New Indiana Addback Statute (IC §6-3-2-20)

In determining taxable income, a corporation must addback

• intangible expenses
• directly related intangible interest expenses (i.e., interest paid to a recipient that originally received the loaned funds from intangible expenses paid to it by the taxpayer or a foreign or U.S. affiliate)

whether paid, accrued or incurred to a foreign or U.S. affiliate (with affiliate meaning IRC §1504 definition, but using 50% ownership percentage)

"Intangible expenses" means amounts that are deductible under federal tax law for:

• expenses, losses and costs for, related to or in connection with the acquisition, use, maintenance, management, ownership, sale, exchange or other disposition of intangible property
• royalty, patent, technical and copyright fees
• licensing fees
• other substantially similar expenses and costs

EXCEPTIONS TO ADDBACK

Section	For Sections 2 - 6 below, the taxpayer must also prove Indiana tax avoidance was not a principal purpose of the transaction giving rise to the expense, and there must be adequate disclosure to the Indiana Department of Revenue ("IDR")
1	An Indiana consolidated or combined return is filed by taxpayer and recipient
2	Recipient's income is subject to tax in another state or in a foreign country that is the recipient's commercial domicile; expenses are at arm's length, commercially reasonable rates
3	Recipient regularly engages in similar transactions with unrelated parties
4	Payment was received by the taxpayer from an unrelated party and is being passed through to recipient on an arm's length basis
5	Recipient pays amount over to third party in same tax year
6	Recipient engages in substantial business activities in intangibles or other substantial business activities; expenses are at arm's length, commercially reasonable rates
7	The IDR and taxpayer agree in writing to an alternative methodology under IC §6-3-2-2(l) or (m)
8	The IDR determines that addback is unreasonable

"Commercially reasonable" means the rate meets arm's length standards under IRC §482.

Addback is made only to extent necessary to cause expenses to be at commercially reasonable rates and at terms comparable to an arm's length transaction. 

Transactions will be considered as having Indiana tax avoidance as a principal purpose if:

• there is not one or more valid business purposes that independently sustains the transaction; and
• the principal purpose of tax avoidance exceeds any other valid business purpose

Effective July 1, 2006, applies only to taxable years beginning after June 30, 2006.