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August 21, 2020

Minnesota Supreme Court holds that income from sale of partial interest in unitary business member is apportionable business income

In YAM Special Holdings, Inc.,1 the Minnesota Supreme Court held that the imposition of corporate income tax on an apportioned share of income from the sale of a partial interest in a member of a unitary business does not violate the Due Process Clause of the US or Minnesota Constitutions because the income is business income of a unitary business that had a sufficient connection to Minnesota.

YAM Special Holdings, Inc. (YAM), which elected to be treated as an S corporation for federal income tax purposes, had its principal place of business and commercial domicile in Arizona. YAM operated Go Daddy business, which provides internet domain names, website hosting and related services to its customers. YAM had no physical presence in Minnesota, nor did it have an interest in any business entities or assets that were in Minnesota. About 1% of YAM's revenue came from transactions with Minnesota customers.

In anticipation of the sale of Go Daddy business, YAM undertook a series of steps to pay off its bank debt, form limited liability companies, and convert and contribute certain subsidiaries into wholly owned limited liability companies. YAM then sold a majority interest in Go Daddy and reported the gain from the sale as income that was not subject to Minnesota tax. The Minnesota Department of Revenue (Department) disagreed and assessed tax on the theory that the gain on the sale of the Go Daddy business was apportionable business income. The Minnesota Tax Court affirmed the Department's assessment and the taxpayer appealed to the Minnesota Supreme Court (court).

YAM's argument that the sale income is nonbusiness income not subject to Minnesota tax was grounded in two theories: (1) Minnesota did not have a sufficient connection with the sale so Minnesota cannot apportion the income because of Due Process concerns; and (2) the income from the sale was derived from a capital transaction that served an investment function.

The court reviewed YAM's first theory, noting that the Minnesota statutory scheme2 adopts the unitary business principle and apportionment approach to determine the portion of income that is subject to tax. The court first concluded that there was a sufficient connection with Minnesota because the gain from the sale was generated by a unitary business3 that received revenues from Minnesota customers. The court rejected YAM's argument that cases such as Allied-Signal, Inc. v. Director, 504 U.S. 768 (1992), Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983) and MeadWestvaco Corp. v. Illinois Dep't. of Revenue, 553 U.S. 16 (2008)4 dictate that the unitary business principle only applies when one of the unitary affiliates is physically located in the state seeking to tax the unitary business's income. Those cases, the court said, did not stand for such a proposition, further finding that taxing an apportioned share of the income from the transaction was permissible because it was the income of a unitary business with a sufficient connection (i.e.,1% of its revenues derived from Minnesota customers) to the state to satisfy Due Process considerations.

The court then turned to YAM's second theory that the gain was income derived from a capital transaction solely serving an investment function. YAM argued that the sale served no operational function and occurred outside the ordinary course of business and, as such, fell within the definition of nonbusiness income set forth in Minn. Stat. Section 290.17, subd. 6. In rejecting YAM's argument, the court noted that the statute codifies an earlier decision of the court5 holding that Minnesota cannot apportion the income if a taxpayer and the corporation that was the source of the income do not have a unitary business relationship, and if the income from the sale serves an investment function rather than an operational function. The court stated that this statutory provision did not apply to YAM because YAM conceded that it and its operating subsidiaries formed a unitary business at the time of the transaction.6 Accordingly, the income generated from the transaction was apportionable business income of that unitary business.


The court's decision is another example in which the disposition of even a partial interest in a unitary business has been treated as apportionable business income by the taxing authority. The case is notable in that it addresses, and rejects, the argument that a member of the unitary business must have a physical presence in Minnesota for the income to be apportionable business income. Instead, it appears that a partial sale of the interest in the unitary business is apportionable to the state when the unitary business has been filing in Minnesota, thereby acknowledging nexus.


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For additional information concerning this Alert, please contact:
State and Local Taxation
   • Bill Nolan (
   • Julie Townsley (


1 YAM Special Holdings, Inc. v. Minn. Commissioner. of Revenue, A20-0021 (Minn. Aug. 12, 2020).

2 Minn. Stat. Section 290.17, subds. 3 and 4, 290.191, subd. 1(a).

3 The taxpayer conceded that it and its operating subsidiaries constituted a unitary business at the time of the transaction. See YAM Special Holdings at 10.

4 The court also distinguished the recent trust nexus cases, i.e. North Carolina Dep't. of Rev. v. Kimberley Rice Kaestner 1992 Family Trust, 588 U.S. (2019) and Fielding v. Commissioner. of Rev., 916 N.W.2d 323 (Minn. 2018), on the ground that those cases involved resident trusts and not a business that received 1% of its revenues from Minnesota sources. YAM Special Holdings at 12-14.

5 See YAM Special Holdings at 16-18. (That earlier decision, according to the court, was Hercules Inc. v. Commissioner of Revenue, 575 N.W.2d 111 (Minn. 1998)).

6 Id. at 18.