SB 239-6_ Filed 02/24/2010, 07:44 Pelath


Text Box


    PREVAILED      Roll Call No. _______
    FAILED        Ayes _______
    WITHDRAWN        Noes _______
    RULED OUT OF ORDER


[

HOUSE MOTION ____

]

MR. SPEAKER:

    I move that Engrossed Senate Bill 239 be amended to read as follows:

SOURCE: Page 51, line 12; (10)MO023928.51. -->     Page 51, between lines 12 and 13, begin a new paragraph and insert:
SOURCE: IC 6-3-1-36; (10)MO023928.23. -->     "SECTION 23. IC 6-3-1-36 IS ADDED TO THE INDIANA CODE AS A NEW SECTION TO READ AS FOLLOWS [EFFECTIVE JANUARY 1, 2011]: Sec. 36. (a) "Unitary business" means a single economic enterprise that is made up either of separate parts of a single business entity or of a commonly controlled group of business entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts.
     (b) Any business conducted by a pass through entity shall be treated as conducted by its partners, shareholders, or members, whether directly held or indirectly held through a series of pass through entities, to the extent of the shareholder, member, or partner's distributive share of the pass through entity's income, regardless of the percentage of the shareholder's, member's, or partner's ownership interest or its distributive or any other share of pass through entity income. A business conducted directly or indirectly by one (1) corporation is unitary with that part of a business conducted by another corporation through its direct or indirect interest in a pass through entity if the conditions of subsection (a) are satisfied.
SOURCE: IC 6-3-1-37; (10)MO023928.24. -->     SECTION 24. IC 6-3-1-37 IS ADDED TO THE INDIANA CODE AS A NEW SECTION TO READ AS FOLLOWS [EFFECTIVE

JANUARY 1, 2011]: Sec. 37. "Combined group" means the group of persons, corporations, and pass through entities whose income and apportionment factors are required to be taken into account pursuant to IC 6-3-2-2(p) and IC 6-3-2.6 in determining the taxpayer's share of the net business income or loss apportionable to Indiana.

SOURCE: IC 6-3-1-38; (10)MO023928.25. -->     SECTION 25. IC 6-3-1-38 IS ADDED TO THE INDIANA CODE AS A NEW SECTION TO READ AS FOLLOWS [EFFECTIVE JANUARY 1, 2011]: Sec. 38. "Tax haven" means a jurisdiction that, during the tax year in question:
        (1) is identified by the Organization for Economic Co-operation and Development (OECD) as a tax haven or as having a harmful preferential tax regime; or
        (2) exhibits the following characteristics established by the Organization for Economic Co-operation and Development (OECD) in its 1998 report entitled Harmful Tax Competition: An Emerging Global Issue as indicative of a tax haven or as a jurisdiction having a harmful preferential tax regime, regardless of whether the jurisdiction is listed by the OECD as an un-cooperative tax haven:
            (A) Has no or nominal effective tax on the relevant income.
            (B) Has one (1) or more of the following characteristics:
                (i) Has laws or practices that prevent effective exchange of information for tax purposes with other governments on taxpayers benefitting from the tax regime.
                (ii) Has a tax regime that lacks transparency.
                (iii) Facilitates the establishment of foreign-owned entities without the need for a local substantive presence or prohibits foreign-owned entities from having any commercial impact on the local economy.
                (iv) Explicitly or implicitly excludes the jurisdiction's resident taxpayers from taking advantage of the tax regime's benefits or prohibits enterprises that benefit from the regime from operating in the jurisdiction's domestic market.
                (v) Has created a tax regime that is favorable for tax avoidance, based upon an overall assessment of relevant factors, including whether the jurisdiction has a significant untaxed offshore financial/other services sector relative to its overall economy.
For purposes of subdivision (2)(B)(ii), a tax regime lacks transparency if the details of legislative, legal, or administrative provisions are not open and apparent or are not consistently applied among similarly situated taxpayers, or if the information needed by tax authorities to determine a taxpayer's correct tax liability, such as accounting records and underlying documentation, is not adequately available.

SOURCE: IC 6-3-1-39; (10)MO023928.26. -->     SECTION 26. IC 6-3-1-39 IS ADDED TO THE INDIANA CODE AS A NEW SECTION TO READ AS FOLLOWS [EFFECTIVE JANUARY 1, 2011]: Sec. 39. "Doing business in a tax haven" means being engaged in activity sufficient for that tax haven jurisdiction to impose a tax under United States constitutional standards.
SOURCE: IC 6-3-1-40; (10)MO023928.27. -->     SECTION 27. IC 6-3-1-40 IS ADDED TO THE INDIANA CODE AS A NEW SECTION TO READ AS FOLLOWS [EFFECTIVE JANUARY 1, 2011]: Sec. 40. "Water's edge election" refers to a taxpayer election under IC 6-3-2.6-8 and IC 6-3-2.6-9.
SOURCE: IC 6-3-2-2; (10)MO023928.28. -->     SECTION 28. IC 6-3-2-2, AS AMENDED BY P.L.182-2009(ss), SECTION 191, IS AMENDED TO READ AS FOLLOWS [EFFECTIVE JANUARY 1, 2011]: Sec. 2. (a) With regard to corporations and nonresident persons, "adjusted gross income derived from sources within Indiana", for the purposes of this article, shall mean and include:
        (1) income from real or tangible personal property located in this state;
        (2) income from doing business in this state;
        (3) income from a trade or profession conducted in this state;
        (4) compensation for labor or services rendered within this state; and
        (5) income from stocks, bonds, notes, bank deposits, patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other intangible personal property described in section 2.2 of this chapter, if the receipt from the intangible is attributable to Indiana under section 2.2 of this chapter; and
         (6) for taxable years beginning after December 31, 2010, income from patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other intangible personal property if benefits of the intangible property are consumed or used in Indiana or if the income otherwise has a substantial nexus to Indiana.
Income from a pass through entity shall be characterized in a manner consistent with the income's characterization for federal income tax purposes and shall be considered Indiana source income as if the person, corporation, or pass through entity that received the income had directly engaged in the income producing activity. Income that is derived from one (1) pass through entity and is considered to pass through to another pass through entity does not change these characteristics or attribution provisions. In the case of nonbusiness income described in subsection (g), only so much of such income as is allocated to this state under the provisions of subsections (h) through (k) shall be deemed to be derived from sources within Indiana. In the case of business income, only so much of such income as is

