E.I. Dupont De Nemours and Company v. Indiana Department of State Revenue
2017 Ind. Tax LEXIS 22
| Ind. T.C. | 2017Background
- DuPont, a Delaware corporation primarily in manufacturing, sold its pharmaceutical subsidiary (DPC) in 2001 for a multi-billion dollar gain and later claimed NOL carryforwards against Indiana AGIT returns for 2005–2007.
- Intercompany loans: DuPont received large loans (1995, 1999, 2005) from related DuPont entities (DEC, DGOI); interest accrued but payments were not made during the years at issue and balances were rolled into later loans.
- Indiana Dept. of Revenue audited DuPont’s consolidated returns and (1) reclassified the 2001 DPC sale gain as apportionable business income, (2) disallowed ~ $3.1 billion of intercompany interest deductions for 2006–2007 as sham, and (3) disallowed a 2007 R&D deduction; assessments plus interest and a 2007 penalty followed.
- DuPont challenged the adjustments; parties filed cross-motions for summary judgment. The Tax Court considered statute-of-limitations, business vs. nonbusiness income characterization, economic substance of loans, R&D treatment, and a negligence penalty.
- The Court granted summary judgment to DuPont on (a) reclassification of the DPC gain (business vs. nonbusiness), (b) disallowance of interest (sham/economic substance), and (c) waiver of the negligence penalty; the Court granted the Department judgment as to the Department’s authority to adjust NOLs (retroactive adjustments) and as to disallowance of the R&D deduction.
Issues
| Issue | Plaintiff's Argument (DuPont) | Defendant's Argument (Dept. of Revenue) | Held |
|---|---|---|---|
| 1. Authority to adjust NOLs in closed years | Dept. cannot adjust pre-2005 closed years under I.C. § 6-8.1-5-2; retroactive adjustments violate settled expectations | Dept. audited open years (2005–2007); accuracy of NOL carryforwards depends on closed-year NOL computations; statute limits assessments but not adjustments | Dept. may recalculate closed-year NOLs for purposes of open-year tax computation; summary judgment for Dept. on authority to adjust NOLs |
| 2. Classification of 2001 DPC sale gain (business vs. nonbusiness) | Sale was part of DuPont’s business activities or integral to operations; therefore apportionable business income | Sale was part of corporate strategy and related to DuPont’s business, so business income | Court found sale was not in DuPont’s regular course (transactional test) and DPC was not managed integrally by DuPont (functional test); gain is nonbusiness income; summary judgment for DuPont |
| 3. Disallowance of intercompany interest deductions (economic substance/sham) | Loans had business purpose (restructuring, financing public offering), were adequately funded, interest accruals and arm’s-length rates, within IRC §482 safe-harbor; transactions had economic substance | Loans lacked substance because lender had no independent receipts, no cash payments were made, and rates were excessive — so deductions should be denied | Court held Dept. failed to show lack of economic substance; accrual accounting, funding evidence, and arm’s-length rates showed substance; summary judgment for DuPont |
| 4. R&D expense deduction for 2007 | DuPont argued Indiana should allow deduction because federal taxable income (I.R.C. §63) start point should reflect R&D expense when state credit unavailable | Dept. argued DuPont elected federal R&D tax credit (not deduction) so I.R.C. §63 taxable income does not include R&D deduction; Indiana does not provide a separate deduction | Court held DuPont’s R&D deduction was improper under I.R.C. §63 and Indiana law; summary judgment for Dept. |
| 5. 2007 negligence penalty | DuPont claimed reasonable cause for positions on classification and interest deductions; penalty should be waived | Dept. imposed negligence penalty for 2007 deficiency | Court found DuPont’s positions on classification and interest had reasonable cause (litigated successfully) and also found R&D position was not unreasonable; penalties waived in full; summary judgment for DuPont |
Key Cases Cited
- Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768 (U.S. 1992) (unitary-business principle and compatibility of UDITPA definitions)
- Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (U.S. 1983) (flow of value and functional integration vs. arm’s-length transactions)
- Exxon Corp. v. Wisconsin Dep’t of Revenue, 447 U.S. 207 (U.S. 1980) (economies of scale and centralized functions in unitary analysis)
- MeadWestvaco Corp. v. Illinois Dep’t of Revenue, 533 U.S. 16 (U.S. 2008) (state may tax apportioned sum of a corporation’s multistate business if unitary)
- May Dep’t Stores Co. v. Indiana Dep’t of State Revenue, 749 N.E.2d 651 (Ind. Tax Ct. 2001) (transactional and functional tests for business income)
- Subaru-Isuzu Automotive, Inc. v. Indiana Dep’t of State Revenue, 782 N.E.2d 1071 (Ind. Tax Ct. 2003) (start point and NOL carryforward principles)
- Columbia Sportswear USA Corp. v. Indiana Dep’t of State Revenue, 45 N.E.3d 888 (Ind. Tax Ct. 2015) (limitations on Dept. authority under I.C. §6-3-2-2)
- Rent-A-Ctr. E., Inc. v. Indiana Dep’t of State Revenue, 42 N.E.3d 1043 (Ind. Tax Ct. 2015) (applying §482 arm’s-length standard in state sourcing adjustments)
- Elmer v. Indiana Dep’t of State Revenue, 42 N.E.3d 185 (Ind. Tax Ct. 2015) (applying federal economic substance doctrine)
- Cooper Indus. v. Indiana Dep’t of State Revenue, 673 N.E.2d 1209 (Ind. Tax Ct. 1996) (federal taxable income under I.R.C. §63 as Indiana starting point)