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In Sinclair Broadcast Group, Inc. and Subsidiaries,¹ the Minnesota Tax Court (court) held that under the plain meaning of the statute,² Minnesota conforms to the Internal Revenue Code (IRC) Section 382 limitation for acquired net operating losses (NOLs) on a pre-apportioned basis. In so holding, the court rejected the Minnesota Commissioner of Revenue's (Commissioner) interpretation of the statute under which she attempted to apply the IRC Section 382 limitation under a "double application" — first to Minnesota net income and second to Minnesota taxable income.

As the court explained, Minnesota incorporates by reference the provisions of IRC Section 381, which allows for the transfer of certain tax attributes (including NOLs) of an acquired corporation to another corporation, as well as the provisions of IRC Section 382, which imposes an annual limitation upon the use of acquired NOLs after a change of ownership of any corporation. In 1998, the taxpayer, Sinclair, acquired the stock of a Minnesota corporation (KLGT, Inc.) that owned and operated a television station in the Minneapolis area. At the time, KLGT, Inc. had federal and net apportioned Minnesota NOLs of approximately $4 million. Because Sinclair's purchase of the KLGT, Inc. stock constituted an ownership change under IRC Section 382, KLGT, Inc.'s federal NOLs were subject to an annual limitation determined under IRC Section 382. Similarly, because Minnesota follows the provisions of IRC Section 382, KLGT, Inc.'s Minnesota NOLs were also subject to limitation for Minnesota Franchise Tax purposes.

Minn. Stat. Section 290.095, subd. 3(d) stated that "the limitation amount determined under [IRC S]ection 382 shall be applied to net income, before apportionment, in each post change year to which the loss is carried." Sinclair applied the IRC Section 382 limitation determined for federal income tax purposes to its pre-apportioned Minnesota net income in subsequent years. The Commissioner audited Sinclair's 2011, 2012 and 2013 returns and revised and recalculated Sinclair's determination of its Minnesota NOLs for prior years on a post-apportionment basis. This recalculation caused some of the loss carried forward from KLGT, Inc.'s tax years to expire and more of Sinclair's post-acquisition losses were required to be applied to pre-2011 tax years. The Commissioner relied upon its Revenue Notice issued in 1999 (RN 99-07), which interpreted Minn. Stat. Section 290.095, subd. 3(d) to provide for a "double application" of the federal IRC Section 382 limitation; first to Minnesota net income and second to Minnesota taxable income.

In ruling in favor of Sinclair, the court found under a plain reading of the statute that the limitation amount to be applied is computed under IRC Section 382 and the amount to which the limitation applies is Minnesota net income for each post change year to which the Minnesota NOLs are carried. The court further held that "[t]he parenthetical phrase 'before apportionment' [in the statute] reflects the Legislature's appreciation that 'net income' is not an apportioned amount, and emphasizes its intention that the [IRC S]ection 382 limitation be applied to net income 'before [its eventual] apportionment' to derive Minnesota 'taxable net income.'"³

Additionally, the court ruled the Commissioner's "double application" of the IRC Section 382 limitation interpretation of Minn. Stat. Section 290.095, subd. 3(d) is unsupported by a plain reading of the statute, noting that subd. 3(d) "provides for only a single application of the [IRC S]ection 382 limitation … ." The court further stated that the Commissioner's interpretation would result in applying the IRC Section 382 limitation to Minnesota taxable income, without Minnesota taxable income being expressly mentioned in subd. 3(d) of the statute. In explaining its conclusion, the court referenced a decision it reached in 2012 — Express Scripts, 2012 WL 3642291 — where it likewise addressed the application of IRC Section 382 for Minnesota tax purposes and reached the same conclusion.

Implications

While not considered likely, the Commissioner could appeal the decision to the Minnesota Supreme Court. Taxpayers whose NOLs were subject to an IRC Section 382 limitation should review how they filed in Minnesota and whether they followed the Commissioner's position and if so, consider filing amended returns or refund claims for all open years or reconsider their remaining Minnesota NOL carryovers. If the decision is appealed, refund claims may be requested to be held in abeyance pending the final outcome of the case.

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ENDNOTES

¹ Sinclair Broadcast Group, Inc. and Subsidiaries v. Commissioner of Revenue, No. 8919-R (Minn. Tax Ct. Aug. 11, 2017).

² Minn. Stat. §290.095, subd. 3(d).

³ The court citing Goodyear Tire & Rubber Co. v. Dynamic Air, Inc., 702 N.W.2d 237, 244 (Minn. 2005).