apportioned to this state under the provision of subsection (b) shall be deemed to be derived from sources within the state of Indiana. In the case of compensation of a team member (as defined in section 2.7 of this chapter), only the portion of income determined to be Indiana income under section 2.7 of this chapter is considered derived from sources within Indiana. In the case of a corporation that is a life insurance company (as defined in Section 816(a) of the Internal Revenue Code) or an insurance company that is subject to tax under Section 831 of the Internal Revenue Code, only so much of the income as is apportioned to Indiana under subsection (r) is considered derived from sources within Indiana.
    (b) Except as provided in subsection (l), if business income of a corporation or a nonresident person is derived from sources within the state of Indiana and from sources without the state of Indiana, the business income derived from sources within this state shall be determined by multiplying the business income derived from sources both within and without the state of Indiana by the following:
        (1) For all taxable years that begin after December 31, 2006, and before January 1, 2008, a fraction. The:
            (A) numerator of the fraction is the sum of the property factor plus the payroll factor plus the product of the sales factor multiplied by three (3); and
            (B) denominator of the fraction is five (5).
        (2) For all taxable years that begin after December 31, 2007, and before January 1, 2009, a fraction. The:
            (A) numerator of the fraction is the property factor plus the payroll factor plus the product of the sales factor multiplied by four and sixty-seven hundredths (4.67); and
            (B) denominator of the fraction is six and sixty-seven hundredths (6.67).
        (3) For all taxable years beginning after December 31, 2008, and before January 1, 2010, a fraction. The:
            (A) numerator of the fraction is the property factor plus the payroll factor plus the product of the sales factor multiplied by eight (8); and
            (B) denominator of the fraction is ten (10).
        (4) For all taxable years beginning after December 31, 2009, and before January 1, 2011, a fraction. The:
            (A) numerator of the fraction is the property factor plus the payroll factor plus the product of the sales factor multiplied by eighteen (18); and
            (B) denominator of the fraction is twenty (20).
        (5) For all taxable years beginning after December 31, 2010, the sales factor.
    (c) The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property

owned or rented and used in this state during the taxable year and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used during the taxable year. However, with respect to a foreign corporation, the denominator does not include the average value of real or tangible personal property owned or rented and used in a place that is outside the United States. Property owned by the taxpayer is valued at its original cost. Property rented by the taxpayer is valued at eight (8) times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from subrentals. The average of property shall be determined by averaging the values at the beginning and ending of the taxable year, but the department may require the averaging of monthly values during the taxable year if reasonably required to reflect properly the average value of the taxpayer's property.
    (d) The payroll factor is a fraction, the numerator of which is the total amount paid in this state during the taxable year by the taxpayer for compensation, and the denominator of which is the total compensation paid everywhere during the taxable year. However, with respect to a foreign corporation , the denominator does not include compensation paid in a place that is outside the United States. Compensation is paid in this state if:
        (1) the individual's service is performed entirely within the state;
        (2) the individual's service is performed both within and without this state, but the service performed without this state is incidental to the individual's service within this state; or
        (3) some of the service is performed in this state and:
            (A) the base of operations or, if there is no base of operations, the place from which the service is directed or controlled is in this state; or
            (B) the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the individual is a resident of this state.
    (e) The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this state during the taxable year, and the denominator of which is the total sales of the taxpayer everywhere during the taxable year. Sales include receipts from intangible property and receipts from the sale or exchange of intangible property. However, with respect to a foreign corporation, the denominator does not include sales made in a place that is outside the United States if, for taxable years beginning after December 31, 2010, the foreign corporation is not part of a combined group or a foreign corporation that is the subject of a water's edge election. Receipts from intangible personal property are derived from sources within Indiana if the receipts from the intangible personal property are attributable to Indiana under

