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Chapman v. Commissioner of Revenue

August 29, 2002

R. AUSTIN CHAPMAN AND NADINE CHAPMAN, RELATORS,
v.
COMMISSIONER OF REVENUE, RESPONDENT.



SYLLABUS BY THE COURT

Under Minn. Stat. §§ 290.091, subd. 2 and 290.21, subd. 3(b), which allow a deduction in computing a taxpayer's alternative minimum tax for contributions made "to or for the use of" charitable organizations located in and carrying on substantially all of their activities in Minnesota, "for the use of" means "in trust for."

By allowing a deduction for contributions to Minnesota charities but not for contributions to non-Minnesota charities, Minn. Stat. § 290.091, subd. 2 violates the Commerce Clause because it discriminates against interstate commerce.

Under well-established severance principles, the language that allows a deduction for Minnesota charitable contributions in computing the alternative minimum tax must be severed to eliminate the unconstitutional discrimination, with the result that no deduction is available for any charitable contributions in computing the alternative minimum tax.

Due process requires that relators be provided meaningful backward-looking relief that eliminates the discriminatory treatment for the tax years at issue, either by forgiving the additional tax liability assessed against them for the disallowance of their charitable contributions or retroactively taxing those who benefited from the Minnesota-only charitable contribution deduction. The case is remanded to the tax court for determination of the proper relief.

Affirmed in part, reversed in part and remanded.

Heard, considered and decided by the court en banc.

The opinion of the court was delivered by: Anderson, Russell A., Justice

Tax Court Anderson, Russell A., J.

Took no part, Gilbert and Meyer, JJ.

OPINION

Individual taxpayers subject to the Minnesota alternative minimum tax (AMT) are permitted a charitable contribution deduction if the contribution is made "to or for the use of" a charitable organization "located in and carrying on substantially all of its activities in the [State of Minnesota]." Minn. Stat. §§ 290.091, subd. 2(f), and 290.21, subd. 3(b) (1994). In this case, we are asked to determine whether relators' contributions to a Massachusetts donor-advised charitable gift fund qualified for deduction under Minnesota's AMT provisions and, if not, whether Minnesota's AMT provisions violate the Commerce Clause and Equal Protection Clause of the United States Constitution and the Uniformity Clause of the Minnesota Constitution. The Minnesota Tax Court determined that relators' contributions did not qualify for deduction because they were neither made to qualifying Minnesota charities nor made in trust for qualifying Minnesota charities. The tax court also determined that Minnesota's AMT provisions allowing a deduction for contributions to Minnesota charities but not for contributions to non-Minnesota charities do not violate the Commerce Clause, the Equal Protection Clause, or the Uniformity Clause. We affirm in part and reverse in part.

In 1992, R. Austin Chapman and Nadine Chapman, relators, established a donor-advised fund account with the Fidelity Investments Charitable Gift Fund in Boston, Massachusetts. In 1994, 1995, and 1996, the Chapmans made contributions to this fund. In computing their Minnesota AMT*fn1 liabilities for each of these three years, the Chapmans deducted the amount of their contribution to the fund for that year.

The respondent Commissioner of Revenue subsequently disallowed these deductions on the grounds that the Fidelity fund was not located in Minnesota and did not carry on substantially all of its activity in Minnesota. The Commissioner assessed additional tax liability and interest against the Chapmans for the relevant tax years of $145,006.34. After the Commissioner's decision was upheld on administrative appeal, the Chapmans challenged the decision in the Minnesota Tax Court. The Chapmans argued that their contributions to the Fidelity fund were made "for the use of" Minnesota charities within the meaning of Minn. Stat. §§ 290.091, subd. 2(f) and 290.21, subd. 3(b). They also argued that restriction of the Minnesota AMT charitable deduction to Minnesota charities violates the Commerce Clause and the Equal Protection Clause of the U.S. Constitution and violates the Uniformity Clause of the Minnesota Constitution.*fn2 The Chapmans sought reversal of the additional taxes and interest assessed by the Commissioner.

The parties then stipulated to the facts and sought summary judgment from the tax court. The parties stipulated that (1) the Fidelity Charitable Gift Fund is a trust formed in Massachusetts and a public charity under the Internal Revenue Code of 1986, (2)ácontributions made to this fund from 1994 through 1996 were deductible under the Code and under Minn. Stat. § 290.01, subd. 19 (2000), (3) Fidelity's principal office is in Massachusetts, (4) the Chapmans contributed $313,200 to the fund in 1994, $462,100 to the fund in 1995, and $838,000 to the fund in 1996, (5) no distributions from the fund were made to any charity from 1994 through 1996, (6) from 1997 through 2000, distributions from the fund were made to various charitable organizations andfoundations by Fidelity as designated by the Chapmans, (7) Fidelity complied with every distribution request or grant recommendation made by the Chapmans, (8) in 1997, all but $20,000 of the $377,500 distributed by Fidelity went to charitable organizations and foundations located in Minnesota, (9) from 1998 through 2000, all of the funds distributed by Fidelity went to charitable organizations and foundations located in Minnesota, and (10) in calculating their Minnesota AMT liability for the tax years 1994 through 1996, the Chapmans reported contributions made to Fidelity in each of the years as qualified "Minnesota charitable contribution deductions" under Minn. Stat. § 290.091, subd. 2(f).

