The Indiana Supreme Court has held that the acquisition of a riverboat by a parent corporation that was subsequently transferred to its subsidiary corporation was a retail transaction subject to Indiana use tax. The purchase price paid by the parent corporation to the riverboat manufacturer constituted the required consideration. There is nothing inherent in capital contribution transactions that automatically exempt them from the reach of Indiana's sales and use tax law; only when a capital contribution is made without consideration is the transaction not subject to tax. (Indiana Department of State Revenue v. Belterra Resort Indiana, LLC, Ind. S. Ct., Dkt. No. 49S10-1010-TA-519, 10/05/2010.)
Capital contribution or retail transaction. Belterra Resort Indiana (“Belterra”) is a Nevada corporation that owns and operates a hotel and riverboat casino in Indian. Pinnacle Entertainment Inc. (“Pinnacle”) is a Delaware corporation that is Belterra's parent company. Pinnacle contracted with an Alabama manufacturer to purchase and construct the Miss Belterra riverboat. The Alabama manufacturer conveyed title and possession of the completed riverboat to Pinnacle on July 24, 2000; Pinnacle paid no Alabama sales tax on this transaction. The next day, Pinnacle transferred title and possession of the riverboat to Belterra while in international waters off the Gulf of Mexico. The riverboat then headed to its ultimate destination in Indiana. Pinnacle owned a 97% interest in Belterra at the time of the transfer, and subsequently acquired the remaining 3% interest in Belterra in August of 2001. The Indiana Department of Revenue audited Belterra in 2002 and issued a proposed use tax assessment, plus penalty and interest, due to Belterra's acquisition of the riverboat. Belterra protested the assessment, and the Department issued a Letter of Findings denying the protest. Belterra filed a timely appeal of the denial with the Indiana Tax Court, which held that Belterra was not subject to use tax on its acquisition of the riverboat because it was a contribution to capital and not the result of a retail transaction.
Acquisition of riverboat was retail transaction. Belterra argued that the riverboat was not acquired in a retail transaction since no consideration was given in exchange for the riverboat; Belterra believed the transfer of the riverboat was made as a capital contribution with no consideration given. Belterra relied on the case of Grand Victoria Casino & Resort, LP v. Indiana Department of State Revenue, Ind. Tax Ct., 789 NE2d 1041 (2003), in which the Indiana Tax Court held that when a riverboat was received when two companies merged, with no cash or other property received in connection with the capital contribution of the riverboat, the capital contribution was a transfer of property without consideration, and was not a retail sale subject to sales tax. The Indiana Supreme Court found that Pinnacle and Belterra were not similarly situated to the parties in Grand Victoria, and observed that there is nothing inherent in capital contribution transactions that automatically exempt them from the reach of Indiana's sales and use tax law. The Court did note, however, that where a capital contribution is made without consideration then the transaction is not subject to sales tax.
The Court stated that the issue in this case was whether the transfer of the riverboat from Pinnacle to Belterra was done without either side receiving consideration. The concept of consideration encompasses any benefit accruing to the promisor or any detriment borne by the promissee. The tax consequences of the acquisition and transfer of the riverboat needed to be analyzed under the step transaction doctrine to determine the substance of the transaction to determine whether it was undertaken for the benefit of tax avoidance. The step doctrine is comprised of two separate tests: the end results test and the interdependence test. Under the end results test, “purportedly separate transactions will be amalgamated into a single transaction when it appears that they were really component parts of a single transaction intended from the outset to be taken for the purpose of reaching the ultimate result.” The interdependence test requires an analysis of “whether on a reasonable interpretation of objective facts the steps were so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series.”
Under the end results test, the Court found that the transactions engaged in by Pinnacle and Belterra were component parts of a single transaction intended to reach the ultimate result of avoiding paying use tax while maintaining 100% control of the riverboat. The component transactions were Pinnacle's purchase of the boat from the manufacturer, the contribution of the boat to Belterra in international waters, and Belterra's operation of the boat as a casino in Indiana. Once the boat was operating in Indiana, Pinnacle purchased the remaining 3% ownership interest in Belterra, thus reacquiring 100% control of the boat through its 100%-owned subsidiary.
The substance of the transactions was also suspect under the interdependence test. Pinnacle's purchase of the riverboat from the manufacturer, its contribution of the boat to Belterra, Belterra's operation of the boat in Indiana, and Pinnacle's acquisition of 100% control of the subsidiary owning the boat were so interdependent that it was unreasonable to conclude that any of the transactions would have been undertaken except with a view to completing the whole series of transactions.
Based on the application of the step doctrine to collapse Pinnacle's and Belterra's various transactions, the Court determined that the acquisition of the riverboat from the manufacturer was a retail transaction subject to Indiana use tax; the purchase price paid to the manufacturer by Pinnacle constituted the consideration required by law.