section 2.2 of this chapter or subsection (a)(6). Regardless of the f.o.b. point or other conditions of the sale, sales of tangible personal property are in this state if:
        (1) the property is delivered or shipped to a purchaser that is within Indiana, other than the United States government; or
        (2) the property is shipped from an office, a store, a warehouse, a factory, or other place of storage in this state and:
            (A) the purchaser is the United States government; or
            (B) the taxpayer is not taxable in the state of the purchaser.
Gross receipts derived from commercial printing as described in IC 6-2.5-1-10 shall be treated as sales of tangible personal property for purposes of this chapter.
    (f) Sales, other than receipts from intangible property covered by subsection (e) and sales of tangible personal property, are in this state if:
        (1) the income-producing activity is performed in this state; or
        (2) the income-producing activity is performed both within and without this state and a greater proportion of the income-producing activity is performed in this state than in any other state, based on costs of performance.
    (g) Rents and royalties from real or tangible personal property, capital gains, interest, dividends, or patent or copyright royalties, to the extent that they constitute nonbusiness income, shall be allocated as provided in subsections (h) through (k).
    (h)(1) Net rents and royalties from real property located in this state are allocable to this state.
    (2) Net rents and royalties from tangible personal property are allocated to this state:
        (i) if and to the extent that the property is utilized in this state; or
        (ii) in their entirety if the taxpayer's commercial domicile is in this state and the taxpayer is not organized under the laws of or taxable in the state in which the property is utilized.
    (3) The extent of utilization of tangible personal property in a state is determined by multiplying the rents and royalties by a fraction, the numerator of which is the number of days of physical location of the property in the state during the rental or royalty period in the taxable year, and the denominator of which is the number of days of physical location of the property everywhere during all rental or royalty periods in the taxable year. If the physical location of the property during the rental or royalty period is unknown or unascertainable by the taxpayer, tangible personal property is utilized in the state in which the property was located at the time the rental or royalty payer obtained possession.
    (i)(1) Capital gains and losses from sales of real property located in this state are allocable to this state.
    (2) Capital gains and losses from sales of tangible personal property are allocable to this state if:


        (i) the property had a situs in this state at the time of the sale; or
        (ii) the taxpayer's commercial domicile is in this state and the taxpayer is not taxable in the state in which the property had a situs.
    (3) Capital gains and losses from sales of intangible personal property are allocable to this state if the taxpayer's commercial domicile is in this state.
    (j) Interest and dividends are allocable to this state if the taxpayer's commercial domicile is in this state.
    (k)(1) Patent and copyright royalties are allocable to this state:
        (i) if and to the extent that the patent or copyright is utilized by the taxpayer in this state; or
        (ii) if and to the extent that the patent or copyright is utilized by the taxpayer in a state in which the taxpayer is not taxable and the taxpayer's commercial domicile is in this state.
        (2) A patent is utilized in a state to the extent that it is employed in production, fabrication, manufacturing, or other processing in the state or to the extent that a patented product is produced in the state. If the basis of receipts from patent royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the patent is utilized in the state in which the taxpayer's commercial domicile is located.
        (3) A copyright is utilized in a state to the extent that printing or other publication originates in the state. If the basis of receipts from copyright royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the copyright is utilized in the state in which the taxpayer's commercial domicile is located.
    (l) If the allocation and apportionment provisions of this article do not fairly represent the taxpayer's income derived from sources within the state of Indiana, the taxpayer may petition for or the department may require, in respect to all or any part of the taxpayer's business activity, if reasonable:
        (1) separate accounting;
        (2) for a taxable year beginning before January 1, 2011, the exclusion of any one (1) or more of the factors, except the sales factor;
        (3) the inclusion of one (1) or more additional factors which will fairly represent the taxpayer's income derived from sources within the state of Indiana; or
        (4) the employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income.
    (m) In the case of two (2) or more organizations, trades, or businesses owned or controlled directly or indirectly by the same interests, the department shall distribute, apportion, or allocate the income derived from sources within the state of Indiana between and

among those organizations, trades, or businesses in order to fairly reflect and report the income derived from sources within the state of Indiana by various taxpayers.
    (n) For purposes of allocation and apportionment of income under this article, a taxpayer is taxable in another state if:
        (1) in that state the taxpayer is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax; or
        (2) that state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not.
    (o) Notwithstanding subsections (l) and (m) but subject to subsection (p) and IC 6-3-2.6, the department may not, under any circumstances, subsections (l) and (m), require that income, deductions, and credits attributable to a taxpayer and another entity be reported in a combined income tax return for any taxable year, if the other entity is:
        (1) a foreign corporation; or
        (2) a corporation that is classified as a foreign operating corporation for the taxable year by section 2.4 of this chapter.
    (p) Notwithstanding subsections (l) and (m), the department may not require that income, deductions, and credits attributable to a taxpayer and another entity not described in subsection (o)(1) or (o)(2) be reported in a combined income tax return for any taxable year, unless the department is unable to fairly reflect the taxpayer's adjusted gross income for the taxable year through use of other powers granted to the department by subsections (l) and (m). A taxpayer engaged in a unitary business with one (1) or more other corporations shall file a combined report that includes the income, determined under IC 6-3-2.6-5 and IC 6-3-2.6-6, and apportionment factors, determined under IC 6-3-2.6-4, of all corporations that are members of the unitary business, and the other information as required by the department. For this purpose, the business conducted by a pass through entity that is directly or indirectly held by a corporation shall be considered the business of the corporation to the extent of the corporation's distributive share of the pass through entity income, inclusive of guaranteed payments to the extent prescribed by rule adopted under IC 4-22-2. The department may, by rule adopted under IC 4-22-2, require that the combined report include the income and associated apportionment factors of any persons, corporations, or pass through entities that are not included pursuant to this subsection, but that are members of a unitary business, in order to reflect proper apportionment of income of entire unitary businesses. The authority to require combination by rule under this subsection includes the authority to require the combination of persons, corporations, or pass

