Indiana Department Of Revenue Rules On NOL Calculation And Consolidated Group Membership Issues

In an administrative appeal from an assessment published as a Letter of Findings, the Indiana Department of Revenue recently determined that a corporate taxpayer could not factor foreign source dividend deductions into its net operating loss (NOL) deduction calculation. However, the Department permitted the taxpayer to file an amended return for a closed year in order to properly compute the amount of NOL carryforward available, to the extent such changes came as a result of adjustments made to the federal return by the Internal Revenue Service on a Revenue Agent's Report (RAR). The Department also required the exclusion of a taxpayer's out-of-state subsidiary that did not have Indiana source income from the taxpayer's Indiana consolidated income tax return.1

Background

The administrative appeal from the Department's assessment had three separate components, two based on the taxpayer's NOL calculation, and one based on the composition of the taxpayer's consolidated group. The taxpayer, a parent corporation doing business in Indiana and other states, filed consolidated Indiana adjusted gross income tax returns. The Department examined the taxpayer's 2006 tax year, in which the taxpayer took an NOL deduction from NOLs carried forward from 2001 and 2003. Following the audit, the Department limited the 2001 NOL carryforward due to untimely reporting of RAR adjustments, and also found that the taxpayer's calculation of NOLs from its 1999, 2001 and 2003 years which took foreign source dividend deductions into account was erroneous. Finally, the Department rejected the taxpayer's inclusion of an out-of-state subsidiary in its consolidated Indiana return.

NOL Deduction Based on Foreign Source Dividends

While taxpayers are allowed a deduction from Indiana adjusted gross income for certain foreign source dividends included in Indiana adjusted gross income,2 no similar deduction or modification exists in the calculation of the Indiana NOL deduction. The taxpayer claimed that by not allowing an adjustment for foreign source dividends in the Indiana NOL deduction, the Department was unconstitutionally taxing foreign source dividends, and cited the U.S. Supreme Court's decision in Kraft3 for this assertion. In the Letter of Findings, the Department rejected this argument, asserting that a deduction did exist for foreign source dividends in the Indiana statute (unlike the statute in Kraft), and passing on the opportunity to go through a constitutional...