in-20250326-IR-045250127NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 02-20242361; 02-20242362; 02-20242363 Corporate Income and Withholding Tax For the 2022 Tax Year HOLDING Partnerships successfully established that they did not owe back taxes but failed to establish that the penalties should be abated. ISSUE

I. Corporate Income Tax – Income

Authority: IC 6-3-4-12; 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); Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012); Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); Income Tax Information Bulletin 72 (February 2020); Income Tax Information Bulletin 72 (January 2014); IT-65 Partnership Booklet (2022). Taxpayers protest the Department’s assessment of unpaid income taxes.

II. Withholding Tax – Penalties.

Authority: IC 6-8.1-10-2.1; Schedule IN-COMPA (2022). Taxpayers protest the Department’s assessment of penalties for failure to withhold. STATEMENT OF FACTS Taxpayers are three business entities organized under Texas law that are treated as partnerships for tax purposes. Entity A owns a piece of commercial property in Indiana, Entity B partially owns Entity A, and Entity C owns Entity B. Entity C is owned by two individuals who are Texas residents. Taxpayers filed partnership tax returns for the 2022 tax year with the Indiana Department of Revenue (“Department”) in which they did not include composite returns. The Department audited Taxpayers and determined that Taxpayers had failed to withhold taxes from its nonresident partners’ income. The Department therefore assessed each Taxpayer unpaid withholding taxes, a twenty percent penalty for failing to withhold, and a $500 statutory penalty for failing to file a composite return. Taxpayers timely protested, and the Department held an administrative hearing. This Letter of Findings results.

I. Corporate Income Tax – Income

DISCUSSION Taxpayers argue that they do not owe back taxes because the nonresident partners file individual Indiana income tax returns on which they report the income that Taxpayers pass through to them. 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 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). Where a taxpayer is challenging the Department’s final determination, the taxpayer is required to provide documentation explaining and supporting its challenge. Poorly developed and non-cogent arguments are subject to waiver. Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138, 1145 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480, 486 n.9 (Ind. Tax Ct. 2012). Additionally, “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.’” Indiana Dep’t of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Thus, all interpretations of Indiana tax law contained within this decision are entitled to deference. Indiana requires that partnerships owned by residents of other states withhold tax from the nonresident owners’ shares of income. IC 6-3-4-12(a). The Department requires that partnerships pay withholding tax once per year. See Income Tax Information Bulletin 72 (February 2020), 20200226 Ind. Reg. 045200065NRA; see also IC 6-3-4-12(g). Partnerships are required to file “a composite adjusted gross income tax return on behalf of all nonresident partners.” IC 6-3-4-12(i). At one time, the Department allowed nonresident partners to opt out of this requirement, but it no longer does. Compare Income Tax Information Bulletin 72 (January 2014), 20140129 Ind. Reg. 045140015NRA with Income Tax Information Bulletin 72 (February 2020), 20200226 Ind. Reg. 045200065NRA. Partnerships subject to withholding who meet the requirements for an exemption from withholding must either file a Schedule IN-COMPA with their return or request consent from the Department. IT-65 Partnership Booklet (2022). These requirements apply equally to partnerships that are owned by nonresident partnerships. Id. Partnerships subject to withholding are liable for the entire amount of tax that they were required to withhold. IC 6-3-4-12(a)(1). However, if a partnership fails to withhold the proper amount of tax, but the partners ultimately pay the tax, the partnership will not be liable for the tax it failed to withhold. IC 6-3-4-12(h). The partnership may still be liable for interest and penalties for failure to withhold even if the partners ultimately pay the tax. Id. Taxpayers were required by law to both file a composite return with the Department and withhold taxes from each of their respective owners’ shares of Taxpayers’ income. But Taxpayers did not file a composite return, nor did they present documentation showing that they paid withholding tax to the Department or were exempt from withholding. Taxpayers presented documentation reflecting that their owners had net losses on their Indiana returns and ultimately did not owe any tax to Indiana. Taxpayers have shown that they do not owe the Department any tax because any amount that Taxpayers should have withheld would ultimately have been refunded when their owners filed their Indiana tax returns. FINDING Taxpayers’ protest of the income tax liability is sustained.

II. Withholding Tax – Penalties.

A partnership that fails to withhold tax that it is legally required to withhold is subject to a penalty equal to twenty percent of the amount that should have been withheld. IC 6-8.1-10-2.1(h). A pass-through entity that fails to include all nonresident owners on its composite return is subject to a $500 penalty. IC 6-8.1-10-2.1(j). As discussed above, Taxpayers were required to file a composite return and withhold taxes from each of their respective owners’ shares of partnership income. Taxpayers did not file an affidavit stating that they did not have income requiring withholding. The Indiana Composite Filing Opt-Out Affidavit states that “[f]ailure to attach an affidavit shall be treated as if the affidavit had not been completed…”, Schedule IN-COMPA (2022). The Department therefore determined that Taxpayers were partnerships required to withhold taxes and that Taxpayers had income subject to withholding. This determination means that Taxpayers failed to comply with their statutory duty to withhold, and therefore, Taxpayers are subject to a penalty equal to twenty percent of the amount that should have been withheld, plus interest. Taxpayers are pass-through entities who are required to withhold taxes on behalf of their nonresident owners. But Taxpayers did not do so. Taxpayers are therefore liable for the penalties assessed against them for failure to withhold taxes and failure to file. FINDING Taxpayers’ protest of the penalty liabilities is denied. SUMMARY Taxpayers’ protest is sustained to the extent that they do not owe withholding tax or interest thereon and denied to the extent that they still are liable for all penalties. January 10, 2025 Replaces Finding Document at: New