through entities that are not (or would not be if doing business in this state) subject to the tax imposed by this article. In addition, if the department determines that the reported income or loss of a taxpayer engaged in a unitary business with any person, corporation, or pass through entity not included under this subsection represents an avoidance or evasion of tax by that taxpayer, the department may, on a case by case basis, require that all or any part of the income and associated apportionment factors of the person, corporation, or pass through entity be included in the taxpayer's combined report. With respect to inclusion of associated apportionment factors under this subsection, the department may require the inclusion of one (1) or more additional factors that will fairly represent the taxpayer's business activity in Indiana, or the employment of any other method to effectuate a proper reflection of the total amount of income subject to apportionment and an equitable allocation and apportionment of the taxpayer's income. Subsection (o) does not apply to this subsection.
    (q) Notwithstanding subsections (o) and (p), one (1) or more taxpayers may petition the department under subsection (l) for permission to file a combined income tax return for a taxable year. The petition to file a combined income tax return must be completed and filed with the department not more than thirty (30) days after the end of the taxpayer's taxable year. A taxpayer filing a combined income tax return must petition the department within thirty (30) days after the end of the taxpayer's taxable year to discontinue filing a combined income tax return.
    (r) This subsection applies to a corporation that is a life insurance company (as defined in Section 816(a) of the Internal Revenue Code) or an insurance company that is subject to tax under Section 831 of the Internal Revenue Code. The corporation's adjusted gross income that is derived from sources within Indiana is determined by multiplying the corporation's adjusted gross income by a fraction:
        (1) the numerator of which is the direct premiums and annuity considerations received during the taxable year for insurance upon property or risks in the state; and
        (2) the denominator of which is the direct premiums and annuity considerations received during the taxable year for insurance upon property or risks everywhere.
The term "direct premiums and annuity considerations" means the gross premiums received from direct business as reported in the corporation's annual statement filed with the department of insurance.

SOURCE: IC 6-3-2-20; (10)MO023928.29. -->     SECTION 29. IC 6-3-2-20, AS AMENDED BY P.L.211-2007, SECTION 21, IS AMENDED TO READ AS FOLLOWS [EFFECTIVE JANUARY 1, 2011]: Sec. 20. (a) The following definitions apply throughout this section:
        (1) "Affiliated group" has the meaning provided in Section 1504 of the Internal Revenue Code, except that the ownership percentage in Section 1504(a)(2) of the Internal Revenue Code shall be determined using fifty percent (50%) instead of eighty percent (80%).
        (2) "Directly related intangible interest expenses" means interest expenses that are paid to, or accrued or incurred as a liability to, a recipient if:
            (A) the amounts represent, in the hands of the recipient, income from making one (1) or more loans; and
            (B) the funds loaned were originally received by the recipient from the payment of intangible expenses by any of the following:
                (i) The taxpayer.
                (ii) A member of the same affiliated group as the taxpayer.
                (iii) A foreign corporation.
        (3) "Foreign corporation" means a corporation that is organized under the laws of a country other than the United States and would be a member of the same affiliated group as the taxpayer if the corporation were organized under the laws of the United States.
        (4) "Intangible expenses" means the following amounts to the extent these amounts are allowed as deductions in determining taxable income under Section 63 of the Internal Revenue Code before the application of any net operating loss deduction and special deductions for the taxable year:
            (A) Expenses, losses, and costs directly for, related to, or in connection with the acquisition, use, maintenance, management, ownership, sale, exchange, or any other disposition of intangible property.
            (B) Royalty, patent, technical, and copyright fees.
            (C) Licensing fees.
            (D) Other substantially similar expenses and costs.
        (5) "Intangible property" means patents, patent applications, trade names, trademarks, service marks, copyrights, trade secrets, and substantially similar types of intangible assets.
        (6) "Interest expenses" means amounts that are allowed as deductions under Section 163 of the Internal Revenue Code in determining taxable income under Section 63 of the Internal Revenue Code before the application of any net operating loss deductions and special deductions for the taxable year.
        (7) "Makes a disclosure" means a taxpayer provides the following information regarding a transaction with a member of the same affiliated group or a foreign corporation involving an intangible expense and any directly related intangible interest expense with the taxpayer's tax return on the forms prescribed by the

department:
            (A) The name of the recipient.
            (B) The state or country of domicile of the recipient.
            (C) The amount paid to the recipient.
            (D) A copy of federal Form 851, Affiliation Schedule, as filed with the taxpayer's federal consolidated tax return.
            (E) The information needed to determine the taxpayer's status under the exceptions listed in subsection (c).
        (8) "Recipient" means:
            (A) a member of the same affiliated group as the taxpayer; or
            (B) a foreign corporation;
        to which is paid an item of income that corresponds to an intangible expense or any directly related intangible interest expense.
        (9) "Unrelated party" means a person that, with respect to the taxpayer, is not a member of the same affiliated group or a foreign corporation.
    (b) Except as provided in subsection (c), in determining its adjusted gross income under IC 6-3-1-3.5(b), a corporation subject to the tax imposed by IC 6-3-2-1 shall add to its taxable income under Section 63 of the Internal Revenue Code:
        (1) intangible expenses; and
        (2) any directly related intangible interest expenses;
paid, accrued, or incurred with one (1) or more members of the same affiliated group or with one (1) or more foreign corporations.
    (c) The addition of intangible expenses or any directly related intangible interest expenses otherwise required in a taxable year under subsection (b) is not required if one (1) or more of the following apply to the taxable year:
        (1) The taxpayer and the recipient are both included in the same consolidated tax return filed under IC 6-3-4-14 or in the same combined return filed under IC 6-3-2-2(p) or IC 6-3-2-2(q) for the taxable year.
        (2) The taxpayer makes a disclosure and, at the request of the department, can establish by a preponderance of the evidence that:
            (A) the item of income corresponding to the intangible expenses and any directly related intangible interest expenses was included within the recipient's income that is subject to tax in:
                (i) a state or possession of the United States; or
                (ii) a country other than the United States;
            that is the recipient's commercial domicile and that imposes a net income tax, a franchise tax measured, in whole or in part, by net income, or a value added tax;
            (B) the transaction giving rise to the intangible expenses and

