Tax Court rejects company’s claim it was a passive investor

A mobile telecommunications group was unable to convince the Indiana Tax Court Tuesday that it was entitled to summary judgment on the issue of whether it should have received a refund for paid adjusted gross income tax.

Vodafone Americas Inc. and Vodafone Holdings LLC, incorporated in Delaware, appealed the denial of its claim for refund for taxable years ending March 31, 2005-2008. Vodafone asked the Tax Court to answer whether the income it received as a partner of a general partnership with Cellco, which did business as Verizon Wireless in Indiana, was income derived from sources within Indiana.

Vodafone sought the tax refund because it believed it had erroneously attributed a portion of its income to Indiana. Indiana Code requires it to pay a tax on the part of its adjusted gross income derived from sources within Indiana. Since it is not commercially domiciled in Indiana, Vodafone contended that its income – dividends it received from investing in Cellco – is not derived from sources within the state and therefore not taxable.

“The critical question is whether the income Vodafone received as a partner of Cellco had the character of operational income or investment income because if it was operational income, it was not income in the form of ‘dividends from investments’ under Indiana Code § 6-3-2-2(g),” Senior Judge Thomas Fisher wrote in Vodafone Americas Inc. and Vodafone Holdings LLC v. Indiana Dept. of State Revenue, 49T10-1002-TA-7.

“The mere fact that Vodafone was a partner in a general partnership gives its income from that partnership the character of operational income. As such, Vodafone’s income is not income in the form of ‘dividends from investments’ under Indiana Code § 6-3-2-2.2(g).”

Vodafone argued that despite the fact it was in a general partnership, a “lack of control” placed it in essentially the same position as being a limited partner of, or a true “passive investor” in Cellco. But Vodafone participates in Cellco’s management by appointing members to the board of representatives, by appointing Cellco’s chief financial officer and it holds certain veto rights regarding business.

“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 Cellco and thus that it was a mere ‘passive investor’ in Cellco,” Fisher wrote. He denied summary judgment and noted the court will schedule a case management conference by separate order. The appeal presented an unspecified alternative issue that wasn’t addressed in the summary judgment motion, which can now proceed to trial.