Indiana: Lawsuit Settlement Income Included in the Numerator and Denominator of the Sales Factor

The Indiana Department of Revenue recently determined that a financial institution had to include lawsuit settlement proceeds in both the numerator and denominator of its sales factor.  The taxpayer, a holding company headquartered outside Indiana filed Financial Institution Tax (FIT) combined returns with its affiliates. As a result of a competitor’s anti-competitive business practices, the taxpayer received a financial settlement.  The taxpayer amended its 2009 FIT return to include the settlement proceeds in its apportionment factor denominator, but not the numerator, which resulted in a refund.  The Department, after reviewing the return, denied the refund. 

The Indiana FIT is imposed on financial institutions and other entities that transact the business of a financial institution.  A taxpayer doing business in Indiana and elsewhere is required to apportion its income to Indiana using a single-sales factor, which is calculated by dividing the taxpayer’s receipts attributable to transacting business in Indiana by the taxpayer’s receipts attributable to transacting business in all taxing jurisdictions. The Department argued that the settlement proceeds were not receipts attributable to “transacting business” and should be excluded from the sales factor denominator.  In contrast, the taxpayer argued that the settlement was based on lost business opportunities as the proceeds were intended to compensate for the profit it could have made on the lost income.  The hearing officer agreed with the taxpayer, finding that the settlement was based on the direct economic impact of the competitor’s anti-competitive business practices.  Specifically, if the taxpayer had not been conducting its credit card business, then it would not have received the settlement and the proceeds were predicated upon and related to the taxpayer’s routine operating activities. Thus, the settlement proceeds constituted receipts attributable to transacting the business of a financial institution.  However, the hearing officer went on to “reject” the argument that the proceeds should not be included in the numerator of the apportionment factor. In the officer’s view, the taxpayer “cannot have it both ways”— if the proceeds represented lost business opportunities throughout the United States, then a portion of the proceeds must also represent lost business opportunities in Indiana. Please contact Marc Caito at 317-951-2434 with questions on Memorandum of Decision 18-20181837R.