In Vodafone Americas Inc. and Vodafone Holdings LLC v. Ind. Dep’t of State Rev. (June 18, 2013), Taxpayers (collectively “Vodafone”) owned various entities that, in turn, owned a 45% interest in a general partnership organized under Delaware law.  The partnership (doing business as Verizon Wireless) provided wireless voice and data services and communications equipment to Indiana customers and to customers throughout the United States.  During the years at issue (taxable years ending March 31, 2005 through March 31, 2008), Vodafone was a Delaware corporation commercially domiciled in California and then Colorado.  Initially, Vodafone filed Indiana adjusted gross income tax returns that attributed a portion of its income to Indiana.  It filed amended returns and sought a refund, claiming that its income was not derived from Indiana sources and therefore not taxable by Indiana.   The Department denied the refund claims.  On appeal to the Tax Court, Vodafone filed a motion for summary judgment on one question:  “whether the income it received as a partner of a general partnership that was doing business in Indiana was income derived from sources within Indiana.”  Slip op. at 1-2.

Sourcing income derived from intangibles.  The Court held that the disputed income was derived from Indiana sources.  Slip op. at 8.  For the years at issue, “adjusted income derived from sources within Indiana” included “income from . . . intangible personal property if the receipt from the intangible [was] attributable to Indiana under [Indiana Code § 6-3-2-2.2].”  Slip op. at 3 (quoting Ind. Code § 6-3-2-2(a)(5) (amended 2011)).   Vodafone argued that its partnership interest was intangible personal property and that the income it received as a result of its partnership interest could only be deemed Indiana sourced income if it was attributable to Indiana under Section Indiana Code § 6-3-2-2.2(g).  That subsection provided that “[r]eceipts in the form of dividends from investments are attributable to this state if the taxpayer’s commercial domicile is in Indiana.”  Slip op. at 4 (quoting Indiana Code § 6-3-2-2.2(g) (2005)). Accordingly, because it was not commercially domiciled in Indiana, Vodafone argued that its income (i.e. “dividends it received from investing in” the partnership) was not taxable in Indiana.

Income was not “dividends from investments.”  The Court explained that use of the term “dividends” in Indiana’s sourcing statute (Ind. Code § 6-3-2-2) is different from the term “dividends from investments” found in Ind. Code §§ 6-3-2-2.2.  Slip op. at 4-5.  The latter “reflects the distinction between operational income and investment income, a key constitutional concept in the attribution of income among the states.”  Slip op. at 5 (citation omitted).  If properly characterized as “operational income,” the income Vodafone received as a partner could not be income in the form of “dividends from investments.” Slip op. 5.  The Court concluded that “the mere fact that Vodafone was a partner in a general partnership gives its income from that partnership the character of operational income.”  Slip op. at 6.  Accordingly, the disputed income was not in the form of “dividends from investments.”  Id.

Management participation, in form and substance.  The Court further rejected Vodafone’s contention that, in substance, its “lack of control” over the partnership’s business made it a “limited partner” or “passive investor.”  Slip op. at 6-7.  The Court observed that Vodafone did participate in the partnership’s management by, among other things, appointing members to the partnership’s Board of Representatives and its Chief Financial Officer.  Id.  “Consequently, Vodafone’s ‘lack of control’ by reason of its minority interest is insufficient to show that it does not participate in the management of [partnership] and thus that it was a mere ‘passive investor’ in [partnership].” Slip op. at 8.

Constitutional arguments dropped.  The Court also rejected Vodafone’s federal constitutional claims based on the Due Process and Commerce Clauses, because those were “premised on its contention that [it] was a passive investor” in the partnership.”  Slip op. at 9 no. 10.

The conversation continues.  Vodafone presented an alternative issue not addressed in its summary judgment motion and not discussed in the Court’s decision.  That issue will now proceed to trial.  Slip op. at 9 n. 11.