any directly related intangible interest expenses between the taxpayer and the recipient was made at a commercially reasonable rate and at terms comparable to an arm's length transaction; and
            (C) the transactions giving rise to the intangible expenses and any directly related intangible interest expenses between the taxpayer and the recipient did not have Indiana tax avoidance as a principal purpose.
        (3) The taxpayer makes a disclosure and, at the request of the department, can establish by a preponderance of the evidence that:
            (A) the recipient regularly engages in transactions involving intangible property with one (1) or more unrelated parties on terms substantially similar to those of the subject transaction; and
            (B) the transaction giving rise to the intangible expenses and any directly related intangible interest expenses between the taxpayer and the recipient did not have Indiana tax avoidance as a principal purpose.
        (4) The taxpayer makes a disclosure and, at the request of the department, can establish by a preponderance of the evidence that:
            (A) the payment was received from a person or entity that is an unrelated party, and on behalf of that unrelated party, paid that amount to the recipient in an arm's length transaction; and
            (B) the transaction giving rise to the intangible expenses and any directly related intangible interest expenses between the taxpayer and the recipient did not have Indiana tax avoidance as a principal purpose.
        (5) The taxpayer makes a disclosure and, at the request of the department, can establish by a preponderance of the evidence that:
            (A) the recipient paid, accrued, or incurred a liability to an unrelated party during the taxable year for an equal or greater amount that was directly for, related to, or in connection with the same intangible property giving rise to the intangible expenses; and
            (B) the transactions giving rise to the intangible expenses and any directly related intangible interest expenses between the taxpayer and the recipient did not have Indiana tax avoidance as a principal purpose.
        (6) The taxpayer makes a disclosure and, at the request of the department, can establish by a preponderance of the evidence that:
            (A) the recipient is engaged in:
                (i) substantial business activities from the acquisition, use,

licensing, maintenance, management, ownership, sale, exchange, or any other disposition of intangible property; or
                (ii) other substantial business activities separate and apart from the business activities described in item (i);
            as evidenced by the maintenance of a permanent office space and an adequate number of full-time, experienced employees;
            (B) the transactions giving rise to the intangible expenses and any directly related intangible interest expenses between the taxpayer and the recipient did not have Indiana tax avoidance as a principal purpose; and
            (C) the transactions were made at a commercially reasonable rate and at terms comparable to an arm's length transaction.
        (7) The taxpayer and the department agree, in writing, to the application or use of an alternative method of allocation or apportionment under section 2(l) or 2(m) of this chapter.
        (8) Upon request by the taxpayer, the department determines that the adjustment otherwise required by this section is unreasonable.
    (d) For purposes of this section, intangible expenses or directly related intangible interest expenses shall be considered to be at a commercially reasonable rate or at terms comparable to an arm's length transaction if the intangible expenses or directly related intangible interest expenses meet the arm's length standards of United States Treasury Regulation 1.482-1(b).
    (e) If intangible expenses or directly related intangible expenses are determined not to be at a commercially reasonable rate or at terms comparable to an arm's length transaction for purposes of this section, the adjustment required by subsection (b) shall be made only to the extent necessary to cause the intangible expenses or directly related intangible interest expenses to be at a commercially reasonable rate and at terms comparable to an arm's length transaction.
    (f) For purposes of this section, transactions giving rise to intangible expenses and any directly related intangible interest expenses between the taxpayer and the recipient shall be considered as having Indiana tax avoidance as the principal purpose if:
        (1) there is not one (1) or more valid business purposes that independently sustain the transaction notwithstanding any tax benefits associated with the transaction; and
        (2) the principal purpose of tax avoidance exceeds any other valid business purpose.

SOURCE: IC 6-3-2.6; (10)MO023928.30. -->     SECTION 30. IC 6-3-2.6 IS ADDED TO THE INDIANA CODE AS A NEW CHAPTER TO READ AS FOLLOWS [EFFECTIVE JANUARY 1, 2011]:
     Chapter 2.6. Determination of Adjusted Gross Income or Loss Using Combined Report; Designation of Surety; Water's Edge Election
    Sec. 1. It is the intent of the general assembly to apply the

