The Indiana Department of Revenue found that a holding company was properly excluded as a member of its affiliates’ financial institutions tax (FIT) combined group return because the company failed to establish nexus with the state. The Department also decided that for purposes of the FIT, there is no distinction between business and nonbusiness income.
Under Indiana’s FIT combined group return rules, taxpayers that do not have nexus with the state are excluded from a combined group return. The holding company contended that it had nexus with Indiana through its membership interest in a wholly owned limited liability company that engages in broker/dealer services and is a disregarded entity from the holder company for income tax purposes.
But the Department of Revenue rejected this argument, explaining that although the broker/dealer had one employee located within Indiana, the broker/dealer had no offices in Indiana (its employee worked from other affiliate offices) and, during the tax years at issue, it earned no Indiana receipts. Further, the Department found that inclusion of the holding company in the FIT combined group return would not fairly represent the combined group’s income attributable to Indiana. The Department found that the broker/dealer’s activities within Indiana were de minimis, but that inclusion of the holding company in the FIT combined group return would have an outsized impact on the combined group’s adjusted gross income.
The Department then rejected taxpayer’s contention that income from its subsidiary’s sale of stock in another company was improperly included in the FIT tax base. Citing the business/nonbusiness income distinction under Indiana’s Adjusted Gross Income Tax, the taxpayer argued that income from such sale should have been allocated to the state of the subsidiary’s domicile. The Department disagreed, and concluded that there is no business/nonbusiness distinction under Indiana’s FIT. The Department noted that, under the FIT, adjusted gross income is determined by reference to the federal definition of taxable income under Internal Revenue Code § 63 and does not incorporate the business/nonbusiness income provisions found in Indiana’s gross income tax provision.
Letter of Findings 18-20210085, Indiana Department of State Revenue (Nov. 18, 2021).