The Indiana Supreme Court has held that foreign source dividends (FSDs) deductible from adjusted gross income (AGI) are not deductible when calculating a taxpayer’s Indiana net operating loss (NOL) deduction.1 Also, the Court rejected the taxpayer’s argument that the Indiana tax statutes facially violated the Foreign Commerce Clause of the U.S. Constitution by disallowing the FSD deduction in the Indiana NOL calculation, but incorporating the federal domestic source dividend deduction in the same calculation.


Caterpillar, a multinational corporation headquartered in Illinois, deducted FSDs when calculating its Indiana NOLs for its 2000-2003 tax years.2 In 2004 and 2005, Caterpillar timely filed amended returns for its 1996-1999 tax years and sought refunds by using the NOLs calculated in Caterpillar’s 2000-2003 tax years to offset Indiana taxable income. Following the Indiana Department of Revenue’s determination that the FSD deductions were improper, Caterpillar timely protested the Department’s recalculation of its Indiana NOL deductions. After the Department denied Caterpillar’s protest, Caterpillar filed an appeal with the Indiana Tax Court. In its petition, Caterpillar appealed the Department’s reduction of its Indiana NOLs available to be carried forward and used in future tax years. The Indiana Tax Court granted Caterpillar summary judgment and held that Caterpillar was allowed to deduct FSDs in the calculation of its Indiana NOLs. The Department appealed the Tax Court’s decision to the Indiana Supreme Court.

Calculation of Indiana AGI and NOLs

Indiana AGI is calculated by beginning with federal taxable income.3 One of the allowable deductions in arriving at Indiana AGI is FSD income.4 After a taxpayer has made the necessary additions and subtractions in accordance with Indiana law, the taxpayer arrives at Indiana AGI by apportioning its income, which does not take into account the Indiana NOL deduction.5

Indiana has a separate statute that provides for the calculation of the Indiana NOL.6 This is a three-step process which entails (1) calculation of the federal NOL; (2) modification of the federal NOL required by Indiana law;7 and (3) determining the portion of the NOL derived from sources within Indiana.8 The calculation of the NOL does not expressly include a modification for FSDs.

FSD Deduction Not Applicable to NOL Computation

In reversing the Indiana Tax Court,9 the Indiana Supreme Court held that Indiana’s tax statutes allow the deduction of FSDs when calculating Indiana’s AGI, but that the NOL statute is clearly stated and does not incorporate an FSD deduction. The Indiana Supreme Court rejected the Tax Court’s finding that the Indiana NOL statute was a “mirror image” of Indiana AGI that incorporated the FSD deduction. As explained by the Supreme Court, the Tax Court’s opinion acknowledged that the term “adjusted gross income” did not appear in the Indiana NOL statute, but the opinion superimposed all adjustments to Indiana AGI, including the FSD deduction, onto the Indiana NOL calculation.

The Indiana Supreme Court determined that the Tax Court’s interpretation was not consistent with the plain meaning of the Indiana NOL statute. If Indiana’s statutes intended for FSDs to be an allowable deduction when calculating Indiana NOLs, the FSD deduction would have been referenced or expressly incorporated into the language of the statute. Because the plain meaning of the statute controlled and was unambiguous, the Supreme Court declined to entertain legislative intent or statutory construction. The Supreme Court held that the Tax Court erred in adopting a “false symmetry” between Indiana AGI and Indiana NOLs. Accordingly, the Supreme Court rejected Caterpillar’s attempt to apply the FSD deduction to its NOL calculation.

In further support of its decision, the Indiana Supreme Court explained that the Tax Court’s interpretation would have consequences beyond the NOL treatment of FSD income and would affect more than corporate taxpayers. Under the Tax Court’s interpretation, both corporations and individuals could use every AGI adjustment to calculate Indiana NOLs. This expansive interpretation reinforced the Supreme Court’s conclusion that the interpretation contradicted the plain meaning of Indiana’s NOL statute. Furthermore, finding exact symmetry between Indiana AGI and NOLs is inconsistent with federal practice.

Caterpillar also raised U.S. constitutional issues by arguing that Indiana’s tax statutes in regard to the NOL computation facially discriminate against foreign commerce.10 Caterpillar argued that the calculation disallows the deduction of FSDs in calculating an Indiana NOL while allowing for the deduction of domestic dividends in the Indiana NOL calculation. The Indiana Supreme Court determined that Caterpillar failed to show proof of any discrimination against foreign commerce, and the U.S. Supreme Court’s precedent cited by Caterpillar was not applicable because that case dealt with the treatment of FSDs in calculating taxable income, not NOLs.


The Indiana Supreme Court’s decision hinges on the presumption that an NOL is separate and distinct from AGI for Indiana purposes and that these are two separate calculations. At this point it is not clear whether Caterpillar will appeal the Indiana Supreme Court’s decision to the U.S. Supreme Court. Even if Caterpillar were to appeal, the U.S. Supreme Court is generally reluctant to grant certiorari to cases involving state tax law. Thus, for the foreseeable future, taxpayers will not be entitled to deduct FSD income when calculating their Indiana NOLs. Taxpayers should review the calculation of their Indiana NOLs that include FSDs or other modifications not expressly contained in the Indiana NOL statute because tax accounting issues arising from such implied modifications may need to be addressed.