provisions of the Proposed Model Statute for Combined Reporting, as approved by the Multistate Tax Commission August 17, 2006, to taxable years beginning after December 31, 2010. The official background material used by the Multistate Tax Commission or its committees to prepare the model statute and any interpretive statements issued by the Multistate Tax Commission or its committees before April 1, 2010, are incorporated into this chapter by reference to guide the implementation of the provisions of this chapter.
    Sec. 2. The use of a combined report does not disregard the separate identities of the taxpayer members of the combined group. Each taxpayer member is responsible for tax based on its adjusted gross income or loss apportioned or allocated to Indiana, which shall include, in addition to other types of income, the taxpayer member's apportioned share of business income of the combined group, where business income of the combined group is calculated as a summation of the individual net business incomes of all members of the combined group. A member's net business income shall be determined by removing all but business income, expense, and loss from that member's total income, as provided in this chapter.
    Sec. 3. (a) Each taxpayer member is responsible for tax based on its adjusted gross income or loss apportioned or allocated to Indiana, which shall include:
        (1) its share of any business income apportionable to Indiana of each of the combined groups of which it is a member, as determined under section 4 of this chapter;
        (2) its share of any business income apportionable to Indiana of a distinct business activity that is conducted within and without Indiana wholly by the taxpayer member, as determined under the provisions of IC 6-3-2 related to the apportionment of business income;
        (3) its income from a business conducted wholly by the taxpayer member entirely within Indiana;
        (4) its income sourced to Indiana from the sale or exchange of capital or assets, and from involuntary conversions, as determined under section 6(8) of this chapter;
        (5) its nonbusiness income or loss allocable to Indiana, determined under the provisions of IC 6-3-2 concerning the allocation of nonbusiness income;
        (6) its income or loss allocated or apportioned in an earlier year, required to be taken into account as state source income during the income year, other than a net operating loss; and
        (7) its net operating loss carryover or carryback. If the adjusted gross income computed under this chapter results in a loss for a taxpayer member of the combined group, that taxpayer member has a state net operating loss (NOL),

subject to the net operating loss limitations, carryforward, and carryback provisions of IC 6-3-2-2.6. The net operating loss may be applied as a deduction in a prior or subsequent year only if that taxpayer has state source positive net income, whether or not the taxpayer is or was a member of a combined reporting group in the prior or subsequent year.
    (b) Except where otherwise provided in this chapter, no tax credit or post-apportionment deduction earned by one (1) member of the combined group, but not fully used by or allowed to that member, may be used in whole or in part by another member of the group or applied in whole or in part against the total income of the combined group. Except where otherwise provided in this chapter, a post-apportionment deduction carried over into a subsequent year as to the member that incurred it, and available as a deduction to that member in a subsequent year, will be considered in the computation of the income of that member in the subsequent year, regardless of the composition of that income as apportioned, allocated, or wholly within Indiana.
    Sec. 4. The taxpayer's share of the business income apportionable to Indiana of each combined group of which the taxpayer is a member shall be the product of:
        (1) the business income of the combined group, determined under sections 5 and 6 of this chapter; and
        (2) the taxpayer member's apportionment percentage, determined under IC 6-3-2-2, including in the numerator the taxpayer's sales associated with the combined group's unitary business in Indiana, and including in the denominator the sales of all members of the combined group, including the taxpayer, that are associated with the combined group's unitary business wherever located. The sales of a pass through entity shall be included in the determination of the partner's apportionment percentage in proportion to a ratio, the numerator of which is the amount of the partner's distributive share of pass through entity's unitary income included in the income of the combined group in accordance with section 6(4) of this chapter, and the denominator of which is the amount of the pass through entity's total unitary income.
    Sec. 5. The business income of a combined group shall be determined as follows:
        (1) From the total income of the combined group, as determined under subdivision (2), subtract any income, and add any expense or loss, other than the business income, expense, or loss of the combined group.
        (2) Except as otherwise provided in this chapter, the total income of the combined group is the sum of the income of each member of the combined group as determined under federal income tax laws, as adjusted for state purposes to

determine adjusted gross income or loss, as if the member were not consolidated for federal purposes.
    Sec. 6. The income of each member of a combined group shall be determined as follows:
        (1) For any member incorporated in the United States, or included in a consolidated federal corporate income tax return, the income to be included in the total income of the combined group shall be the adjusted gross income for the corporation after making appropriate adjustments under this article to determine adjusted gross income or loss.
        (2) For any member to which subdivision (1) does not apply, the income to be included in the total income of the combined group shall be determined as follows:
            (A) A profit and loss statement shall be prepared for each foreign branch or corporation in the currency in which the books of account of the branch or corporation are regularly maintained.
            (B) Adjustments shall be made to the profit and loss statement prepared under clause (A) to conform it to the accounting principles generally accepted in the United States for the preparation of profit and loss statements, except as modified by this chapter or a rule adopted by the department under IC 4-22-2.
            (C) Adjustments shall be made to the profit and loss statement prepared under clause (A) to conform it to the tax accounting standards required by this article.
            (D) Except as otherwise provided by rule, the profit and loss statement of each member of the combined group, and the apportionment factors related to each member's profit and loss statement, whether United States or foreign, shall be translated into the currency in which the parent company maintains its books and records.
            (E) Income apportioned to Indiana shall be expressed in United States dollars.
        (3) In lieu of the procedures set forth in subdivision (2), and subject to the determination of the department that it reasonably approximates income as determined under this article, any member to which subdivision (1) does not apply may determine its income on the basis of the consolidated profit and loss statement that includes the member and that is prepared for filing with the Securities and Exchange Commission by related corporations. If the member is not required to file with the Securities and Exchange Commission, the department may allow the use of the consolidated profit and loss statement prepared for reporting to shareholders and subject to review by an independent auditor. If the statements referred to in this subdivision do not reasonably approximate

