United States

Minnesota: Income and Factors of Foreign Disregarded Entity Included in Computing Combined Group’s Taxable Income

Jul 18, 2016
From KPMG TaxWatch

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The Minnesota Tax Court recently addressed whether the income and factors of a foreign disregarded entity were included, along with those of its domestic owner, in the Minnesota combined group for the tax years at issue.  Under Minnesota law, foreign entities are generally excluded from the combined group even if they are engaged in a unitary business with domestic entities.  However, in the instant case, the taxpayer asserted that the income and factors of the foreign entity—because of its status as a disregarded entity—should be included. The Commissioner of Revenue, on the other hand, argued that the income and factors of the disregarded entity should be excluded due to its foreign status. The matter eventually came before to the tax court.

The tax court determined that because the foreign entity elected to be (1) disregarded as an entity (foreign or otherwise) and (2) to be treated as one with its domestic parent, its income and apportionment factors were not those of a foreign entity; they were those of its domestic parent. As such, the Commissioner erred to the extent that she concluded that the income and factors of the foreign entity should be excluded. In reaching this conclusion, the court declined to defer to Revenue Notice 98-08, which states that Minnesota does not “recognize the check the box election made by a foreign eligible entity with a single 'C' corporation owner, which is electing to be disregarded as a separate entity for federal tax purposes." Please contact Jodie Scott at 612-305-5210 with questions on Ashland Inc. and Affiliates v. Commissioner of Revenue.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.