First Nat. Leasing and Financial Corp. v. Indiana Dept. of State Revenue

• Decision Date: 19 August 1992
• Docket Number: No. 49T10-9105-TA-00024,49T10-9105-TA-00024
• Parties: FIRST NATIONAL LEASING AND FINANCIAL CORP., Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.
• Court: Indiana Tax Court

Page 640

598 N.E.2d 640

FIRST NATIONAL LEASING AND FINANCIAL CORP., Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

No. 49T10-9105-TA-00024.

Tax Court of Indiana.

Aug. 19, 1992.

Brian K. Peters, Brian W. Welch, McHale Cook & Welch, P.C., Indianapolis, C. Clark Germann, Michael C. Connelly, Peggy J. Ryan, Sorling, Northrup, Hanna, Cullen and Cochran, Ltd., Springfield, for petitioner.

Linley E. Pearson, Atty. Gen., Ted Holaday, Deputy Atty. Gen., Indianapolis, for respondent.

FISHER, Judge.

First National Leasing and Financial Corporation (First National) petitions the court to set aside the final determination of the Indiana Department of State Revenue (Department) assessing Indiana gross income tax in the amount of $25,432.97 plus interest and penalties on its rental income received from the lease of equipment to its wholly owned subsidiary, Hulcher Services, Inc. (Hulcher) from September 30, 1976, through September 30, 1986.

FACTS

First National, currently known as First Financial Resources, Incorporated, is a Delaware corporation. First National's corporate headquarters were located in Virden, Illinois, until 1985, when they relocated in Denton, Texas. Hulcher is presently a wholly owned subsidiary of First National, separately incorporated in Delaware and similarly headquartered in Virden, Illinois, until also moving to Denton, Texas in 1985.

While located in Illinois, both corporations had their central offices in the same one-story 8,000 to 10,000 square foot building, Hulcher in one wing and First National in another. Following the September 1985 move to Texas, both corporations continued to be located in the same building, a one story, three-wing building of approximately 12,000 square feet. Once again, however, each corporation is in a separate wing, the third wing occupied by a second First National subsidiary. The employees of the two corporations were distinct until 1984 when, for reasons of efficiency, accounting personnel were consolidated and put on First National's payroll to do accounting for both companies.

From 1975 to 1978, Glen Hulcher was the sole shareholder of First National and his father, Melvin Hulcher, was the sole shareholder of Hulcher Services. During this period, the corporations apparently had no common officers. In 1978, Glen and Melvin each became fifty percent (50%) shareholders of First National, and in turn, First National purchased one hundred percent (100%) of the stock of Hulcher. In 1979, Melvin completely redeemed his stock in First National. Thereafter, Glen was the president and James S. Swanson was the secretary-treasurer for both companies. The positions of vice-president were held by different people, however, during the years at issue.

First National's primary business is leasing equipment to Hulcher. In addition, however, First National performs accounting and administrative services for Hulcher, exclusive of any written agreement. During the years at issue, First National received income derived from its equipment leasing agreements with Hulcher.

Hulcher leases equipment from First National for use in its train derailment business, picking up train wrecks and either Hulcher operates in the eastern two-thirds of the United States from nineteen equipment bases scattered throughout the country. Hulcher stores the leased equipment at its equipment bases until it is called into action. One of Hulcher's equipment bases is located in Bluffton, Indiana. The Bluffton division was conceived and developed exclusively by Hulcher. A variety of Hulcher's leased equipment is located at the Bluffton site, which has eight employees.

putting them back on the track or clearing the track. The leased equipment includes big over-the-road trucks, tractors, lowboy trailers, pick-up trucks, cranes, miscellaneous generators and light plants, and caterpillar tractors with side booms for lifting.

When a train derails, the railroad calls Hulcher's Texas headquarters, which then dispatches equipment from its various bases to meet the needs of the situation. For the twenty-three months prior to First National's administrative hearing, Hulcher operated the equipment stored at Bluffton in Indiana for thirty-seven percent (37%) of its total operating time. The rental payments made by Hulcher to First National are based on a flat percentage, negotiated annually, and determined independent of the amount of revenue generated by Hulcher from the use of the Indiana based equipment.

