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By Alex Ebert
An Indiana tax court mostly sided with DuPont over $808,445 in taxes and fees the state’s Department of Revenue sought to collect as an adjustment to the company’s 2006 and 2007 state income tax filings.
The opinion, issued July 11, found that in 2001 DuPont properly classified sale of interest in a pharmaceutical subsidiary worth more than $4 billion as “nonbusiness income” and found that $3.1 billion in intercompany loan interest deductions were proper. However, the court held that DuPont couldn’t claim a deduction for its $43 million in research and development expenses on its state return after already claiming a credit for R&D on its federal income filings ( E.I. DuPont De Nemours & Co. v. Ind. Dep’t of Revenue , Ind. T.C., No. 49T10-1307-TA-00065, 7/11/17 ).
The court said the 2001 sale of DuPont Pharmaceuticals Company (DPC) was properly classified as “nonbusiness income” because DuPont, primarily a manufacturing concern, wasn’t in the normal business of selling pharmaceutical companies. The intercompany loan interest was on the up-and-up because DuPont required arms-length interest rates for loans between its companies, and balance sheets reflected payment and receipt of the loans, the court said.
“We believe the Judge got the important questions exactly right,” Dan Turner, a DuPont spokesman, told Bloomberg BNA in an email. “That DuPont’s gain from the sale of its partnership interest in DPC was clearly non-business income; and the decision that DuPont was not unitary with DPC is obvious under the evidence, and is no surprise since the Michigan Court of Appeals already reached the same result.”
Department of Revenue spokesperson Emily Landis found a silver lining.
“It was a split decision, but the areas on which DOR triumphed offered much-needed clarity,” she told Bloomberg BNA in an email. “The impact of areas the court ruled in favor of DuPont—business income and interest expenses—have limited impact on Indiana tax law.”
The department is prohibited by statute from revealing whether DuPont will face tax liability now that the court said it can’t claim its research expenses as a deduction.
At issue was also whether the Indiana Department of Revenue had the ability to adjust tax liability based on a sale executed past the statute of limitations. However, the adjustment hinged on net operating loss deductions DuPont carried forward into 2006 and 2007 from 2001—the year of the DPC sale. Accordingly, the court found that reexamination of the sale was permitted.
DuPont prevailed on similar grounds in a 2012 case in which the Michigan Department of Treasury sought to tax the sale of DPC. Michigan audited DuPont’s filings from 2001 through 2004, but DuPont successfully proved that it and DPC were not “unitary” for purposes of the state’s tax, and that it would have been unconstitutional for Michigan to tax the proceeds of the sale.
Without a sufficient nexus to a state, the U.S. Constitution doesn’t permit states to tax subsidiaries that don’t form a unitary part of a foreign taxpayer’s business. Like the Indiana court, the Michigan Court of Appeals found that DPC didn’t pass the tests to make it a unitary part of DuPont because it and DuPont weren’t engaged in the same line of business.
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