By Ted Friedman and Prentiss Willson

The Indiana Department of Revenue determined that affiliated entities of an out-of-state manufacturing corporation were not unitary. The corporation conducted marketing operations as one business segment and production operations as a second business segment. The corporation included its marketing entities in its Indiana consolidated return. On audit, Department staff included the production entities in a combined Indiana return. In considering the corporation’s protest, the Department stated that, in order to require related entities to file a combined return to fairly reflect income, the Department must: (1) find that the entities form a unitary group; (2) make a finding that the corporation’s own method of filing distorts the corporation’s Indiana income or expenses; and (3) be unable to fairly reflect Indiana income using other methods before requiring the combined-filing method. The Department determined that the corporation had established that the production and marketing entities conducted inter-divisional transactions on an arms-length basis, that the transactions were financially and competitively market driven, and that the entities were separately managed. The Department also determined the inter‑divisional transactions were not self-serving and were not structured simply as a means of minimizing state tax obligations. Accordingly, the Department concluded that the marketing and production entities were not unitary and that the corporation had met its burden of establishing that the Department erred in requiring the corporation and its affiliates to file a combined return. Supplemental Letter of Findings, 02-20120008 (Ind. Dep’t of Revenue Mar. 26, 2014).