Introduced Version
SENATE BILL No. 608
_____
DIGEST OF INTRODUCED BILL
Citations Affected: IC 6-3; IC 6-8.1-5-1.
Synopsis: Expense disallowance. Requires a corporation, for purposes
of computing state adjusted gross income tax, to add back deductions
taken on the corporation's federal income tax return for certain interest
and intangible expenses incurred in a transaction with a related
business.
Effective: January 1, 2005 (retroactive).
Weatherwax, Simpson
January 24, 2005, read first time and referred to Committee on Tax and Fiscal Policy.
Introduced
First Regular Session 114th General Assembly (2005)
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SENATE BILL No. 608
A BILL FOR AN ACT to amend the Indiana Code concerning
taxation.
Be it enacted by the General Assembly of the State of Indiana:
SOURCE: IC 6-3-1-3.5; (05)IN0608.1.1. -->
SECTION 1. IC 6-3-1-3.5 IS AMENDED TO READ AS
FOLLOWS [EFFECTIVE JANUARY 1, 2005 (RETROACTIVE)]:
Sec. 3.5. When used in this article, the term "adjusted gross income"
shall mean the following:
(a) In the case of all individuals, "adjusted gross income" (as
defined in Section 62 of the Internal Revenue Code), modified as
follows:
(1) Subtract income that is exempt from taxation under this article
by the Constitution and statutes of the United States.
(2) Add an amount equal to any deduction or deductions allowed
or allowable pursuant to Section 62 of the Internal Revenue Code
for taxes based on or measured by income and levied at the state
level by any state of the United States.
(3) Subtract one thousand dollars ($1,000), or in the case of a
joint return filed by a husband and wife, subtract for each spouse
one thousand dollars ($1,000).
(4) Subtract one thousand dollars ($1,000) for:
(A) each of the exemptions provided by Section 151(c) of the
Internal Revenue Code;
(B) each additional amount allowable under Section 63(f) of
the Internal Revenue Code; and
(C) the spouse of the taxpayer if a separate return is made by
the taxpayer and if the spouse, for the calendar year in which
the taxable year of the taxpayer begins, has no gross income
and is not the dependent of another taxpayer.
(5) Subtract:
(A) one thousand five hundred dollars ($1,500) for each of the
exemptions allowed under Section 151(c)(1)(B) of the Internal
Revenue Code for taxable years beginning after December 31,
1996; and
(B) five hundred dollars ($500) for each additional amount
allowable under Section 63(f)(1) of the Internal Revenue Code
if the adjusted gross income of the taxpayer, or the taxpayer
and the taxpayer's spouse in the case of a joint return, is less
than forty thousand dollars ($40,000).
This amount is in addition to the amount subtracted under
subdivision (4).
(6) Subtract an amount equal to the lesser of:
(A) that part of the individual's adjusted gross income (as
defined in Section 62 of the Internal Revenue Code) for that
taxable year that is subject to a tax that is imposed by a
political subdivision of another state and that is imposed on or
measured by income; or
(B) two thousand dollars ($2,000).
(7) Add an amount equal to the total capital gain portion of a
lump sum distribution (as defined in Section 402(e)(4)(D) of the
Internal Revenue Code) if the lump sum distribution is received
by the individual during the taxable year and if the capital gain
portion of the distribution is taxed in the manner provided in
Section 402 of the Internal Revenue Code.
(8) Subtract any amounts included in federal adjusted gross
income under Section 111 of the Internal Revenue Code as a
recovery of items previously deducted as an itemized deduction
from adjusted gross income.
(9) Subtract any amounts included in federal adjusted gross
income under the Internal Revenue Code which amounts were
received by the individual as supplemental railroad retirement
annuities under 45 U.S.C. 231 and which are not deductible under
subdivision (1).
(10) Add an amount equal to the deduction allowed under Section
221 of the Internal Revenue Code for married couples filing joint
returns if the taxable year began before January 1, 1987.
(11) Add an amount equal to the interest excluded from federal
gross income by the individual for the taxable year under Section
128 of the Internal Revenue Code if the taxable year began before
January 1, 1985.
