By Todd Betor and Pilar Mata

In a Letter of Findings, the Indiana Department of Revenue disallowed a corporate partner’s attempt to deduct flow-through income from a limited liability company as “foreign source dividends and other adjustments” on its Indiana corporate income tax return. Indiana requires corporate partners to report their share of partnership income, whether distributed or undistributed, on their income tax returns, with certain adjustments for intercompany and related party transactions. If a corporate partner is unitary with a partnership, only nonbusiness income can be removed from a corporate partner’s apportionable base. The taxpayer, an Indiana corporation, held a majority interest in an Indiana limited liability company (LLC) that elected to be treated as a partnership for U.S. federal income tax purposes, and which owned an Indiana LLC that was a disregarded entity for U.S. federal income tax purposes and conducted a gaming business in Indiana. The taxpayer argued that it was not domiciled in Indiana and thus, under Riverboat Development, Inc. v. Department of State Revenue, 881 N.E.2d 107 (Ind. Tax Ct. 2008), the taxpayer did not have to report or pay tax on the flow-through income. The Department disagreed, not only finding the taxpayer to be incorporated in and operating in Indiana, but also that Riverboat Development was distinguishable because that case involved a non-resident shareholder’s receipts of “intangibles,” and no “intangibles” were at issue in this case. Finally, the Department found that the taxpayer and the LLCs were unitary because the taxpayer earned its income solely from business in Indiana as the majority member of the LLCs and from managing the gaming LLC’s daily business operations. Consequently, the Department determined that the taxpayer’s flow-through income from the LLCs was nondeductible business income that was attributable to Indiana and subject to Indiana corporate income tax. Ind. Dep’t of State Rev., Ltr. Of Findings No. 02-20100152 (Mar. 1, 2013).