, sales tax assessments, gift certificates, and deposits from December of prior years, which are not reflected on the bank statements until January of the following year. The documentation provided by Taxpayer supports his argument that the assessments were overstated. The Department will conduct a supplemental review of the documentation provided, make adjustments, and issue new assessments. FINDING Taxpayer’s protest is sustained to the extent that a supplemental review by the Department will result in a reduction of the assessments for additional Indiana individual income tax. January 31, 2025 Replaces Finding Document at: New