News and Insights

Minnesota Supreme Court Overturns Financial Institution Ruling

Tax Development Jul 18, 2018

As reported in our release dated August 24, 2017, the Minnesota Supreme Court has issued its decision in Associated Bank, N.A. v. Commissioner of Revenueon July 5, 2018. The Court overturned the tax court’s ruling that the commissioner of revenue properly invoked alternative apportionment resulting in a tax on the income of non-corporate entities. The taxpayer had taken advantage of an anomaly in Minnesota law that defined financial institutions as corporations. Associated Bank had changed its ownership structure so that its Minnesota real estate loan assets were held by two new limited liability companies located in Wisconsin. In doing so, under the reading of the statute, the interest income earned by the LLCs would not be included as Minnesota source income in the numerator of the taxpayer’s Minnesota apportionment factor. 

The commissioner invoked Minnesota’s alternative apportionment provision to include the interest income of the LLCs in the financial institution’s combined report. The Minnesota Supreme Court upheld the determination made by the commissioner. In doing so, the Court distinguished this case from its earlier decision in HMN Financial,in which the Court did not allow the commissioner to look through or disregard a taxpayer’s corporate structure. The Court found that in the current controversy, the commissioner was not disregarding the taxpayer’s structure but was using his authority to rectify the misrepresentation of the tax liability resulting from the structure. The fact that the LLCs were not included in the combined report did not “fairly reflect” the income of the taxable entities in the group. Because there was not a “fair reflection” of income, the commissioner appropriately used his authority to invoke alternative apportionment.   

1 Associated Bank, N.A. v. Comm'r of Revenue, Minn., No. A17-0923, July 5, 2018.
2 HMN Financial Inc. v. Comm’r of Revenue, Minn., 782 NW2d 558, May 20, 2010.


Mary Bernard