The Minnesota Supreme Court held that the Commissioner of Revenue properly applied an alternative apportionment method to allocate a taxpayer’s corporate income to Minnesota. Additionally, the court addressed what the Commissioner must demonstrate in order to exercise this authority.
Commissioner Challenges Statutory Apportionment
The taxpayer, a nationally-chartered bank, created two LLCs. Each LLC had two members. Under this arrangement the financial-institution apportionment formula applied to the LLC members as financial institutions. However, the general apportionment applied to the LLCs. As a result, Minnesota law at the time did not require the LLCS to include certain interest income in calculating their income subject to tax.
Under audit, the Commissioner found that the statutory apportionment formula distorted the taxpayer’s income. She applied an alternative apportionment method to account for the taxpayer’s interest income earned from Minnesota loans and the value of the loans. The tax court, relying on its own precedent in HMN Financial, Inc. v. Commissioner of Revenue, 782 N.W.2d 558 (Minn. 2010), ruled that the Commissioner’s use of an alternative appointment method was improper. .
Prior Case Law on Alternative Apportionment Authority
The court noted that some of the facts of HMN Financial were similar to those in the case at hand. However, the Court distinguished the cases. In HMN Financial, the Commissioner relied on the alternative apportionment statute as general authority to challenge the results of the applied method. However, in the case at hand, the Commissioner relies on the statute as specific authority to challenge the applied apportionment method used.
Alternative Apportionment Authority
In order to use an alternative method, the Commissioner must show that:
- the statutorily required apportionment method does not fairly reflect the taxpayer’s net income from Minnesota sources; and
- the alternative apportionment does fairly reflect that income.
The Commissioner successfully showed the general apportionment formula did not reflect any of the taxpayer’s income from the LLCs’ Minnesota business activities. The Court also found that the Commissioner presented substantial evidence to show that the alternative apportionment method fairly reflected net income.
Associated Bank, N.A. and Affiliates v. Commissioner of Revenue, Minnesota Supreme Court, No. A17-0923, July 5, 2018, ¶204-427