income as determined under this article, the department may accept those statements with appropriate adjustments to approximate that income.
        (4) If a unitary business includes income from a pass through entity, the income to be included in the total income of the combined group shall be the member of the combined group's direct and indirect distributive share of the pass through entity's unitary business income.
        (5) All dividends paid by one (1) to another of the members of the combined group shall, to the extent those dividends are paid out of the earnings and profits of the unitary business included in the combined report, in the current or an earlier year, be eliminated from the income of the recipient. This subdivision does not apply to dividends received from members of the unitary business that are not a part of the combined group.
        (6) Except as otherwise provided by rule, business income from an intercompany transaction between members of the same combined group shall be deferred in a manner similar to the manner provided in 26 CFR 1.1502-13. Upon the occurrence of any of the following events, deferred business income resulting from an intercompany transaction between members of a combined group shall be restored to the income of the seller, and shall be apportioned as business income earned immediately before the event:
            (A) the object of a deferred intercompany transaction is:
                (i) resold by the buyer to an entity that is not a member of the combined group;
                (ii) resold by the buyer to an entity that is a member of the combined group for use outside the unitary business in which the buyer and seller are engaged; or
                (iii) converted by the buyer to a use outside the unitary business in which the buyer and seller are engaged; or
            (B) the buyer and seller are no longer members of the same combined group, regardless of whether the members remain unitary.
        (7) A charitable expense incurred by a member of a combined group shall, to the extent allowable as a deduction pursuant to Section 170 of the Internal Revenue Code, be subtracted first from the business income of the combined group (subject to the income limitations of that section applied to the entire business income of the group), and any remaining amount shall then be treated as a nonbusiness expense allocable to the member that incurred the expense (subject to the income limitations of that section applied to the nonbusiness income of that specific member). Any charitable deduction disallowed under the foregoing requirement set forth in this subdivision,

but allowed as a carryover deduction in a subsequent year, shall be treated as originally incurred in the subsequent year by the same member, and the rules of this section shall apply in the subsequent year in determining the allowable deduction in that year.
        (8) Gain or loss from the sale or exchange of capital assets, property described by Section 1231(a)(3) of the Internal Revenue Code, and property subject to an involuntary conversion shall be removed from the total separate net income of each member of a combined group and shall be apportioned and allocated as follows:
            (A) For each class of gain or loss (short term capital, long term capital, Internal Revenue Code Section 1231, and involuntary conversions) all members' business gain and loss for the class shall be combined (without netting between such classes), and each class of net business gain or loss separately apportioned to each member using the member's apportionment percentage determined under section 4 of this chapter.
            (B) Each taxpayer member shall then net its apportioned business gain or loss for all classes, including any such apportioned business gain and loss from other combined groups, against the taxpayer member's nonbusiness gain and loss for all classes allocated to Indiana, using the rules of Sections 1231 and 1222 of the Internal Revenue Code, without regard to any of the taxpayer member's gains or losses from the sale or exchange of capital assets, Section 1231 property, and involuntary conversions that are nonbusiness items allocated to another state.
            (C) Any resulting state source income (or loss, if the loss is not subject to the limitations of Section 1211 of the Internal Revenue Code) of a taxpayer member produced by the application of the preceding subsections shall then be applied to all other state source income or loss of that member.
            (D) Any resulting state source loss of a member that is subject to the limitations of Section 1211 of the Internal Revenue Code shall be carried forward or carried back by that member, and shall be treated as state source short-term capital loss incurred by that member for the year for which the carryover or carryback applies.
        (9) Any expense of one (1) member of the unitary group that is directly or indirectly attributable to the nonbusiness or exempt income of another member of the unitary group shall be allocated to that other member as corresponding nonbusiness or exempt expense, as appropriate.
    Sec. 7. As a filing convenience, and without changing the

respective liability of the group members, members of a combined reporting group may annually elect to designate one (1) taxpayer member of the combined group to file a single return in the form and manner prescribed by the department, in lieu of filing their own respective returns. However, the taxpayer designated to file the single return:
        (1) consents to act as surety with respect to the tax liability of all other taxpayers properly included in the combined report; and
        (2) agrees to act as agent on behalf of those taxpayers for the year of the election for tax matters relating to the combined report for that year.
If for any reason the surety is unwilling or unable to perform its responsibilities, tax liability may be assessed against the taxpayer members of the combined reporting group.
    Sec. 8. (a) Taxpayer members of a unitary group that meet the requirements of section 9 of this chapter may elect to determine each of their apportioned shares of the net business income or loss of the combined group pursuant to a water's edge election. Under a water's edge election, taxpayer members shall take into account all or a portion of the income and apportionment factors of only certain members otherwise included in the combined group pursuant to IC 6-3-2-2(p), as follows:
        (1) The entire income and apportionment factors of any member incorporated in the United States or formed under the laws of any state, the District of Columbia, or any territory or possession of the United States.
        (2) The entire income and apportionment factors of any member, regardless of the place incorporated or formed, if the average of the member's property, payroll, and sales factors within the United States (as determined under IC 6-3-2-2.4) is twenty percent (20%) or more.
        (3) The entire income and apportionment factors of any member that is:
            (A) a domestic international sales corporation as described in Sections 991 through 994 of the Internal Revenue Code;
            (B) a foreign sales corporation as described in Sections 921 through 927 of the Internal Revenue Code; or
            (C) an export trade corporation, as described in Sections 970 to 971 of the Internal Revenue Code.
        (4) Any member not described in subdivisions (1) through (3) shall include the portion of its income derived from or attributable to sources within the United States, as determined under the Internal Revenue Code without regard to federal treaties, and its apportionment factors related to the income.
        (5) Any member that is a "controlled foreign corporation," as