The tax court denied the Chapmans' motion for summary judgment and granted the Commissioner summary judgment. The court explained that under Minnesota's AMT provisions, individual taxpayers are permitted a charitable contribution deduction if the contribution is made "to or for the use of" qualifying charitable organizations. Drawing on federal tax cases, the court concluded that the term "for the use of" under the Minnesota AMT provisions means "irrevocably in trust for." Because the Chapmans did not make charitable contributions "irrevocably in trust for" Minnesota charitable organizations, they did not qualify for the AMT deduction.

The tax court also held that Minnesota's AMT charitable contribution provisions do not violate the U.S. and Minnesota Constitutions. The court explained that the provisions implicate the Commerce Clause because donations to donor-advised conduit funds constitute economic activity in the stream of commerce. However, the court decided that the limited scope of the charitable contribution deduction does not violate the Commerce Clause because the denial does not discriminate against interstate commerce. More specifically, the court reasoned that the statute allows a deduction for contributions to conduit funds located both in Minnesota and outside Minnesota so long as the contributions made to the conduit funds are made "for the use of" Minnesota charities. Finally, the court determined that Minnesota's AMT charitable contribution provisions do not violate the Equal Protection Clause or the Uniformity Clause because those AMT provisions do not discriminate against the use of conduit funds located outside Minnesota.

Following the tax court decision, the Chapmans filed a petition for writ of certiorari asking our court to evaluate whether the tax court erred in interpreting Minnesota's AMT statutory scheme and whether the AMT statutory scheme violates the U.S. Constitution or the Minnesota Constitution.

I.

Our review of tax court decisions is limited to determining whether the tax court lacked jurisdiction, whether the tax court's decision is supported by the evidence and is in conformity with the law, and whether the tax court committed any other error of law. Skyline Preservation Found. v. County of Polk, 621 N.W.2d 727, 731 (Minn. 2000); Minn. Stat. § 271.10, subd. 1 (2000). We review an order granting summary judgment to determine whether there are any genuine issues of material fact and whether the lower court erred in applying the law. Burlington N.R.R. v. Comm'r of Revenue, 606 N.W.2d54, 57 (Minn. 2000). Because the parties stipulated to the facts underlying this dispute, we need only consider whether the applicable law was properly applied. We review de novo the tax court's conclusions of law, including the interpretation of statutes. Id. Because states have wide latitude in establishing their taxation schemes, and because statutes are declared unconstitutional only when absolutely necessary, a taxpayer challenging the constitutionality of a state tax statute bears a heavy burden. Stelzner v. Comm'r of Revenue, 621 N.W.2d 736, 740 (Minn. 2001). We will uphold a statute unless the challenging party demonstrates that it is unconstitutional beyond a reasonable doubt. Olson v. Ford Motor Co., 558 N.W.2d 491, 496 (Minn. 1997).

The first question before us is whether the tax court properly construed the challenged provisions to find that the charitable contribution deduction for the AMT must be made to or in trust for Minnesota charitable organizations. To address this question, it is necessary to examine the Minnesota AMT statutory scheme.

The computation of an individual taxpayer's Minnesota AMT liability begins with calculation of the taxpayer's Minnesota alternative minimum taxable income (AMTI). Minn. Stat. § 290.091, subd. 1(a) (2000). The Minnesota AMTI is determined by making various adjustments required by Minn. Stat. § 290.091, subd. 2(a), to the taxpayer's federal AMTI. These adjustments include an "add-back" of itemized deductions permitted for federal AMTI purposes, meaning that the amounts of those deductions remain taxable income for Minnesota AMT purposes. Minn. Stat. § 290.091, subd. 2(a).*fn3 The statute includes two exceptions to this disallowance of federal itemized deductions—one for the "Minnesota charitable contribution deduction" and the other for the medical expense deduction. Minn. Stat. § 290.091, subd. 2(a)(2). This statutory structure results in the disallowance of deductions for all charitable contributions in computing the Minnesota AMTI except the "Minnesota charitable contribution deduction." It is that differential treatment that is at issue here.

The "Minnesota charitable contribution deduction" is defined for purposes of the Minnesota AMT as "a charitable contribution deduction under section 170 of the Internal Revenue Code to or for the use of an entity described in section 290.21, subdivision 3, clauses (a) to (e)." Minn. Stat. ยง 290.091, subd. 2(f). Section 290.21, subdivision 3 sets forth, as relevant here, certain allowable deductions for ...


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