Whenever Hulcher needs new equipment, it supplies the specifications to First National, which in turn places the order with a manufacturer. First National obtains financing to purchase the equipment and is the titled owner of the equipment. When the newly manufactured equipment is ready for delivery, Hulcher and First National enter into a lease agreement, which is negotiated at their corporate headquarters. First National then directs the delivery of the equipment to Hulcher outside Indiana. First National does not pick up the equipment from the manufacturer and never uses the equipment. Moreover, First National does not control where the equipment is used or stored. Indeed, Hulcher, in its sole discretion, locates the equipment at one of its bases and routinely relocates its equipment as well as its bases of operation without any involvement by First National.

First National and Hulcher entered a master lease agreement that covers all the property Hulcher rents. The basic lease terms require Hulcher to pay for the repair, storage, and insurance of the equipment. Furthermore, the master lease refers to attachments or exhibits that detail the individual pieces of equipment. Until 1978, each piece of leased equipment was separately scheduled. Separate scheduling is, however, no longer done unless it is required for financing purposes.

Hulcher has substantial contact with Indiana. Hulcher is an Indiana taxpayer, which warehouses equipment, performs services, and employs residents of Indiana. On the other hand, First National does not have an office, warehouse, or distribution center in Indiana, nor does it deliver equipment or have salesmen or other employees in the state. First National has never received rental payments in Indiana from Hulcher, nor has Hulcher made a lease payment from Indiana. Furthermore, First National has never filed as a taxpayer in Indiana, but is a taxpayer in Texas.

Additional facts appear below as necessary.

ISSUES

The parties assert several issues that the court restates as follows:

I. Is First National's gross income from leasing equipment to its wholly owned subsidiary, which stores and uses the equipment within Indiana, derived from "sources within Indiana" within the meaning of IND.CODE 6-2.1-2-2(a)(2)?

II. If First National's rental income is derived from "sources within Indiana," is it "taxable gross income" under IC 6-2.1-2-2(a)(2) or is it exempt from tax under IND.CODE 6-2.1-3-3 and the Commerce Clause of the United States Constitution?

DISCUSSION & DECISION

Initially, the court observes that the parties have been seduced, as in today's previous A three-step analysis is required to determine the taxability of a non-resident: (1) are the receipts "gross income," ² (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"? ³

                two decisions, 1 into leaping over issues concerning the imposition of tax under Indiana's statutes by the allure of Constitutional arguments.  Indeed, the Department contends that First National's rental income is subject to tax under IC 6-2.1-2-2(a)(2) (formerly IND.CODE 6-2-1-2), 45 I.A.C. 1-1-49, and 45 I.A.C. 1-1-84 because a sufficient nexus exists for the state to impose tax under the four-part test in Complete Auto Transit, Inc. v. Brady (1977), 430 U.S. 274, 277-78, 97 S.Ct. 1076, 1078, 51 L.Ed.2d 326, and the decision in Goldberg v. Sweet, (1989), 488 U.S. 252, 257-58, 109 S.Ct. 582, 587, 102 L.Ed.2d 607.   The Department's contention suggests that Indiana's imposition statutes have no independent vitality but are properly construed by applying only Constitutional standards.  Nevertheless, as has already been stated today:  "The court's consideration [ ] must follow the analytical framework demanded by the imposition statute and well-settled Indiana law, recognizing that '[c]ourts will not decide Constitutional questions unless such a determination is necessary.' "  Indiana-Kentucky Elec., at 661 (quoting Bethlehem Steel, at 1330).   To reposition the cart where it belongs, behind the horse, the court therefore will consider the taxability of the gross income at issue according to the requirements of IC 6-2.1-2-2(a)(2)
                

Indiana-Kentucky Elec., at 661 (citing IC 6-2.1-2-2(a)(2); Bethlehem Steel, at 1329) (footnotes in original).

The parties do not dispute that First National's rental income is "gross income" under IC 6-2.1-1-2. The court consequently considers first whether First National's rental income is derived from "sources within Indiana" within the meaning of IC 6-2.1-2-2(a)(2). Indiana courts and the Department's regulations agree that income has an Indiana "source" when a taxpayer has an Indiana "business situs" at which activities related to the transaction giving rise to the income (the critical transaction) are more than minimal, not remote or incidental to the transaction, i.e., the income has an Indiana "tax situs." Indiana-Kentucky Elec., at 663.

"BUSINESS SITUS"

First National asserts it does not have an Indiana "business situs" because it does not maintain an office, warehouse, inventory, or employees in Indiana, nor does it perform services, conduct sales, accept or receive rental payments, or negotiate contracts in Indiana. Furthermore, First National maintains that although it owns derailment equipment located in Indiana, it had no control over its location in the state.

The Department, on the...