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

• Decision Date: 19 August 1994
• Docket Number: No. 49S05-9212-TA-1046,49S05-9212-TA-1046
• Parties: INDIANA DEPARTMENT OF STATE REVENUE, Appellant (Respondent Below), v. BETHLEHEM STEEL CORPORATION, Appellee (Petitioner Below).
• Court: Indiana Supreme Court

Page 264

639 N.E.2d 264

INDIANA DEPARTMENT OF STATE REVENUE, Appellant (Respondent Below), v. BETHLEHEM STEEL CORPORATION, Appellee (Petitioner Below).

No. 49S05-9212-TA-1046.

Supreme Court of Indiana.

Aug. 19, 1994.

Rehearing Denied Nov. 23, 1994.

Pamela Carter, Atty. Gen., Joel Schiff, Deputy Atty. Gen., Indianapolis, for appellant.

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

SHEPARD, Chief Justice.

Does the Indiana corporate gross income tax apply to receipts from the sale of federal tax benefits when the benefits derive from equipment located in Indiana but the owner is commercially domiciled in another state and the transaction occurs out of state? We hold it does not.

I. Facts

Neither party disputes the facts. Bethlehem Steel Corporation is a multistate corporation which manufactures and sells iron and steel products. The corporation is incorporated in Delaware, commercially domiciled in Pennsylvania, and authorized to conduct business in all fifty states and the District of Columbia. Some fifteen percent of Bethlehem's business occurs at its Burns Harbor Plant in Porter County, Indiana.

In 1981, 1982, and 1983, Bethlehem sold its rights to certain federal tax benefits under I.R.C. § 168(f)(8) (repealed 1986). ¹ Pursuant to § 168, Bethlehem structured these sales as sale-leaseback agreements or "safe harbor leases." ² Each transaction followed the same pattern: Bethlehem purchased equipment eligible for federal tax deductions and credits (i.e., investment tax credits, energy tax credits, and accelerated depreciation deductions). Bethlehem then sold the equipment in exchange for cash and a nonrecourse note. The note equaled Bethlehem's basis in the equipment. The cash payment represented the purchase price for the tax benefits. The buyer then leased the equipment back to Bethlehem for an amount equal to the note payments. At the end of the lease, Bethlehem would repurchase the equipment at a nominal charge. Bethlehem always retained both possession of the equipment and title to it, and the only money actually to change hands was the proceeds from the sale of the benefits.

Approximately forty-five percent of the equipment underlying Bethlehem's safe harbor leases was located at Burns Harbor. The agreements were negotiated and consummated outside Indiana, however, through Bethlehem's New York investment advisers and legal counsel. All the buyers were non-Indiana companies, and the payments were made and received through bank accounts beyond our borders. Further, Bethlehem based its decisions to enter these agreements on financial and investment considerations, not on the business operations at the Burns Harbor Plant. The management at Burns Harbor did not play any role in these decisions, and the plant would have continued its operations whether or not these sales occurred.

In 1987, the Indiana Department of State Revenue audited Bethlehem's returns for the three years in question and assessed Bethlehem for the gross proceeds from the sales of tax benefits on the Indiana equipment. The gross proceeds amounted to $55,065,367, creating a $729,588 net tax liability. ³ Bethlehem protested. The Department conducted a hearing but upheld the additional taxes in May 1988. Bethlehem then paid the taxes and petitioned the Department for a $717,451 refund. The Department did not respond to the petition within 180 days, so Bethlehem filed an original tax appeal with the Indiana Tax Court. On cross motions for summary judgment, Judge Fisher reversed the Department's decision and held for Bethlehem. Bethlehem Steel Corp. v. Indiana Dep't of State Revenue (1992), Ind.Tax, 597 N.E.2d 1327. The Department timely petitioned this Court for review. Ind.Appellate Rule 18. We granted the Department's petition for review and now affirm the Tax Court's judgment.

II. Standard of Review

It is well established that any doubts regarding the meaning or applicability of the gross income tax statute will be resolved in favor of the taxpayer. See, e.g., Gross Income Tax Div. v. Surface Combustion Corp. (1953), 232 Ind. 100, 111 N.E.2d 50, cert. denied, 346 U.S. 829, 74 S.Ct. 51, 98 L.Ed. 353; Indiana Dep't of State Revenue v. Convenient Indus. of Am. (1973), 157 Ind.App. 179, 299 N.E.2d 641.