(12) Subtract an amount equal to the amount of federal Social
Security and Railroad Retirement benefits included in a taxpayer's
federal gross income by Section 86 of the Internal Revenue Code.
(13) In the case of a nonresident taxpayer or a resident taxpayer
residing in Indiana for a period of less than the taxpayer's entire
taxable year, the total amount of the deductions allowed pursuant
to subdivisions (3), (4), (5), and (6) shall be reduced to an amount
which bears the same ratio to the total as the taxpayer's income
taxable in Indiana bears to the taxpayer's total income.
(14) In the case of an individual who is a recipient of assistance
under IC 12-10-6-1, IC 12-10-6-2.1, IC 12-15-2-2, or IC 12-15-7,
subtract an amount equal to that portion of the individual's
adjusted gross income with respect to which the individual is not
allowed under federal law to retain an amount to pay state and
local income taxes.
(15) In the case of an eligible individual, subtract the amount of
a Holocaust victim's settlement payment included in the
individual's federal adjusted gross income.
(16) For taxable years beginning after December 31, 1999,
subtract an amount equal to the portion of any premiums paid
during the taxable year by the taxpayer for a qualified long term
care policy (as defined in IC 12-15-39.6-5) for the taxpayer or the
taxpayer's spouse, or both.
(17) Subtract an amount equal to the lesser of:
(A) for a taxable year:
(i) including any part of 2004, the amount determined under
subsection (f); and
(ii) beginning after December 31, 2004, two thousand five
hundred dollars ($2,500); or
(B) the amount of property taxes that are paid during the
taxable year in Indiana by the individual on the individual's
principal place of residence.
(18) Subtract an amount equal to the amount of a September 11
terrorist attack settlement payment included in the individual's
federal adjusted gross income.
(19) Add or subtract the amount necessary to make the adjusted
gross income of any taxpayer that owns property for which bonus
depreciation was allowed in the current taxable year or in an
earlier taxable year equal to the amount of adjusted gross income
that would have been computed had an election not been made
under Section 168(k)(2)(C)(iii) of the Internal Revenue Code to
apply bonus depreciation to the property in the year that it was
placed in service.
(20) Add an amount equal to any deduction allowed under
Section 172 of the Internal Revenue Code.
(b) In the case of corporations, the same as "taxable income" (as
defined in Section 63 of the Internal Revenue Code) adjusted as
follows:
(1) Subtract income that is exempt from taxation under this article
by the Constitution and statutes of the United States.
(2) Add an amount equal to any deduction or deductions allowed
or allowable pursuant to Section 170 of the Internal Revenue
Code.
(3) Add an amount equal to any deduction or deductions allowed
or allowable pursuant to Section 63 of the Internal Revenue Code
for taxes based on or measured by income and levied at the state
level by any state of the United States.
(4) Subtract an amount equal to the amount included in the
corporation's taxable income under Section 78 of the Internal
Revenue Code.
(5) Add or subtract the amount necessary to make the adjusted
gross income of any taxpayer that owns property for which bonus
depreciation was allowed in the current taxable year or in an
earlier taxable year equal to the amount of adjusted gross income
that would have been computed had an election not been made
under Section 168(k)(2)(C)(iii) of the Internal Revenue Code to
apply bonus depreciation to the property in the year that it was
placed in service.
(6) Add an amount equal to any deduction allowed under Section
172 of the Internal Revenue Code.
(7) Add or subtract the amount determined under
IC 6-3-2-20.
(c) In the case of life insurance companies (as defined in Section
816(a) of the Internal Revenue Code) that are organized under Indiana
law, the same as "life insurance company taxable income" (as defined
in Section 801 of the Internal Revenue Code), adjusted as follows:
(1) Subtract income that is exempt from taxation under this article
by the Constitution and statutes of the United States.
(2) Add an amount equal to any deduction allowed or allowable
under Section 170 of the Internal Revenue Code.
(3) Add an amount equal to a deduction allowed or allowable
under Section 805 or Section 831(c) of the Internal Revenue Code
for taxes based on or measured by income and levied at the state
level by any state.
(4) Subtract an amount equal to the amount included in the
company's taxable income under Section 78 of the Internal
Revenue Code.
