The Indiana Tax Court held that the Indiana Department of Revenue could not require Rent-A-Center East, Inc. (RAC East) to file a combined return with two of its affiliates. Rent-A-Center East, Inc. v. Indiana Dep’t of Rev., 49T10-0612-TA-106 (May 27, 2011). Generally, Indiana requires corporations to file income tax returns on a separate entity basis. Indiana, however, permits the Department of Revenue to require entities to file a combined report if:
- Indiana’s standard apportionment provisions do not fairly reflect a taxpayer’s income derived from sources within Indiana; and
- The Department is unable to effectuate an equitable apportionment of the taxpayer’s gross income by any other method.
RAC East filed its 2003 Indiana income tax return on a separate entity basis and owed no income tax based on this filing methodology. RAC East paid royalties on an arm’s-length basis to RAC West, the entity that owned the trademarks and trade names associated with the Rent-A-Center brand, and paid management fees to RAC Texas. The Indiana Department determined that RAC East was required to file on a combined basis with RAC West and RAC Texas, assessing $513,273, including interest and penalties.
The Indiana Tax Court determined that the Department failed to provide any facts substantiating that the application of combined reporting was appropriate. An Indiana regulation specifically provides that the Department may not require a combined report “unless the department is unable to fairly reflect the taxpayer’s adjusted gross income through use of” alternative apportionment or an adjustment of income between related entities. The Department stated that it considered disallowing RAC East’s expense deductions to RAC West and RAC Texas, but that computation would nearly double RAC East’s tax liability. The Indiana Tax Court held that the Department’s argument was nothing more than a hypothetical and not a valid attempt to adjust the taxpayer’s income without the use of a combined report.