E.I. DUPONT DE NEMOURS and COMPANY, Petitioner,
INDIANA DEPARTMENT OF STATE REVENUE, Respondent.
ATTORNEYS FOR PETITIONER: FRANCINA A. DLOUHY DANIEL R. ROY
FAEGRE BAKER DANIELS LLP Indianapolis, IN, HOLLIS L. HYANS
MORRISON & FOERSTER LLP New York, New York.
ATTORNEYS FOR RESPONDENT: CURTIS T. HILL, JR., ATTORNEY
GENERAL OF INDIANA, WINSTON LIN DEPUTY ATTORNEY GENERAL
ORDER ON PARTIES' CROSS-MOTIONS FOR SUMMARY
BLOOD WENTWORTH, JUDGE.
DuPont De Nemours and Company ("DuPont") has
appealed the Indiana Department of State Revenue's final
determination assessing it with additional adjusted gross
income tax (AGIT) and interest for the 2006 and 2007 tax
years and a penalty for 2007. DuPont's appeal is
currently before the Court on the parties' cross-motions
for summary judgment. In resolving those cross-motions, the
Court grants each in part and denies each in part.
AND PROCEDURAL HISTORY
a Delaware corporation, was founded in 1802. (App. Pet'r
Mot. Summ. J. ("Pet'r Des'g Evid."), Vol.
III, Aff. of Gary M. Pfeiffer ("Pfeiffer Aff.")
¶ 3). Originally, DuPont manufactured gunpowder.
(See Pet'r Br. Supp. Mot. Summ. J.
("Pet'r Br.") at 30-31.) See also
Wikipedia, https://en.www.wikipedia.org/wiki/DuPont (last
visited July 10, 2017). Today, however, it is engaged with
its subsidiaries and affiliates in a variety of industrial,
agricultural, and chemical manufacturing businesses
worldwide. (Pfeiffer Aff. ¶ 3.)
DuPont's Pharmaceutical Business
1991, DuPont and Merck & Co., Inc. formed the DuPont
Merck Pharmaceutical Company ("DMPC"). (Pfeiffer
Aff. ¶¶ 6-7.) DuPont and Merck each owned equal 50%
interests in DMPC, which researched, developed, manufactured,
and sold human pharmaceutical products, imaging agent
products, and other related product lines. (Pfeiffer Aff.
¶¶ 6, 9; Pet'r Des'g Evid., Vol. I, Ex. 1
at DIN 1161.) DMPC operated independently of DuPont and
Merck: it maintained its own management team, its own
separate research agenda and development facilities, its own
employees, its own profit objectives, and its own separate
operating policies and procedures. (Pfeiffer Aff.
¶¶ 9-12; Pet'r Des'g Evid., Vol. III, Aff.
of Kurt M. Landgraf ("Landgraf Aff.") ¶¶
17-18.) While DuPont initially leased certain facilities to
DMPC and provided it with some "start-up" personnel
and administrative services, DuPont charged DMPC
arm's-length fees for the services it rendered.
(See Resp't Des'g Evid., Ex. 2G at DIN
1998, Merck sold its 50% interest in DMPC to DuPont Pharma,
Inc., a subsidiary of DuPont. (See, e.g., Pfeiffer
Aff. ¶¶ 13-14, 17; Resp't Des'g Evid., Ex.
2H.) At that point, DMPC was renamed DuPont Phamaceuticals
Company ("DPC"). (Pfeiffer Aff. ¶ 17.) While
DPC received certain start-up services from DuPont, for which
it paid arm's-length fees, it otherwise operated
independently of DuPont. (Landgraf Aff. ¶ 29; Resp't
Des'g Evid., Ex. 5 at 56.)
2001, DuPont sold DPC to Bristol-Meyers Squibb Company.
(Pfeiffer Aff. ¶¶ 37, 41; Pet'r Des'g
Evid., Vol. II, Ex. 9.) The sale generated a gain of over $4
billion to DuPont. (Resp't Des'g Evid., Ex. 6 at 4.)
DuPont's Financing Arrangements
1995, DuPont Energy Company ("DEC"), a subsidiary
of Dupont through Dupont's ownership of Conoco, Inc. and
its subsidiaries, loaned DuPont nearly $8 billion at an
interest rate of 8.528% ("1995 Loan"). (Pet'r
Des'g Evid., Vol. III, Aff. of Sharon E. Smith
("Smith Aff.") ¶ 3, Ex. 10, Aff. of Noah
Schreiber ("Schreiber Aff.") ¶ 3, Aff. of
Sherif Assef ("Assef Aff.") ¶ 4a; Resp't
Des'g Evid., Ex. 2J.) The 1995 Loan terms did not require
DuPont to make any payments on either the interest or the
principal until 2005. (Resp't Des'g Evid., Ex. 2J.)
