in-20250326-IR-045250116NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20241637 Individual Income Tax For The Tax Year 2022 HOLDING Individual was an employee who provided his “restaurant equipment repair” service to an owner of a restaurant and received W-2 wages. As such, Individual, as an employee, was not allowed to claim a business expense deduction associated with “restaurant equipment repair.” Individual also failed to substantiate his claimed business expense deduction associated with his “restaurant equipment repair” business and was responsible for additional Indiana income tax. ISSUE

I. Individual Income Tax – Burden of Proof.

Authority: I.R.C. § 61; I.R.C. § 62; I.R.C. § 162; IC 6-3-1-3.5; IC 6-3-2-1; IC 6-8.1-5-1; IC 6-8.1-5-4; Stinson Est. v. United States, 214 F.3d 846 (7th Cir. 2000); Indiana Dep’t of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Miller Brewing Co. v. Indiana Dep’t of State Revenue, 903 N.E.2d 64 (Ind. 2009); Scopelite v. Indiana Dep’t of Local Gov’t Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Internal Revenue Service , Publication 535: Business Expenses (2022); Internal Revenue Service, Topic no. 510, Business use of car; Internal Revenue Service, Topic no. 305, Recordkeeping. Taxpayer protests the proposed assessment of individual income tax for 2022. STATEMENT OF FACTS Taxpayer is an Indiana resident who, together with his spouse, timely filed their 2022 Indiana Full-Year Resident Individual Income Tax Return (“IT-40”). The Indiana Department of Revenue (“Department”) determined that Taxpayer had more federal adjusted gross income than what was reported in their IT-40. The Department concluded that Taxpayer owed additional Indiana and county income tax and, as a result, assessed Taxpayer additional tax, penalty, and interest. Taxpayer timely protested the proposed assessment. An administrative hearing was held. At the hearing, Taxpayer requested, and was granted, additional time to submit supporting documents requested by the Department. Taxpayer, however, did not provide the requested supporting documents. This Letter of Findings ensues.

I. Individual Income Tax – Burden of Proof.

DISCUSSION The Department determined that Taxpayer had more federal adjusted gross income than what was reported in his IT-40. The Department assessed Taxpayer additional income tax, penalty, and interest. Taxpayer stated, in part: The issue thus is whether Taxpayer demonstrated that the assessment was incorrect. IC 6-8.1-5-4(a) requires that “[e]very person subject to a listed tax must keep books and records so that the [D]epartment can determine the amount, if any, of the person’s liability for that tax by reviewing those books and records. The records [] include all source documents necessary to determine the tax, including invoices, register tapes, receipts, and canceled checks.” The person also “must allow inspection of the books and records and returns by the [D]epartment or its authorized agents at all reasonable times.” IC 6-8.1-5-4(c). When the person subject to the listed tax fails to keep books and records, under IC 6-8.1-5-1(b), the Department “shall make a proposed assessment of the amount of the unpaid tax on the basis of the best information available to the [D]epartment” if the Department “reasonably believes that a person has not reported the proper amount of tax due.” All tax assessments are prima facie evidence that the Department’s claim for the unpaid tax is valid; the taxpayer bears the burden of proving that any assessment is incorrect. IC 6-8.1-5-1(c). Importantly, “each tax year stands alone.” Miller Brewing Co. v. Indiana Dep’t of State Revenue, 903 N.E.2d 64, 69 (Ind. 2009). The taxpayer is required to provide documentation to explain and support his or her challenge. When an agency is charged with enforcing a statute, jurisprudence defers to the agency’s reasonable interpretation of that statute “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). 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). Indiana imposes an adjusted gross income tax on all residents. IC 6-3-2-1. An Indiana resident taxpayer’s income is determined by starting with the federal adjusted gross income and making certain adjustments. IC 6-3-1-3.5. The Indiana statute refers to the Internal Revenue Code to compute what is considered the taxpayer’s Indiana income tax. I.R.C. § 61(a) provides that gross income includes “all income from whatever source derived[.]” A taxpayer who is in a trade or business may be able to claim deductions “which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.” I.R.C. § 62(a)(1); I.R.C. § 162. As a threshold issue, the taxpayer must not be an employee when he carried on the trade or business. “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.” Internal Revenue Service, Publication 535: Business Expenses (2022), available https://www.irs.gov/pub/irs-prior/p535--2022.pdf. If the taxpayer purchases tangible personal property, such as a vehicle, only when the taxpayer uses the property for business purposes is the taxpayer allowed to deduct the cost of such use. “[T]he Modified Accelerated Cost Recovery System (MACRS) is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986.” Internal Revenue Service, Topic no. 510, Business use of car, available at https://www.irs.gov/taxtopics/tc510 (last visited January 30, 2025). “Internal Revenue Code provisions dealing with deductions, exemptions, and exclusions are matters of legislative grace.” Stinson Est. v. United States, 214 F.3d 846, 848 (7th Cir. 2000). The taxpayer who claims such deductions must maintain adequate records to substantiate them. See Internal Revenue Service, Topic no. 510, Business use of car, available at https://www.irs.gov/taxtopics/tc510 (last visited January 30, 2025) and Topic no. 305, Recordkeeping, https://www.irs.gov/taxtopics/tc305 (last visited January 30, 2025). During the initial review of Taxpayer’s tax filing, the Department found that Taxpayer reported $0 income and deducted approximately $60,000 in expenses on a Schedule C – Profit or Loss From Business – to his federal return, Form 1040. Taxpayer claimed an approximately $60,000 loss on their adjusted gross income as a result. The Department requested that Taxpayer explain and provide verifiable records to support the claimed deduction, in relevant part: The Department reviewed Taxpayer’s documents and disallowed the deduction concerning Taxpayer’s business expenses because the information could not be verified. To support his protest, Taxpayer provided his 2022 income tax returns and schedules. At the hearing, in addition to referencing his tax filings, Taxpayer stated that he was in the restaurant equipment repair business and helped the restaurant owner in 2022. Taxpayer asserted that the restaurant owner decided to pay him, so he received a W-2 as a result. Taxpayer offered the W-2 to support his income attributable to his “restaurant equipment repair” business and his protest. As mentioned, Taxpayer here stated that he was in the “restaurant equipment repair” business and deducted approximately $60,000 in business expenses. Taxpayer only offered a W-2 to support that he was entitled to deduct these expenses incurred in 2022. Upon review, however, Taxpayer is mistaken. To claim business expense deductions attributable to a trade or business carried on by Taxpayer, his trade or business cannot be the performance of services by Taxpayer as an employee. Taxpayer in this case was an employee of that restaurant when he performed his “restaurant equipment repair” services in 2022. Taxpayer thus was not permitted to deduct expenses incurred pursuant to the above-mentioned tax law. In addition, Taxpayer did not provide any verifiable records to substantiate the approximately $60,000 of expenses claimed. To conclude, Taxpayer’s reliance on his supporting documents is misplaced. Pursuant to the above-mentioned tax law, Taxpayer, as an employee of the restaurant, was not permitted to deduct expenses attributable to his “restaurant equipment repair” services in 2022. Given the totality of the circumstances, in the absence of other verifiable documentation to substantiate the business expenses, the Department is not able to agree that Taxpayer met the burden of proof demonstrating that the assessment was wrong. FINDING Taxpayer’s protest is respectfully denied. January 31, 2025 Replaces Finding Document at: New