Bethlehem Steel Corp. v. Indiana Dept. of State Revenue

Citation597 N.E.2d 1327
Decision Date19 August 1992
Docket NumberNo. 49T05-8912-TA-00070,49T05-8912-TA-00070
PartiesBETHLEHEM STEEL CORPORATION, Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.
CourtTax Court of Indiana

Michael J. Rusnak, Glenn M. Sermersheim, Locke Reynolds Boyd & Weisell, Indianapolis, for petitioner.

Linley E. Pearson, Atty. Gen., Joel Schiff, Deputy Atty. Gen., Indianapolis, for respondent.

FISHER, Judge.

Bethlehem Steel Corporation (Bethlehem) claims a refund from the Indiana Department of State Revenue (the Department) of gross income tax assessed and collected together with interest on cash proceeds received from interstate transactions structured pursuant to Internal Revenue Code Sec. 168(f)(8) (1981) (repealed 1986) in the amount of $717,451 for the years 1981, 1982, and 1983. The case is before the court on the parties' cross motions for summary judgment.

FACTS

The parties stipulated the following facts. Bethlehem is a Delaware corporation, commercially domiciled in Bethlehem, Pennsylvania. In 1981, 1982, and 1983, Bethlehem sold its rights to intangible federal income tax benefits, such as investment tax credits, energy tax credits, and accelerated depreciation deductions, to out-of-state purchasers for a cash payment. The tax benefits were based upon and arose out of Bethlehem's purchase and ownership of certain capital equipment located at various plants throughout the nation. Forty-five percent (45%) of the equipment associated with the transferred tax benefits was located at Bethlehem's steel-making facility in Porter County, Indiana, known as the Burns Harbor Plant.

Bethlehem structured the sales of tax benefits pursuant to I.R.C. Sec. 168(f)(8) (the safe harbor leases) 1 as sale-leasebacks: (1) acquiring equipment directly with its own and/or borrowed funds, (2) "selling" the equipment to a "purchaser" in exchange for up-front cash and non-recourse notes totalling Bethlehem's cost basis in the equipment, (3) "leasing" the equipment back for rental payments that exactly equalled, in timing and amount, the principal and interest payments due under the non-recourse notes, and (4) "repurchasing," at its option, the equipment upon the expiration of the lease for a nominal sum.

Although Bethlehem's transactions appeared in form to be sale-leaseback transactions in which the equipment itself was sold and then leased back from the purchasers, the sale-leaseback was actually a legal fiction. Unlike a true sale-leaseback, the equipment was never "sold" or "leased," the title at all times remaining with Bethlehem. The "lease" payments, which completely offset the payments due under the non-recourse notes, were never exchanged. The only cash that actually changed hands was the up-front cash payment to Bethlehem, and the "purchasers" in return were entitled to federal tax benefits as the "owner" of new capital equipment under the federal safe harbor lease provisions.

Bethlehem's decision to enter safe harbor lease transactions was based on financial and investment considerations alone, as the result of advice from investment advisors and legal counsel located outside Indiana. The management at the Burns Harbor Plant had no say in decisions to enter the safe harbor leases, and the business operations at the plant did not influence such decisions. Moreover, the safe harbor lease transactions did not affect the regularly conducted business operations at the Burns Harbor Plant.

Bethlehem sold the tax benefits to non-resident corporations, conducting all negotiations and closings outside the state of Indiana. As a result, Bethlehem received cash proceeds in the amount of $3,207,175 in 1981, $12,999,649 in 1982, and $38,858,543 in 1983.

Bethlehem timely filed its Indiana Corporation Income Tax returns, Form IT-20CY, for the years at issue. After an audit, the Department proposed the assessment of additional gross income tax on the cash proceeds received in 1981, 1982, and 1983, from the sale of federal tax benefits. After a protest hearing, the Department issued its letter of findings and notices of tax due, demanding additional gross income tax and the interest thereon. On June 23, 1988, Bethlehem paid the Department, discharging in full its additional tax and interest liability for the years at issue.

On December 5, 1988, Bethlehem timely filed claims for refund of tax paid and interest accrued from the date of payment for the years 1981, 1982, and 1983. The Department has not to this date made a determination concerning Bethlehem's claims for refund. 2

ISSUES

I. Are the cash proceeds received from a safe harbor lease transaction pursuant to Internal Revenue Code Sec. 168(f)(8) "gross income" within the meaning of IND.CODE 6-2.1-1-13?

II. Are the cash proceeds of a non-resident received from a safe harbor lease transaction associated with equipment located in Indiana derived from "sources within Indiana" taxable under IND.CODE 6-2.1-2-2(a)(2)?

