Indiana State Dept. of Revenue, Income Tax Division v. Valley Financial Services, Inc., 3-1281A335

• Court: Indiana Appellate Court
• Writing for the Court: HOFFMAN
• Citation: Indiana State Dept. of Revenue, Income Tax Division v. Valley Financial Services, Inc., 435 N.E.2d 68 (Ind. App. 1982)
• Decision Date: 19 May 1982
• Docket Number: No. 3-1281A335,3-1281A335
• Parties: INDIANA STATE DEPARTMENT OF REVENUE, INCOME TAX DIVISION, Appellant (Defendant Below), v. VALLEY FINANCIAL SERVICES, INC., Appellee (Plaintiff Below).

Page 68

435 N.E.2d 68

INDIANA STATE DEPARTMENT OF REVENUE, INCOME TAX DIVISION Appellant (Defendant Below), v. VALLEY FINANCIAL SERVICES, INC., Appellee (Plaintiff Below).

No. 3-1281A335.

Court of Appeals of Indiana, Third District.

May 19, 1982.

Linley E. Pearson, Atty. Gen., Alembert W. Brayton, Ted J. Holaday, Deputy Attys. Gen., Indianapolis, for appellant.

Glenn L. Duncan, Thorne, Grodnik & Ransel, Elkhart, for appellee.

HOFFMAN, Presiding Judge.

The Indiana State Department of Revenue appeals from a judgment in favor of Valley Financial Services, Inc., on Valley's claim for a refund of intangible taxes. The dispositive issues concern the trial court's interpretation of various transactions between Valley Financial Services, Inc. and Valley Bank and Trust Company.

The Department served Valley a notice of tax due in the amount of $35,228.93. Valley paid the tax and then filed a written protest in lieu of an administrative hearing in which it objected to the tax notice. Valley then filed a claim for refund of tax, interest, and penalty for the tax years 1976, 1977, and 1978. This claim was denied by the Department on September 13, 1979. Valley filed a verified petition for refund of state intangibles tax in the Elkhart Circuit Court on October 5, 1979.

Trial of this matter was held on February 10, 1981. On July 21, 1981 the trial court entered judgment in favor of Valley with the following findings:

"1. Plaintiff is an Indiana corporation with its principal place of business located in Elkhart County, Indiana.

2. Plaintiff, Valley Financial Services, Inc., (hereinafter referred to as 'Valley') owns in excess of 80% of the outstanding, authorized and issued shares of stock of Valley Bank and Trust Company (hereinafter referred to as 'Bank') located in Mishawaka, Indiana, between said two entities.

3. On or about August 7, 1979, Valley, petitioner in this cause, received a notice of tax due number 0135709708 issued to Valley by the Department of Revenue, Income Tax Division (hereinafter referred to as 'Department').

4. Notice number 0135709708 indicated a tax, interest, and penalty due the Department by Valley in the amount of $35,228.93 which sum Valley subsequent to August 7, 1979, paid and delivered to the Department.

5. Valley pursuant to statute protested the original assessment by filing with the Department a written protest in lieu of an administrative hearing.

6. Valley having paid the tax filed a claim for refund, Form No. IT-843 for tax years 1976, 1977, and 1978 claiming a refund for tax, interest and penalty.

7. On or about September 13, 1979, the Department denied Valley's claim for refund and issued notice of said denial.

8. Valley operates certain loan accounts which contain loans known as participation loans.

9. The Department assessed Valley $29,024.79 tax of which $21,897.69 represents tax on the accounts known as participation loans. In addition to said tax, a prorata portion of interest and penalty, to-wit: $5,111.41 is attributable to said participation loans.

10. Bank allowed other institutions in addition to Valley to participate in loans. All participation loans were handled alike, no matter who the participant was. Even though slightly different documents were used on some participation loans in the Account, all the loans in the Account were also handled alike by Bank. Very shortly after the origination of the loan by Bank, (generally within one day) the participation documents were signed. The interest paid on the participation loan was linked to the role in Bank's loan to its customers. Bank continued to collect the payments on the loan. All funds collected were transmitted to Valley or other participant until the participant arrangement was terminated or the participant's interest was paid in full.

