The Minnesota Supreme Court, in Ashland Inc. and Affiliates,¹ affirmed the decision of the Minnesota Tax Court that Minnesota state law clearly provides for conformity with the status of an eligible foreign entity electing to check the box to be disregarded as a separate entity from its parent, and that Minnesota's water's edge provisions could not render the conformity provisions superfluous. Accordingly, the income and apportionment factors of the disregarded foreign entity were properly included in the taxpayer's Minnesota unitary combined report.

The taxpayer, Ashland Inc., filed combined Minnesota franchise tax returns for the tax years 2009 through 2011. Ashland's subsidiary, Hercules, a member of its unitary combined return, owned 100% of a Luxembourg entity, Hercules SARL. Hercules SARL had elected to be disregarded as a separate entity in accordance with Treasury Regulation Section 301.7701-2(a) (2012). Relying upon Minn. Stat. Section 290.01, Subd. 19 (2012), which defines net income as "federal taxable income … incorporating … any elections made by the taxpayer," Ashland included the income and apportionment factors of Hercules SARL in its unitary combined returns.

Minnesota audited Ashland in 2015, determining that Ashland had improperly included income (loss) and apportionment factors of Hercules SARL in its water's edge unitary combined report. Minnesota asserted that, under Minn. Stat. Section 290.17, Subd. 4(f), foreign corporations and other foreign entities that are part of the unitary business may not be included in determining the income and apportionment of the unitary business.

In its ruling, the Minnesota Supreme Court determined that the incorporation of the federal election to "disregard" Hercules SARL resulted in the reporting of income and losses of Hercules SARL only as a part of the business activity of Hercules. This fact effectively distinguished the conclusion reached in this case from the decision reached by the Minnesota Supreme Court in the 2006 Manpower, Inc. v. Commissioner of Revenue case.

Implications

Taxpayers affected by this decision in a positive way should consider filing refund claims for all open years. Taxpayers that potentially are negatively impacted by this decision should consider consulting with their tax advisor, to discuss specific application of this decision.

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ENDNOTES

¹ Ashland Inc. and Affiliates v. Minn. Comm'r of Revenue, No. A16-1257 (Minn. S. Ct. Aug. 2, 2017).