III. Whether assessing gross income tax on a non-resident's income derived from the sale of intangible federal tax benefits associated with equipment located in Indiana violates IND.CODE 6-2.1-3-3 and the Commerce Clause of the United States Constitution, article I, section 8, clause 3, as income derived from interstate commerce?

STANDARD OF REVIEW

The court shall grant a motion for summary judgment if no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. Ind.Rules of Procedure, Trial Rule 56(C).

Cross motions for summary judgment do not alter the standard for granting summary judgment. Aetna Ins. Co. v. Rodriguez (1986), Ind.App., 496 N.E.2d 1321, 1323; Ind.Rules of Procedure, Trial Rule 56(C). Each motion must be considered separately to determine whether there is a genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Aetna, 496 N.E.2d at 1323 (citing Ebert v. Grain Dealers Mut. Ins. Co. (1973), 158 Ind.App. 379, 303 N.E.2d 693).

Caylor-Nickel Clinic, P.C. v. Indiana Dep't of State Revenue (1991), Ind.Tax, 569 N.E.2d 765, 766-67, aff'd, (1992), Ind., 587 N.E.2d 1311.

"Absent a genuine issue of material fact, the court may grant summary judgment only if one of the parties is entitled to judgment as a matter of law." Scott Oil Co. v. Indiana Dep't of State Revenue (1992), Ind.Tax, 584 N.E.2d 1127, 1130.

The parties agree this case presents no genuine issue of material fact. The dispute therefore concerns whether, as a matter of law, Indiana can tax Bethlehem Steel's cash proceeds from the interstate sale, pursuant to I.R.C. Sec. 168(f)(8), of its intangible federal income tax benefits related to its equipment located at its Indiana plant.

DISCUSSION & DECISION
I.

In this opinion, as well as the two others decided today, 3 the court analyzes limitations

on state taxation under the Commerce Clause, article I, section 8, clause 3 of the United States Constitution. Indiana imposes gross income tax on the receipt of:

(1) the entire taxable gross income of a taxpayer who is a resident or a domiciliary of Indiana; and

(2) the taxable gross income derived from activities or businesses or any other sources within Indiana by a taxpayer who is not a resident or a domiciliary of Indiana.

IC 6-2.1-2-2(a) (emphasis added). Accordingly, the state has the power to tax "gross income" received that is "taxable gross income." " 'Taxable gross income' means the remainder of: (1) all gross income which is not exempt from tax under IC 6-2.1-3; less (2) all deductions which are allowed under IC 6-2.1-4." IC 6-2.1-1-13. The taxability of an Indiana resident therefore requires a two-part analysis: (1) are the receipts "gross income" and (2) is the "gross income" "taxable gross income"? The taxability of a non-resident taxpayer, such as Bethlehem, requires an additional step: (1) are the receipts "gross income," (2) is the "gross income" derived from "sources within Indiana," and (3) is the "gross income" that is derived from "sources within Indiana" "taxable gross income"?

The court notes that the parties argue at length over issues involving the interstate commerce exemption under IC 6-2.1-3-3 and the Commerce Clause, which would ultimately determine whether the receipts are "taxable gross income." The court nonetheless agrees with Judge Sullivan of the Indiana Court of Appeals that

[t]he temptation to consider the Indiana Gross Income Tax [ ] upon [Constitutional] terms, as has been done almost invariably in the past, is like the lure of the siren's song....

Insofar as here pertinent, the Gross Income Tax statute requires that in order to be taxable, gross income of a non-resident must be derived from activities within the state. If the activities giving rise to the income sought to be taxed do not occur within Indiana, then the tax may not be levied--not because to do so is forbidden by the United States Constitution (although it may well be)--but rather because under those facts the levy is forbidden by the statute.

Indiana Dep't of State Revenue v. Convenient Indus. of Am., Inc. (1973), 157 Ind.App. 179, 181-85, 299 N.E.2d 641, 643-45; accord Miami Coal Co. v. Fox (1931), 203 Ind. 99, 116, 176 N.E. 11, 17.

"Courts will not decide Constitutional questions unless such a determination is necessary." Indiana Dep't of State Revenue v. J.C. Penney Co. (1980), Ind.App., 412 N.E.2d 1246, 1252 (citing Indiana Educ. Employment Relations Bd. v. Benton Community School Corp. (1977), 266 Ind. 491, 365 N.E.2d 752), trans. denied; Bayh v. Sonnenburg (1991), Ind., 573 N.E.2d 398, 402. Therefore, the court must analyze, in the order specified above, the requirements that permit the imposition of tax under the Indiana Gross Income Tax Act (the Act), IND.CODE 6-2.1-1-1 et seq.

The first issue is whether Bethlehem's cash proceeds received from safe harbor lease transactions constitute "gross income" within the meaning of the Act. Indiana imposes tax on a taxpayer's receipt of "gross income." IC 6-2.1-2-2(a)...

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