Ind. Dep't of State Revenue v. Caterpillar, Inc.

Decision Date25 August 2014
Docket NumberNo. 49S10–1402–TA–79.,49S10–1402–TA–79.
PartiesINDIANA DEPARTMENT OF STATE REVENUE, Petitioner (Respondent below), v. CATERPILLAR, INC., Respondent (Petitioner below).
CourtIndiana Supreme Court

Gregory F. Zoeller, Attorney General of Indiana, Andrew W. Swain, John D. Snethen, Timothy A. Schultz, Deputy Attorneys General, Indianapolis, IN, Attorneys for Petitioner.

Timothy J. Eifler, Walter L. Sales, Louisville, KY, Attorneys for Respondent.

Opinion

RUSH

, Chief Justice.

Indiana's tax statutes expressly authorize corporate taxpayers to deduct some foreign source dividend income when calculating Indiana adjusted gross income. But Caterpillar attempted to use that same deduction to increase its Indiana net operating losses available for carryover to other tax years. We hold that the plain meaning of the Indiana tax statutes disallows Caterpillar's use of the foreign source dividend deduction outside of its legislatively authorized context. We also hold that Caterpillar has not met its burden to show that disallowing the deduction discriminates against foreign commerce under the Foreign Commerce Clause of the Federal Constitution. Accordingly, we reverse the Tax Court's decision and grant summary judgment for the Indiana Department of State Revenue.

Background and Relevant Tax Statutes

Three Indiana tax statutes inform our discussion: 1) the statute defining “adjusted gross income” (“AGI”); 2) the foreign source dividend deduction statute; and 3) the net operating loss (“NOL”) statute. Indiana corporate taxpayers use a multistep process to calculate their taxable Indiana AGI. The calculation begins with federal taxable income, to which a taxpayer makes expressly enumerated adjustments under Indiana Code section 6–3–1–3.5(b)

( Section 3.5(b)). Then, the taxpayer makes additional adjustments based on provisions outside of Section 3.5(b). One such provision is the foreign source dividend deduction statute. It allows a corporate taxpayer to deduct a percentage of its dividend income earned from foreign subsidiaries: “A corporation that includes any foreign source dividend in its adjusted gross income for a taxable year is entitled to a deduction from that adjusted gross income.” Ind.Code § 6–3–2–12(b) (2004). After making these adjustments, the taxpayer determines how much of its income is apportioned or allocated to Indiana, based on provisions in Indiana Code section 6–3–2–2. The resulting number is Indiana AGI before the NOL deduction. Finally, a corporation may apply allowable NOL deductions, which are calculated by applying the three-step formula found in the Indiana NOL statute: “An Indiana net operating loss equals the taxpayer's federal net operating loss for a taxable year as calculated under Section 172 of the Internal Revenue Code, derived from sources within Indiana and adjusted for the modifications required by IC 6–3–1–3.5.” I.C. § 6–3–2–2.6(c).

Facts and Procedural History

This case presents the question of whether the Indiana tax statutes allow Caterpillar to increase its Indiana NOLs by deducting foreign source dividend income. Caterpillar challenges the Indiana Department of State Revenue's (the Department's) longstanding application of the Indiana tax statutes. We granted the Department's petition for review to resolve this question and its Foreign Commerce Clause implications.

Caterpillar is a multinational corporation, incorporated in Delaware with its headquarters in Peoria, Illinois. It is the world's largest manufacturer of construction and mining equipment, and it operates one of its manufacturing plants in Lafayette, Indiana. From 2000 to 2003, Caterpillar owned over two hundred fifty subsidiaries, either directly or indirectly. Some of these subsidiaries were other U.S. corporations, but most were foreign companies operating outside the United States. During this time, Caterpillar received dividends from both its domestic and foreign subsidiaries.

From 2000 to 2003 (“the Loss Years”), Caterpillar deducted its foreign source dividend income when calculating its Indiana NOLs. In so doing, Caterpillar grafted Indiana's foreign source dividend deduction statute, see I.C. § 6–3–2–12

, into the Indiana NOL calculation—literally. Caterpillar had to write in the deduction manually on its tax return because the NOL schedule (Schedule IT–20NOL) made no space for the foreign source dividend deduction. In this way, Caterpillar presumed to increase its Indiana NOLs by deducting foreign source dividend income from the Loss Years.

In 2004 and 2005, Caterpillar timely filed amended tax returns for 1996, 1997, 1998, and 1999 (the “Carryback Years”) that included a modified AGI reduced by the NOLs carried back from the Loss Years, and sought a refund based on the amended returns. The Department partially denied the refund after it audited Caterpillar's returns filed during the Carryback and Loss Years. The Department rejected Caterpillar's insertion of the foreign source dividend deduction into the NOL calculation; reduced Caterpillar's usable Indiana NOLs by $8,309,622; and issued a partial refund to Caterpillar consistent with the Department's interpretation of the Indiana NOL statute.

