Indiana Sales Tax Win for Taxpayers With Bad Debt Deductions

In what will be considered a win for taxpayers with bad debt deductions, on Jan. 4, 2024, the Indiana Tax Court issued its long-awaited decision in Indiana Finance Financial Corp. v. Indiana Department of State Revenue. The court granted summary judgement in favor of Indiana Finance. The case dealt with the calculation of the sales tax bad debt deduction as it relates to repossessed property and the applicability of IRC Section 166 in that circumstance. At issue was Indiana Finance’s use of the Market Discount Rules in the calculation of its adjusted basis in the installment contracts.

The court disagreed with the Indiana Department of Revenue’s argument that value received from installment payments made by customers should be treated differently than value received from third parties during the recovery process. The court also disagreed with the department’s argument that the Market Discount Rules do not apply to the calculation of a bad debt deduction because they meet the definition of securities under IRC Section 165(g)(2)(C).

The court instead focused on the mathematics of IRC Section 166 and the Net Debt Principal. It found that Indiana Finance was correct in calculating its bad debt deductions by excluding only the portion of repossessed property that was not market discount income. The matter was remanded to the department for action which presumably includes issuance of the refund claims at the heart of the litigation.

KSM’s State & Local Tax Group follows tax litigation across the country. If you have questions about how this or other legal decisions might affect your business, please contact your KSM advisor or complete this form.