11. Valley has no control as to whom Bank loans money.

12. All interest and principal payments are made directly to Bank and not to Valley.

13. All collateral documents, i.e. mortgages, security agreements, financing statements, corporate resolutions authorizing borrowing list Bank as creditor and made no mention of Valley.

14. The promissory note executed by the customer-borrower is executed and delivered to Bank and indicates a promise to repay Bank. Said note which is a negotiable instrument is kept in the possession of Bank entirely within the control of Bank.

15. Only Bank can release security and only Bank can cancel or transfer the promissory note.

16. The preloan interview and loan application is processed by Bank and is conducted at Bank not by Valley.

17. The disbursement to the customer-borrower is made by Bank on a Bank check. No funds are disbursed to said customer-borrower by Valley.

18. Valley has no involvement and exercises no control over the decision to make loans to Bank customers either as to when or in what amounts.

19. Most of the time the customer-borrower does not know of Valley's involvement.

20. On occasion, Valley requires Bank to repurchase the participation or in essence pay off the loan by Valley to Bank. Such action by Valley does not cause Bank to require the customer-borrower to pay off his loan.

21. Bank, not Valley, reports to the customer-borrower somewhere near the third week of each calendar year the amount of interest paid by said customer-borrower to Bank for sums borrowed during the previous year. Said report indicates all interest paid by the customer-borrower including any amounts which might have been sold off on participation loans to Valley or other financial institutions. Said report does not indicate any payment of interest to Valley or any other entity but Bank.

22. Bank's policy has always been to repay the principal due the financial institution which has purchased the participation before reducing principal owed itself or to state it in other terms, the policy has been one of last in, first out with the participation purchasers being considered the last one in.

23. Bank makes the loans and for the most part disburses the funds to the commercial borrower prior to receiving any funds from Valley.

24. Valley actually issues a check to Bank when it purchases a participation in a loan and does not issue a check to the customer-borrower.

25. In all instances, money going from Valley goes to Bank after the loan is made to the customer-borrower of Bank.

26. Valley does individualize on its account records the participation loans and does use the name of the Bank customer-borrower for that purpose. This individualization is necessary due to difference in interest rates involved in the different accounts.

27. Bank makes payment of interest on the loans which Valley has purchased a participation in once a month by one check and does not individualize on that check the amounts by customer name.

28. Valley has never conveyed any interest in a participation which it has purchased to any other financial institution other than back to Bank. David Lehman testified that although it might be possible to do this, he knows of no instance when this has ever been done by any financial institution.

29. Bank loan officers, not Valley loan officers, supervise the day-to-day management of the loans.

Conclusions of Law

1. Under the intangibles tax code any person residing in Indiana is subjected to an intangibles tax if said person receives the income or profits of an intangible.

2. The intangibles tax code contains an exemption for debt instruments of a subsidiary corporation to the extent such intangibles are owned by a parent corporation owning at least eighty percent (80%) of the voting stock of the subsidiary corporation.

3. Plaintiff is making loans to Bank and not to the commercial customers of Bank.

4. Valley does not own and is not exercising a taxable privilege as said term is used regarding intangibles subject to tax in the State of Indiana.

5. The loans which constitute participation loans by Valley with Bank are not subject to Indiana intangibles tax; said loans do not come within the definition of an intangible subject to tax as regards Valley.

6. Even if said participation loans and the interest therein acquired by Valley were intangibles, they would be exempt pursuant to the parent-subsidiary exemption provided by Indiana law.

7. Valley is entitled to a refund of $21,897.69 tax, interest and penalty thereon to date of payment in the amount of $5,111.41, and interest thereon from date of payment as required by law."

The Department argues that the trial court erred in holding that Valley does not own and does not exercise a taxable privilege pursuant to the statutes regarding intangible taxes. The Department also asserts that the trial court's holding that the transactions between Valley and Valley Bank and Trust Company constituted loans from Valley to the Bank is erroneous.

The participation agreements contemplate Valley's purchase of an undivided interest in a loan which was previously made by the Bank to one of its customers. Representative clauses of the participation agreement are:

"WHEREAS, Valley...