(5) Add or subtract the amount necessary to make the adjusted
gross income of any taxpayer that owns property for which bonus
depreciation was allowed in the current taxable year or in an
earlier taxable year equal to the amount of adjusted gross income
that would have been computed had an election not been made
under Section 168(k)(2)(C)(iii) of the Internal Revenue Code to
apply bonus depreciation to the property in the year that it was
placed in service.
(6) Add an amount equal to any deduction allowed under Section
172 or Section 810 of the Internal Revenue Code.
(7) Add or subtract the amount determined under
IC 6-3-2-20.
(d) In the case of insurance companies subject to tax under Section
831 of the Internal Revenue Code and organized under Indiana law, the
same as "taxable income" (as defined in Section 832 of the Internal
Revenue Code), adjusted as follows:
(1) Subtract income that is exempt from taxation under this article
by the Constitution and statutes of the United States.
(2) Add an amount equal to any deduction allowed or allowable
under Section 170 of the Internal Revenue Code.
(3) Add an amount equal to a deduction allowed or allowable
under Section 805 or Section 831(c) of the Internal Revenue Code
for taxes based on or measured by income and levied at the state
level by any state.
(4) Subtract an amount equal to the amount included in the
company's taxable income under Section 78 of the Internal
Revenue Code.
(5) Add or subtract the amount necessary to make the adjusted
gross income of any taxpayer that owns property for which bonus
depreciation was allowed in the current taxable year or in an
earlier taxable year equal to the amount of adjusted gross income
that would have been computed had an election not been made
under Section 168(k)(2)(C)(iii) of the Internal Revenue Code to
apply bonus depreciation to the property in the year that it was
placed in service.
(6) Add an amount equal to any deduction allowed under Section
172 of the Internal Revenue Code.
(7) Add or subtract the amount determined under
IC 6-3-2-20.
(e) In the case of trusts and estates, "taxable income" (as defined for
trusts and estates in Section 641(b) of the Internal Revenue Code)
adjusted as follows:
(1) Subtract income that is exempt from taxation under this article
by the Constitution and statutes of the United States.
(2) Subtract an amount equal to the amount of a September 11
terrorist attack settlement payment included in the federal
adjusted gross income of the estate of a victim of the September
11 terrorist attack or a trust to the extent the trust benefits a victim
of the September 11 terrorist attack.
(3) Add or subtract the amount necessary to make the adjusted
gross income of any taxpayer that owns property for which bonus
depreciation was allowed in the current taxable year or in an
earlier taxable year equal to the amount of adjusted gross income
that would have been computed had an election not been made
under Section 168(k)(2)(C)(iii) of the Internal Revenue Code to
apply bonus depreciation to the property in the year that it was
placed in service.
(4) Add an amount equal to any deduction allowed under Section
172 of the Internal Revenue Code.
(f) This subsection applies only to the extent that an individual paid
property taxes in 2004 that were imposed for the March 1, 2002,
assessment date or the January 15, 2003, assessment date. The
maximum amount of the deduction under subsection (a)(17) is equal
to the amount determined under STEP FIVE of the following formula:
STEP ONE: Determine the amount of property taxes that the
taxpayer paid after December 31, 2003, in the taxable year for
property taxes imposed for the March 1, 2002, assessment date
and the January 15, 2003, assessment date.
STEP TWO: Determine the amount of property taxes that the
taxpayer paid in the taxable year for the March 1, 2003,
assessment date and the January 15, 2004, assessment date.
STEP THREE: Determine the result of the STEP ONE amount
divided by the STEP TWO amount.
STEP FOUR: Multiply the STEP THREE amount by two
thousand five hundred dollars ($2,500).
STEP FIVE: Determine the sum of the STEP THREE FOUR
amount and two thousand five hundred dollars ($2,500).