Moreover, we do not set aside the findings or judgment of the Tax Court unless they are clearly erroneous, Ind.Tax Court Rule 10, and summary judgments also enter the process of appellate review cloaked with a presumption of validity. As we explained in Indiana Dep't of State Revenue v. Caylor-Nickel Clinic (1992), Ind., 587 N.E.2d 1311, 1313:

When [a] summary judgment involves a question of law within the particular purview of the Tax Court, cautious deference is appropriate. The Indiana Tax Court was established to develop and apply specialized expertise in the prompt, fair, and uniform resolution of state tax cases.

Thus, we accord due deference to the Tax Court's determinations of tax law on summary judgment and set aside such determinations only if we are definitely and firmly convinced that an error was made. Cf. Associated Milk Producers, Inc. v. Indiana Dep't of State Revenue (1989), Ind., 534 N.E.2d 715 (applying clearly erroneous standard to case tried on merits).

III. Imposition Statute and Regulation

Indiana imposes a gross income tax on the gross receipts of residents and domiciliaries and on the gross receipts of nonresidents and nondomiciliaries. ⁴ Ind.Code Ann art. 6-2.1 (Burns 1989). The taxability of the income of a nonresident or nondomiciliary depends upon three determinations.

First, the receipts must constitute "gross income." Ind.Code Ann. § 6-2.1-1-2 (Burns 1989). In Hoosier Energy Rural Electric Coop. v. Indiana Dep't of State Revenue (1991), Ind., 572 N.E.2d 481, we determined that the proceeds from sales of federal tax benefits under § 168(f)(8) are "gross income."

Second, the receipts must be "taxable gross income," which the statute defines as that portion of "gross income" not subject to exemption, Ind.Code Ann. ch. 6-2.2-3 (Burns 1989), or deduction, Ind.Code Ann. ch. 6-2.1-4 (Burns 1989). Ind.Code Ann. § 6-2.1-1-13 (Burns 1989). The provision relevant to this appeal exempts taxpayers with "[g]ross income derived from business conducted in commerce between the state of Indiana and either another state or a foreign country ... to the extent the state of Indiana is prohibited from taxing that gross income by the United States Constitution." Ind.Code Ann. § 6-2.1-3-3 (Burns 1989). This, of course, is less a tax exemption than a recognition that the Commerce Clause limits state taxing authority. U.S. Const. art. I, § 8, cl. 3.

Third, the imposition statute distinguishes between the income of residents and domiciliaries and the income of nonresidents and nondomiciliaries. The relevant provision reads:

(a) An income tax, known as the gross income tax, is imposed upon 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.

Ind.Code Ann. § 6-2.1-2-2(a). As a nondomiciliary, then, Bethlehem's gross receipts, including any proceeds from the sale of intangibles, are taxable only if they were "derived from activities or businesses or any other sources within Indiana." Two questions thus present themselves under the statute. First, were Bethlehem's cash proceeds from the sale of the tax benefits accruing to its Indiana equipment "derived from an activity or business or any other source within Indiana" for the purposes of § 6-2.1-2-2(a)(2)? Second, even if these proceeds were derived from an Indiana source, would a gross income tax on those proceeds violate the Commerce Clause of the United States Constitution and trigger the exemption specified by § 6-2.1-3-3?

IV. "Sources within Indiana"

The statute does not define income "derived from activities or businesses or any other sources within Indiana." In the Tax Court, Judge Fisher read the imposition statute against the background of its interpreting regulation, the history of situs analysis, and judicial treatment of taxes on income from intangibles. ⁵ He explained:

[T]he case law analysis focuses on the relationship between the intangible and the taxpayer's "business situs" by identifying activities related to the critical transaction, here, the sale of an intangible giving rise to income, and then determining whether the degree of activities related to the critical transaction is sufficient to uphold taxation in Indiana. When activities related to the critical transaction occur at more than one situs, the dispositive inquiry therefore asks what degree of activity was regularly conducted at the different locations, i.e., are the activities more than minimal, not remote and incidental to the critical transaction.

....

The "integral" analysis [under the departmental regulation] therefore weighs the degree of related activity at a "business situs" to determine if it is more than minimal and not remote or incidental to the transaction giving rise to the income....

Bethlehem Steel, 597 N.E.2d at 1336-37 (citations omitted). Employing this scheme, Judge Fisher analyzed the relationship between the transactions producing the gross income and Bethlehem's activities in Indiana and held that the sales of tax benefits were not sufficiently related to Bethlehem's business activities at Burns Harbor to support the Indiana tax. We generally approve Judge Fisher's reading and application of the statute.

A. The Interpreting Regulation. The Department's regulation, 45 I.A.C. 1-1-51, provides two tests for determining when intangible income derives from an Indiana activity, business, or source. First, the "business situs" test provides that if the taxpayer has established a business situs in...