In a special legislative session, the Minnesota Legislature amended the definition of a “financial institution” to include both corporations and “other business entities,” such as limited liability corporations (“LLCs”), performing financial activities. The amendment in the Tax Omnibus Bill will result in “non-corporate entities that are majority owned by a financial institution or that derive more than one-half of their financial statement income from leasing” being taxed as financial institutions themselves. By including non-corporate investment and leasing entities, the special apportionment rules of financial institutions will effectively apply to non-bank subsidiaries and affiliates. This definition change is effective for tax years beginning after December 31, 2016. This law change will effectively reverse the Minnesota Tax Court’s decision in Associated Bank, N.A. v. Commissioner of Revenue (Minnesota Tax Court, DKT. No. 8851-R, April 18, 2017).
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 Tax Court ruled that LLCs were not financial institutions under the existing statute because they were not corporations. Under the new statute, the LLCs would be considered a financial institution, as other business entities performing financial activities.
TECHNICAL INFORMATION CONTACT:
Mary Bernard
Director
Ryan
401.272.3363
mary.bernard@ryan.com