On May 8, 2008, Caterpillar timely protested the Department's recalculation of its Indiana NOL deductions and partial denial of its refund. After a hearing on August 21, 2008, the Department denied the protest in a Letter of Findings dated October 10, 2008. Letter of Findings: 08–0333R, Ind. Reg. LSA Doc. No. 08–907 (Dec. 17, 2008) (see http://www.in.gov/legislative/iac/20081217–IR–045080907NRA.xml.html). On December 9, 2008, Caterpillar commenced an original tax appeal in the Indiana Tax Court. In its petition, Caterpillar did not seek the refunds the Department denied for the Carryback Years. But, it did appeal the Department's reduction of its Indiana NOLs available for carryforward and use in future tax years.1 Caterpillar moved for summary judgment on October 30, 2009, and the Department filed its own cross-motion for summary judgment on January 15, 2010. On March 28, 2013, the Tax Court rendered its decision granting summary judgment for Caterpillar and denying the Department's cross-motion for summary judgment. Caterpillar, Inc. v. Indiana Dept. of State Revenue, 988 N.E.2d 1269 (Ind.Tax Ct.2013)

. The Department timely petitioned this Court for review,2 and we granted review. Ind. Appellate Rule 63(M).

Standard of Review

When we review a decision from the Indiana Tax Court, we extend cautious deference to the court's special expertise in Indiana tax law. Ind. Dep't of Revenue v. Miller Brewing Co., 975 N.E.2d 800, 803 (Ind.2012)

. Although we exercise de novo review over all questions of constitutional and statutory interpretation, we will set aside a decision by the Tax Court only when we are “definitely and firmly convinced” the Tax Court has erred. Id. (internal quotation marks omitted); Dep't of Local Gov't Fin. v. Roller Skating Rink Operators Ass'n, 853 N.E.2d 1262, 1265 (Ind.2006)

. Additionally, when we examine a statute that an agency is “charged with enforcing ... we defer to the agency's reasonable interpretation of [the] statute even over an equally reasonable interpretation by another party.” Chrysler Grp., LLC v. Review Bd. of Ind. Dep't of Workforce Dev., 960 N.E.2d 118, 124 (Ind.2012) ; Stump v. Ind. Dep't of State Revenue, 777 N.E.2d 799, 802 (Ind.Tax Ct.2002). And when reviewing summary judgment, we will affirm only when the record presents no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Ind. Trial Rule 56(C).

Discussion and Decision

At its core, the resolution of this case is straightforward: The Indiana NOL statute does not reference or incorporate the foreign source dividend deduction, and the Tax Court clearly erred in holding that it did. The Department correctly recognized that the Indiana tax statutes did not authorize Caterpillar to include foreign source dividend income in its Indiana NOL calculation. We also conclude that Caterpillar has not met its burden to show the Indiana tax statutes unconstitutionally discriminate against foreign commerce.

I. The Indiana Net Operating Loss Calculation

“The first and often the only step in resolving an issue of statutory interpretation is the language of the statute.” Shell Oil Co. v. Meyer, 705 N.E.2d 962, 972 (Ind.1998)

. We give effect to the ‘plain and ordinary meaning’ of tax statutes when the Legislature has ‘spoken clearly and unambiguously,’ rather than apply canons of statutory construction or deduce legislative intent. Miller Brewing Co., 975 N.E.2d at 803 (quoting Sloan v. State, 947 N.E.2d 917, 922 (Ind.2011) ); Ind. Dep't of State Revenue v. Horizon Bancorp, 644 N.E.2d 870, 872 (Ind.1994). But if a statute authorizing a deduction is ambiguous, we must construe the deduction narrowly because ‘an income tax deduction is a matter of legislative grace and ... the burden of clearly showing the right to the claimed deduction is on the taxpayer.’ INDOPCO, Inc. v. Comm'r, 503 U.S. 79, 84, 112 S.Ct. 1039, 117 L.Ed.2d 226 (1992) (quoting Interstate Transit Lines v. Comm'r, 319 U.S. 590, 593, 63 S.Ct. 1279, 87 L.Ed. 1607 (1943) ); Ind. Dep't of State Revenue v. Food Mktg. Corp., 403 N.E.2d 1093, 1102–03 (Ind.Ct.App.1980). When something is not enumerated in a statutory list it “should not be engrafted into the list by judicial interpretation.” Morgan Cnty. v. Ferguson, 712 N.E.2d 1038, 1043 (Ind.Ct.App.1999).

Here, we find that the Indiana NOL statute is unambiguous and thus apply the statutory terms as written without resorting to canons of construction. We also “decline [the] parties' invitations to consider extraneous evidence of legislative intent, including—but not limited to—legislative history and administrative interpretations of the statute.” Miller Brewing Co., 975 N.E.2d at 803

.

A. Calculating Indiana NOLs

Indiana corporate taxpayers calculate Indiana NOLs by modifying their federal NOLs...

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