Bose McKinney and Evans, LLP, Blog

The Indiana Supreme Court held that a contribution by a parent corporation to the capital of its subsidiary is not automatically excluded from the Indiana sales and use tax. Instead, the Court looked at whether consideration was given for the capital contribution. If the contribution was made with consideration, then there was a retail sale, and thus, Indiana sales or use tax would be imposed.

In Indiana Department of State Revenue v. Belterra Resort Indiana, LLC, Case No. 49S10-1010-TA-519, Pinnacle Entertainment, Inc. had a riverboat casino manufactured. It bought the riverboat in Alabama for $34,689,719.00 and, in exchange, received title and possession of the riverboat. Pinnacle paid no Alabama sales tax on this transaction. The next day, while in the international waters off the Gulf of Mexico, Pinnacle transferred title and possession of the riverboat to Belterra Resort Indiana, LLC. Prior to the transfer, Pinnacle owned a 97% interest in Belterra. A couple days after the transfer, Pinnacle subsequently obtained the remaining 3%. This gave Pinnacle 100% ownership of Belterra, its subsidiary. Afterwards, the riverboat floated to its new home in Indiana. In 2002, the Indiana Department of Revenue conducted a sales and use tax audit of Belterra. It issued a use tax assessment against Belterra in the amount of $1,869,783.00 plus penalty and interest. Both parties later filed cross motions for summary judgment, and after a hearing, the Tax Court granted Belterra’s motion and denied the Department’s. Thereafter, the Indiana Supreme Court granted review.

The issue before the court was whether the transfer of the riverboat from Pinnacle to Belterra was done without either side receiving consideration. In this case, Belterra submitted an affidavit in which the Board of Directors’ Resolution declared “[ ] the company hereby approves the transfer of ownership of the Riverboat Miss Belterra from Pinnacle Entertainment, Inc. to Belterra Resort Indiana, LLC as a capital contribution and without consideration being paid to Pinnacle Entertainment…”. A question of law, such as whether consideration exists, is decided by the court. To have “consideration,” one must receive a benefit to the detriment of another. A benefit is defined as a legal right given from one person to another, where the person receiving the right would not otherwise be entitled. Money is not the only benefit one can receive from consideration. To determine whether there was any benefit, the Court evaluated the transaction closely. “A transaction structured solely for the purpose of avoiding taxes with no other legitimate business purpose will be considered a sham for taxation purposes.” To analyze the companies’ motive for the transaction, the court used the “step doctrine,” which is divided into the “end results” and “interdependence” tests. The end result of Pinnacle and Belterra’s transactions appears, from the outset, to be intended to avoid paying the Indiana use tax while maintaining complete control over the riverboat. Additionally, the series of transactions were so interdependent that it is unreasonable to conclude that the whole series would have been completed if not for the purpose of avoiding the sales and use taxes. After this application, the court determined that there was consideration and treated the acquisition of the riverboat from the manufacturer as a retail transaction subject to the Indiana use tax.   Therefore, the Tax Court’s holding was reversed and summary judgment was granted in favor of the Department.