SOURCE: IC 6-3-2-20; (05)IN0608.1.2. -->
SECTION 2. IC 6-3-2-20 IS ADDED TO THE INDIANA CODE
AS A NEW SECTION TO READ AS FOLLOWS [EFFECTIVE
JANUARY 1, 2005 (RETROACTIVE)]: Sec. 20. (a) The following
definitions apply throughout this section:
(1) "Intangible expenses and costs" includes the following, to
the extent that the amounts are allowed as deductions or costs
in determining federal taxable income before operating loss
deductions and special deductions for the taxable year under
the Internal Revenue Code:
(A) Expenses, losses, and costs for, related to, or in
connection directly or indirectly with the direct or indirect
use, maintenance, or management of intangible property.
(B) Royalty or licensing fees related to the use of intangible
property.
(C) Other similar expenses and costs.
(2) "Intangible property" means patents, trade names,
trademarks, service marks, copyrights, and similar intangible
assets.
(3) "Interest expenses and costs" means amounts directly or
indirectly allowed as deductions under Section 163 of the
Internal Revenue Code for purposes of determining taxable
income under the Internal Revenue Code, to the extent the
expenses and costs directly or indirectly are for, relate to, or
are in connection with the direct or indirect use, maintenance,
or management of intangible property.
(4) "Related entity" means any of the following:
(A) A person or an entity that directly or indirectly owns
more than fifty percent (50%) of the value of the
outstanding stock, capital, or assets of the taxpayer.
(B) An entity in which the taxpayer directly or indirectly
owns more than fifty percent (50%) of the value of the
outstanding stock, capital, or assets.
(b) The attribution rules of Section 318 of the Internal Revenue
Code apply for the purpose of determining ownership for the
purposes of this section.
(c) Except as provided in subsection (d), for purposes of
computing adjusted gross income under IC 6-3-1-3.5, a corporation
shall add to its federal taxable income any amount deducted in the
calculation of its federal taxable income for:
(1) interest expenses and costs; and
(2) intangible expenses and costs;
directly or indirectly paid, accrued, or incurred to or in connection
with transactions with one (1) or more related entities for the
taxable year. To prevent the double taxation of the same income of
different taxpayers, any amount added to the federal taxable
income of the corporation under this section shall be subtracted
from the federal taxable income of the related entity that received
the amount for purposes of determining the adjusted gross income
of the related entity under IC 6-3-1-3.5.
(d) The adjustments required under subsection (c) do not apply
to interest expenses and costs and intangible expenses and costs
that meet any of the following conditions:
(1) The related entity during the same income year directly or
indirectly paid, received, accrued, or incurred the expenses or
costs to or from a person that is not a related entity.
(2) The amount received by the related entity is subject to
income tax or a tax similar in operation to the tax levied
under this article in:
(A) Indiana or another state; or
(B) a foreign nation that has a tax treaty with the United
States.
(3) The transaction giving rise to the interest expenses and
costs or the intangible expenses and costs between the
corporation and the related entity did not have as its primary
purpose the avoidance of the tax due under this article. For
purposes of this subsection, the existence of both the condition
described in clause (A) and at least two (2) of the conditions
described in clause (B) is sufficient to establish a conclusive
presumption that the transaction did not have as its primary
purpose the avoidance of tax:
(A) The intangible expenses and costs or interest expenses
and costs are within a range that would be paid by parties
acting at arm's length, as determined by an independent
appraisal or other evidence.
(B) Any two (2) of the following with respect to a related
entity:
(i) The corporation has no right of use or ownership of
the intangible property except those rights granted by
the related entity.
(ii) The related entity is engaged in a profit-making
business.
(iii) Net income from the intangible expenses and costs or
interest expenses and costs is retained and invested by
the related entity for the benefit of the stockholders of
the related entity.
(iv) Expenses of maintaining, managing, and defending
the property of the related entity are paid for by the
related entity, and if the services are provided by the
corporation, the related entity pays for the services at an
arm's length rate, as determined by an independent
appraisal or other evidence.
(v) The related entity holds separate board meetings,
maintains separate assets, executes separate contracts,
maintains separate offices, and has employees separate
from the corporation.
(e) Notwithstanding IC 6-8.1-5-1 or any other law, with respect
to any dispute regarding the amount that must be added to the
taxable income of a taxpayer in accordance with this section, this
section shall be strictly construed against the department in favor
of the taxpayer, and the department has the burden of proof with
respect to any issue relevant to ascertaining the liability of a
taxpayer under this section only if:
(1) the taxpayer has produced evidence that establishes that
there is a reasonable dispute with respect to the issue; and
(2) the taxpayer has adequate records of its transactions and
provides the department reasonable access to the records.
