Minnesota Tax Court Approves Alternative Apportionment Based on Net Income Instead of Gross Receipts for Treasury Functions

On June 24, 2024, the Minnesota Tax Court released its Order in E.I. DuPont de Nemours v. Commissioner of Revenue, Docket No. 9485-R, approving a franchise tax assessment of more than $11 million based on the Commissioner of Revenue’s alternative apportionment calculations. 

At issue in the case was the valuation of forward exchange contracts (FECs) bought and sold by DuPont. FECs are agreements to buy or sell a specific amount of a foreign currency at a set exchange rate at a specified date in the future. FECs are useful tools to mitigate the risk of fluctuating exchange rates for companies with significant overseas business.

DuPont argued that its gross receipts relating to FEC activity should be included in its everywhere sales. The Commissioner argued for a net income metric to avoid diluting the company’s business activity in Minnesota.

Both parties agreed on several points. DuPont entered into FECs on a regular and recurring basis. Gross receipts from FECs were earned in the ordinary course of business, and FECs were bought and sold on their gross terms, not net terms. FECs were not, however, a standalone profit center for DuPont. Their purpose was to reduce earnings and cash flow volatility and hedge against currency fluctuations.

Expert testimony showed that gross receipts from FEC transactions comprised more than 70% of DuPont’s everywhere sales in the three tax years at issue, significantly diluting business activity attributed to Minnesota. Using net income changed the analysis so that FECs would account for no more than 5% of DuPont’s everywhere sales during those years.

The court examined similar cases involving “treasury functions” from Tennessee and California. Treasury functions refer to activities of a treasury group in a multistate or multinational entity that invests in securities or other assets. Tennessee rejected the use of gross receipts for treasury functions, instead using net income to avoid distorting sales activity. In that case, a company transferred $11 million to a bank one day, and the next day received the money back along with $2,539.93 in interest. The company included the full $11 million as gross receipts in its sales factor, which was rejected by the court in favor of a net income approach that more accurately reflected the taxpayer’s business operations. Two cases from California reached a similar conclusion.

Balancing these factors, the court found that DuPont’s FEC transactions and other business activities were qualitatively different from each other. Furthermore, the FECs did not serve an independent profit-oriented purpose. They were similar to “treasury functions.” Using gross receipts from FEC transactions in the apportionment formula did not “fairly reflect” DuPont’s business activities and net income in Minnesota. This justified the commissioner’s use of alternative apportionment based on net income.

The results in this case are unsurprising, as many courts have long held that using the gross proceeds for treasury receipts in the apportionment formula can result in distortion. However, consider using gross receipts in the calculation of apportionable foreign source income. In that case, it would seem that the inclusion of gross sales in the apportionment formula are necessary to reflect the in-state income that they generate. Our Ryan state income tax experts are very well versed in the appropriate representations in an apportionment formula to result in fair taxation. 

We encourage you to contact our listed experts to discuss your unique circumstances and ensure that your apportionment factors appropriately reflect your income. 

TECHNICAL INFORMATION CONTACTS:

Greg Rottjakob
Principal
Ryan
314.721.1300
greg.rottjakob@ryan.com

Joseph Schmidt
Director
Ryan
704.552.0722
joseph.schmidt@ryan.com

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