The Minnesota Supreme Court plans to hear arguments in the Associated Bank, N. A. v. Commissioner of Revenue case (Minnesota Tax Court, Dkt. No. 8851-R, April 18, 2017) in the near future. The Multistate Tax Commission (MTC) has filed an amicus brief in support of the commissioner.
Associated Bank took advantage of an anomaly in the statute that defines a financial institution as a “corporation.” To avoid the apportionment factor rules for financial institutions, Associated Bank created two LLCs to conduct business in Minnesota. By avoiding the inclusion of interest income in the apportionment factor of the LLCs, as would be required by the financial institution apportionment rules, the bank was able to significantly lower its state tax liability.
The commissioner attempted to assert alternative apportionment to require the inclusion of the interest income of the two LLCs in the combined unitary report, but the Minnesota Tax Court determined that the two LLCs were not financial institutions, as defined by statute, and, therefore, they could use the standard apportionment rules. The commissioner failed to demonstrate that the standard apportionment method did not “fairly and correctly” determine the entities’ taxable net income apportioned to Minnesota. A 2010 Minnesota Supreme Court decision, HMN Financial Inc. v. Commissioner of Revenue (doc 2010-11300), was cited as precedent for not allowing the commissioner to use the alternative apportionment statute to “look through or disregard the taxpayers’ corporate structure.”
The amicus brief filed by the MTC supported the commissioner, stating that the equitable allocation and apportionment statute is an indication that the Legislature expects that the standard apportionment formula may not always fairly and correctly determine the income generated in the state. The MTC supported the commissioner’s application of the alternative apportionment methodology to correct a misfire of the allocation system by excluding the income generated by granting loans to customers in the state. As this income would not be allocated to any other state, there is not inequity in apportioning this income to Minnesota.
All parties agree that this situation is made possible by the definition inherent in the statute. Although the Legislature has attempted to change the definition of a financial institution in the statute since 2015, to date no law changes have been finalized in the state.
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