SOURCE: IC 6-8.1-5-1; (05)IN0608.1.3. -->
SECTION 3. IC 6-8.1-5-1 IS AMENDED TO READ AS
FOLLOWS [EFFECTIVE JANUARY 1, 2005 (RETROACTIVE)]:
Sec. 1. (a) If the department reasonably believes that a person has not
reported the proper amount of tax due, the department shall make a
proposed assessment of the amount of the unpaid tax on the basis of the
best information available to the department. The amount of the
assessment is considered a tax payment not made by the due date and
is subject to IC 6-8.1-10 concerning the imposition of penalties and
interest. The department shall send the person a notice of the proposed
assessment through the United States mail.
(b) If the person has a surety bond guaranteeing payment of the tax
for which the proposed assessment is made, the department shall
furnish a copy of the proposed assessment to the surety. The notice of
proposed assessment is prima facie evidence that the department's
claim for the unpaid tax is valid.
Except as provided in IC 6-3-2-20,
the burden of proving that the proposed assessment is wrong rests with
the person against whom the proposed assessment is made.
(c) The notice shall state that the person has sixty (60) days from the
date the notice is mailed to pay the assessment or to file a written
protest. If the person files a protest and requires a hearing on the
protest, the department shall:
(1) set the hearing at the department's earliest convenient time;
and
(2) notify the person by United States mail of the time, date, and
location of the hearing.
(d) The department may hold the hearing at the location of its choice
within Indiana if that location complies with IC 6-8.1-3-8.5.
(e) No later than sixty (60) days after conducting a hearing on a
protest, or after making a decision on a protest when no hearing is
requested, the department shall issue a letter of findings and shall send
a copy of the letter through the United States mail to the person who
filed the protest and to the person's surety, if the surety was notified of
the proposed assessment under subsection (a). The department may
continue the hearing until a later date if the taxpayer presents
additional information at the hearing or the taxpayer requests an
opportunity to present additional information after the hearing.
(f) A person that disagrees with a decision in a letter of finding may
request a rehearing not more than thirty (30) days after the date on
which the letter of finding is issued by the department. The department
shall consider the request and may grant the rehearing if the department
reasonably believes that a rehearing would be in the best interests of
the taxpayer and the state.
(g) If a person disagrees with a decision in a letter of finding, the
person may appeal the decision to the tax court. However, the tax court
does not have jurisdiction to hear an appeal that is filed more than one
hundred eighty (180) days after the date on which the letter of finding
is issued by the department.
(h) The tax court shall hear an appeal under subsection (g) de novo
and without a jury. The tax court may do the following:
(1) Uphold or deny any part of the assessment that is appealed.
(2) Assess the court costs in a manner that the court believes to be
equitable.
(3) Enjoin the collection of a listed tax under IC 33-26-6-2.
(i) The department shall demand payment, as provided in
IC 6-8.1-8-2(a), of any part of the proposed tax assessment, interest,
and penalties that it finds owing because:
(1) the person failed to properly respond within the sixty (60) day
period;
(2) the person requested a hearing but failed to appear at that
hearing; or
(3) after consideration of the evidence presented in the protest or
hearing, the department finds that the person still owes tax.
(j) The department shall make the demand for payment in the
manner provided in IC 6-8.1-8-2.
(k) Subsection (a) does not apply to a motor carrier fuel tax return.
SOURCE: ; (05)IN0608.1.4. -->
SECTION 4. [EFFECTIVE JANUARY 1, 2005 (RETROACTIVE)]
(a) The definitions in IC 6-3 apply to this SECTION.
(b) IC 6-3-1-3.5 and IC 6-8.1-5-1, both as amended by this act,
and IC 6-3-2-20, as added by this act, apply to the computation of
adjusted gross income only for a taxable year beginning after
December 31, 2004.
SOURCE: ; (05)IN0608.1.5. -->
SECTION 5.
An emergency is declared for this act.