defined in Section 957 of the Internal Revenue Code, to the extent of the income of that member that is defined in Section 952 of Subpart F of the Internal Revenue Code (Subpart F income), not excluding lower-tier subsidiaries' distributions of such income that were previously taxed, as determined without regard to federal treaties, and the apportionment factors related to that income. Any item of income received by a controlled foreign corporation shall be excluded if that income was subject to an effective rate of income tax imposed by a foreign country greater than ninety percent (90%) of the maximum rate of tax specified in Section 11 of the Internal Revenue Code.
        (6) Any member that earns more than twenty percent (20%) of its income, directly or indirectly, from intangible property or service related activities that are deductible against the business income of other members of the combined group, to the extent of that income and the apportionment factors related to the property or service.
        (7) The entire income and apportionment factors of any member that is doing business in a tax haven. If the member's business activity within a tax haven is entirely outside the scope of the laws, provisions, and practices that cause the jurisdiction to meet the criteria set forth in IC 6-3-1-38 for a tax haven, the activity of the member shall be treated as not having been conducted in a tax haven.
    Sec. 9. (a) A water's edge election is effective only if made on a timely-filed, original return for a tax year by every member of the unitary business subject to tax under this article. The department shall develop rules under IC 4-22-2 governing the impact, if any, on the scope or application of a water's edge election, including termination or deemed election, resulting from a change in the composition of the unitary group, the combined group, the taxpayer members, and any other similar change.
    (b) A water's edge election constitutes consent to the reasonable production of documents and taking of depositions in accordance with Indiana law.
    (c) In the discretion of the department, a water's edge election may be disregarded in part or in whole, and the income and apportionment factors of any member of the taxpayer's unitary group may be included in the combined report without regard to the provisions of this section and section 8 of this chapter, if:
        (1) any member of the unitary group fails to comply with any provision of IC 6-3-2-2(p) or this chapter; or
        (2) a person, corporation, or pass through entity otherwise not included in the water's edge combined group was availed of with a substantial objective of avoiding state adjusted gross income tax.


    (d) A water's edge election is binding for and applicable to the tax year it is made and all tax years thereafter for a period of ten (10) years. It may be withdrawn or reinstituted after withdrawal, prior to the expiration of the ten (10) year period, only upon written request for reasonable cause based on extraordinary hardship due to unforeseen changes in state tax statutes, law, or policy, and only with the written permission of the department. If the department grants a withdrawal of election, the department shall impose reasonable conditions as necessary to prevent the evasion of tax or to clearly reflect income for the election period prior to or after the withdrawal. Upon the expiration of the ten (10) year period, a taxpayer may withdraw from the water's edge election. The withdrawal must be made in writing within one (1) year of the expiration of the election, and is binding for a period of ten (10) years, subject to the same conditions as applied to the original election. If no withdrawal is properly made, the water's edge election shall be in place for an additional ten (10) year period, subject to the same conditions as applied to the original election.
    Sec. 10. IC 6-3-2-16 applies to the combined reporting requirements under this chapter.
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SOURCE: Page 110, line 14; (10)MO023928.110. -->     Page 110, between lines 14 and 15, begin a new paragraph and insert:
SOURCE: ; (10)MO023928.68. -->     "SECTION 68. [EFFECTIVE UPON PASSAGE] (a) The department of state revenue shall adopt rules under IC 4-22-2 to implement IC 6-3-2-2 and IC 6-3-2-20, both as amended by this act, and IC 6-3-2.6, as added by this act. Notwithstanding IC 4-22-2-37.1, the department of state revenue may adopt emergency rules under IC 4-22-2-37.1 for this purpose and an emergency rule adopted under this SECTION expires on the latest of the following:
        (1) The date on which the emergency rule specifies that the emergency rule expires.
        (2) The date that another emergency rule adopted under this SECTION or a permanent rule adopted under IC 4-22-2 supersedes or repeals a previously adopted emergency rule.
        (3) January 1, 2013.
    (b) Not later than September 1, 2010, the department of state revenue, with the assistance of the office of management and budget and the budget agency, shall submit to the legislative council in an electronic format under IC 5-14-6 a report that:
        (1) makes recommendations concerning any legislative changes that are necessary or desirable to implement IC 6-3-2-2 and IC 6-3-2-20, both as amended by this act, and IC 6-3-2.6, as added by this act; and
        (2) contains a projection of the differences in revenue that the state is likely to receive in the period beginning January 1,

2011, and ending December 2016, as a result of the implementation of IC 6-3-2-2 and IC 6-3-2-20, both as amended by this act, and IC 6-3-2.6, as added by this act, and an explanation of the assumptions used by the department of state revenue to make the projection.
The department of state revenue shall present the findings in its report to the commission on state tax and financing policy on the date specified by the commission.
    (c) This SECTION expires January 1, 2013.
".
    Renumber all SECTIONS consecutively.
    (Reference is to ESB 239 as printed February 22, 2010.)

________________________________________

Representative Pelath


MO023928/DI 51     2010