Minnesota commissioner prohibited from using alternative apportionment

May 02, 2017

Minnesota taxpayers should be aware of a recent tax court decision addressing whether the commissioner could disregard an LLC’s business structure and apply an alternative apportionment methodology used for financial institutions. On April 18, 2017, the Minnesota Tax Court issued its decision in Associated Bank, N.A. and Affiliates v. Commissioner of Revenue, finding that the commissioner failed to meet her burden of proof that the statutory apportionment did not fairly and correctly determine Minnesota income.

In 2007, the parent of Associated Bank, N.A. (Associated Bank) created two LLCs under Wisconsin law. The purpose of the LLCs was to hold real estate loans secured by property in Minnesota. Associated Bank remained the mortgagee, and the LLCs received interest income on the loans that otherwise would have been paid to Associated Bank. Associated Bank determined that the transaction would have no impact for federal purposes, but that there would be Minnesota tax savings.

Minnesota’s statutory definition of financial institutions only refers to corporations, and not other types of entities such as partnerships. Associated Bank and the LLCs determined that, based on the definition of a “financial institution,” the LLCs would not qualify as such for Minnesota tax purposes. This was significant because the general apportionment rules would apply to the LLCs during the years at issue instead of the special rules for financial institutions.

Under the general apportionment rules, interest income is excluded from the sales factor. However, under the financial institution apportionment rules, interest earned by financial institutions is included in the sales factor. Because the LLCs did not consider themselves financial institutions, the entities excluded the interest income from the sales factor which resulted in a zero sales factor for both LLCs.

The commissioner argued that the general apportionment factor did not fairly reflect the LLCs Minnesota taxable income. Accordingly, the commissioner determined that the LLCs’ loan interest income and loan values resulted from Minnesota business activity, concluding that income should have been included when calculating the apportionment factors in order to “fairly allocate the taxable net income of the Minnesota unitary group to Minnesota.”

Minnesota’s alternative apportionment statute provides that general apportionment of net income is presumed to fairly determine the taxpayer’s taxable net income allocable to this state. The court held that the presumption in the alternative apportionment statute shifted the burden of proof to the commissioner because the commissioner was the one seeking alternative apportionment. Additionally, the tax court cited the Minnesota Supreme Court decision in HMN Financial, Inc. v. Commissioner of Revenue, which held that a taxpayer has ‘fairly and correctly’ determined its Minnesota taxable income if that taxpayer used the reporting methods outlined in the general apportionment statute.  

The commissioner, in lieu of arguing that Associate Bank failed to properly follow the statute, argued that she had broad authority to disregard business entities structured to minimize Minnesota tax liability. The commissioner effectively treated the LLCs as financial institutions by including interest income and the value of the loan portfolio in the apportionment factor.

The tax court further cited HMN Financial, noting that the taxpayers, in that case, were motivated solely by a desire to reduce their taxes, and did so in compliance with all applicable statutes. In HMN Financial, the commissioner, which appeared to take issue with the result produced rather than the method to reach that result, could not invoke alternative apportionment to look through or disregard the corporate structure.

Here, the tax court concluded that the commissioner could not meet her burden for alternative apportionment by disregarding the business entities and treating the LLCs as financial institutions.


The court halted the commissioner’s attempt to force the financial institution's apportionment provisions on the members’ factors. Minnesota taxpayers subject to an alternative apportionment adjustment should speak to their tax advisers about whether and how HMN Financial and Associated Bank could impact that adjustment.

RSM contributors

  • Joe Wessbecker