1998, DEC assigned the promissory note associated with the
1995 Loan to another DuPont subsidiary, DuPont Global
Operations, Inc. ("DGOI"). (Smith Aff. ¶ 3;
Pet'r Des'g Evid., Vol. III, Ex. 10.) In 1999, DGOI
loaned DuPont $3.9 billion at an interest rate of 7.40%
("1999 Loan"). (Smith Aff. ¶ 4; Pet'r
Des'g Evid., Vol. III, Ex. 11.) The 1999 Loan terms did
not require DuPont to make any payments on either the
interest or the principal until 2009. (Pet'r Des'g
Evid., Vol. III, Ex. 11.)
August 31, 2005, the 1995 Loan came due. (Resp't
Des'g Evid., Ex. 2J at DIN 2027.) That same day, DGOI
loaned DuPont $12.2 billion ("2005 Loan") - which
equaled the full value of the principal and the total
interest due on the 1995 Loan - at an interest rate of 5.64%.
(See Resp't Des'g Evid., Exs. 2L at DIN
2065, 4 at 7-8 (Petitioner's Response to Respondent's
First Request for Admissions at No. 8 (indicating that
because DuPont never made any payments on the 1995 Loan, the
principal and accrued interest on the 1995 Loan were rolled
over and became the principal balance on the 2005 Loan)).)
Similar to the 1995 Loan, the 2005 Loan terms did not require
DuPont to make any payments on the principal or the interest
for ten years. (See Resp't Des'g Evid., Ex.
2L at DIN 2065.)
years 1997 through 2007, DuPont and its subsidiaries filed
consolidated Indiana AGIT returns. (See Pet'r
Des'g Evid., Vol. III, Ex. 16; Resp't Des'g
Evid., Confd'l Ex. 2O.) In 2009, the Department audited
the consolidated 2005, 2006, and 2007 returns. (See
Resp't Des'g Evid., Ex. 3 ¶¶ 5-6.) As a
result of the audit, the Department determined that DuPont
had improperly reported 1) net operating losses
("NOLs") by characterizing the gain from the 2001
sale of DPC as nonbusiness income; 2) interest expense
deductions on the loans it received from DEC and DGOI; and 3)
a research and development ("R&D") expense
deduction. (See Resp't Des'g Evid., Ex. 3
the Department made the following adjustments to DuPont's
1) it reclassified the gain DuPont received from the sale of
DPC as apportionable business income, increasing DuPont's
2001 adjusted gross income by nearly $5 billion and reducing
the amount of NOLs DuPont could carry forward to subsequent
2) it eliminated the interest expense deductions DuPont
reported between 2005 and 2007 that were related to the 1995,
1999, and 2005 Loans, increasing DuPont's adjusted gross
income in 2006 and 2007 by approximately $3 billion and
further reducing DuPont's available NOLs carry forward;
3) it eliminated DuPont's 2007 R&D expense deduction,
increasing DuPont's 2007 adjusted gross income by another
(See Resp't Des'g Evid., Ex. 3 ¶¶
9-20, Confd'l Ex. 8 at 4.)
Department's three adjustments culminated in the issuance
of Proposed Assessments against DuPont for an additional
$394, 490 in AGIT liability plus interest for 2006 and $376,
328 plus interest for 2007. (Resp't Des'g Evid., Ex.
3 ¶¶ 21-22; Ex. 7.) The Department also assessed a
$37, 627 penalty against DuPont for tax year 2007.
(Resp't Des'g Evid., Ex. 7 at 6.) DuPont subsequently
protested the Proposed Assessments but, after conducting a
hearing, the Department denied the protest in a Letter of
Findings. (Resp't Des'g Evid., Confd'l Ex. 8.)
26, 2013, DuPont filed an original tax appeal, claiming the
Department's audit adjustments were improper. DuPont and
the Department filed cross-motions for summary judgment, and
the Court conducted a hearing on the motions on March 4,
judgment is appropriate when there are no genuine issues of
material fact and the moving party is entitled to a judgment
as a matter of law. Ind. Trial Rule 56(C). Cross-motions for
summary judgment do not alter this standard. Horseshoe
Hammond, LLC v. Indiana Dep't of State Revenue, 865
N.E.2d 725, 727 (Ind. Tax Ct. 2007), review denied.
parties' cross-motions for summary judgment present the
following questions for the Court's resolution:
I. Did the Department have the authority to make adjustments
to DuPont's NOLs in years that were closed to assessment
under the ...