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December 4, 2023

Minnesota Supreme Court rules gain on sale of goodwill is apportionable business income

In Cities Management, Inc. v. Comm'r. of Rev., Case No. A23-0222 (November 22, 2023), the Minnesota Supreme Court affirmed the Minnesota Tax Court's ruling that income derived from the goodwill generated by the sale of company stock was apportionable business income.


The taxpayer is an S corporation that did business in Minnesota and Wisconsin and was 80% owned by a nonresident taxpayer. In 2015, the nonresident and her co-owner sold their stock to a third party. The purchaser requested that the owners make an IRC 338(h)(10) election, to treat the transfer of stock as an asset sale with the purchaser obtaining a stepped-up basis in the corporation's assets. Much of the value of the deemed asset sale related to goodwill. The nonresident consulted a public accounting firm for advice about the tax treatment of the transaction. In advising the nonresident, the accounting firm relied on Nadler v. Comm'r. of Rev., a prior decision of the Minnesota Tax Court (tax court), which held the income generated from the sale of goodwill was nonbusiness income subject to allocation under Minn. Stat. 290.17, Subd. 2(c).

The Minnesota Department of Revenue (Department) did not appeal Nadler, and, internally, took the position that it did not acquiesce to the tax court's decision in Nadler. As early as 2007, the Department circulated non-public technical advice memoranda informing its auditors that the Department would not follow Nadler, but it did not make its decision public until it issued Revenue Notice 17-02 in 2017.1

At the time the taxpayer and nonresident shareholder filed their returns for tax year 2015, they, as well as the tax advisors, were unaware of the Department's position. The taxpayer filed its nonresident withholding return, and the nonresident filed her Minnesota income tax returns, allocating the gain to her state of residence.

In 2018, the Department audited the filed returns and determined that the gain was apportionable business income and assessed the S corporation nonresident withholding tax, interest and a substantial underpayment penalty. The taxpayer appealed the assessment to the Department, which affirmed the assessment but removed the substantial underpayment penalty on the grounds that the taxpayer reasonably relied on Nadler and the Department had not issued written guidance until 2017.

The taxpayer appealed to the tax court, which affirmed the Department's decision. In so doing, the tax court rejected the taxpayer's argument that it was bound by Nadler, referencing intervening court decisions, such as YAM Special Holdings,2 which held that gain recognized by an S corporation from the sale of goodwill was apportionable business income. Following YAM Special Holdings, the tax court then held that the gain was apportionable business income. The taxpayer appealed to the Minnesota Supreme Court (Court).

Court finds goodwill is apportionable business income

The Court first addressed the taxpayer's argument that the Department was bound by Nadler based on Minn. Stat. 271.01, Subd. 5, the tax court's jurisdictional statute. That statute indicated that "the [t] ax [c]ourt shall be the sole, exclusive, and final authority … in those cases that have been appealed to the [t]ax [c]ourt … ." The taxpayer argued that this language reflected a legislative intent that the Department be bound by unappealed tax court decisions interpreting Minnesota tax law. The Court disagreed with this reasoning, finding persuasive the Department's argument that the language indicated an intent that the tax court have the power "to decide each case before it completely" and concluding that the statute did not require the Department to follow Nadler.3

The Court then turned to the more complicated issue of whether the tax court correctly determined that the gain was apportionable business income. The Court first reviewed Minn. Stat. 290.17, which applies to the income of nonresident individuals, including partners in partnerships and S corporation shareholders. The Court observed that Minn. Stat. 290.17, Subd. 2 provides rules for allocating income "not derived from the conduct of a trade or business" and that Subdivision 2(c) provides that gain from the sale of "goodwill … is allocated to this state to the extent that the income from the business in the year preceding the year of sale was assignable to Minnesota under subdivision 3." Minn. Stat. 290.17, subd. 3 generally requires all trade or business income to be "subject to apportionment except nonbusiness income." Minn. Stat. 290.17, Subd. 6 further defines "nonbusiness income" as income that constitutionally cannot be apportioned, including income derived from a capital transaction solely serving an investment function. Finally, the court noted that Minn. Stat. 290.17, Subd. 4 codifies the constitutional unitary business principle, focusing on language stating that "the entire income of a unitary business is subject to apportionment" and that notwithstanding "subdivision 2, paragraph (c), none of the income of a unitary business is considered to be derived from any particular source and none may be allocated to a particular place except as provided by the applicable apportionment formula."

The Court then acknowledged that Minn. Stat. 290.17 is not a "model of clarity" and that both parties' interpretations are supported by the statutory language, but neither parties' interpretation harmonizes all of the statute's provisions. The Court concluded that the treatment of the gain on the sale of goodwill under Minn. Stat. 290.17 is ambiguous, requiring it to resort to legislative intent as evidenced by contemporaneous legislative history and consideration of former law as authorized by Minn. Stat. 645.16(5) and (7). The Court then reviewed the legislative history of an omnibus tax bill enacted in 1999,4 which responded to two Minnesota Supreme Court cases holding that certain income was nonbusiness income under the statutes in place at that time.5 The Court noted that the conference committee's discussion of the 1999 changes reflected an intent to (1) "fix a perceived problem" in the Court's prior decisions, namely because of the Court's interpretation of business and nonbusiness income, as well as the fact that out-of-state taxpayers were paying less income tax than Minnesota-domiciled taxpayers; and (2) put in place a purely constitutional distinction between business and nonbusiness income.

Based on this legislative history, the Court concluded that the taxpayer's income was derived from a unitary asset and did not constitute nonbusiness income. As a result and contrary to the taxpayer's argument, the allocation rules did not apply. Accordingly, the Court held that the gain was apportionable business income.6


The Court's decision is relatively unremarkable in its treatment of goodwill as inseparable from the business as a whole and its classification as apportionable business income. The case's unique procedural posture and the Court's clarification that the Department is not bound by unappealed tax court decisions, even in the absence of it issuing public notice of its disagreement, is notable. Normally, the legislature would have to enact a law establishing that the Department is not bound by unappealed tax court decisions.


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

Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor


1 Minn. Dept. of Rev., Revenue Notice # 17-02, Individual and Corporate Franchise Tax — Nadler v. Commissioner — Minnesota Allocation Policy (July 3, 2017).

2 YAM Special Holdings, Inc. v. Comm'r. of Rev, 947 N.W.2ed 438 (Minn. 2020). See Tax Alert 2020-2118.

3 The Court noted that it was "troubled by the Commissioner's conduct that this case brought to light" and that deciding internally, without notice to the public, that it would not follow Nadler would "do little to inspire the trust and confidence of taxpayers in Minnesota's tax system." The Court, however, concluded that it could not invalidate the assessment based on the Department being bound to Nadler.

4 Act of May 25, 1999, ch. 243, art. 2, Sec. 21, 1999 Minn. Laws 2054, 2076.

5 See Firstar Corp. v. Comm'r. of Rev., 575 N.W.2d 835 (Minn. 1998) and Hercules, Inc. v. Comm'r. of Rev., 575 N.W.2ed 111 (Minn. 1998).

6 A lone dissenting opinion would have, based on the "outrageous conduct of the Commissioner," announced an equitable rule that the Commissioner is bound by unappealed tax court decisions, unless the Department provides public notice of its disagreement.