Under Minn. Stat. §á290.191, subd. 5(j) (1988), the "consumer" of the benefits of management services provided to a mutual fund is the mutual fund, not its ultimate investors, and thus the fees collected for those services are properly allocated for tax purposes to the state in which the mutual fund is located.
The opinion of the court was delivered by: Hanson, Justice
Heard, considered, and decided by the court en banc.
Relator Lutheran Brotherhood Research Corporation (LBR) filed corporate franchise tax returns for the tax years 1992, 1993 and 1994 which attributed to Minnesota 100 percent of the fees collected by LBR and its wholly-owned subsidiary, Lutheran Brotherhood Securities (LBS), based on the location of the mutual funds that paid those fees. Subsequently, LBR filed amended returns claiming refunds by attributing to Minnesota only between 12 and 30 percent of the fees, based on the percentage of mutual fund investors who were located in Minnesota. LBR argued that this attribution was appropriate under the statutory provision that "[r]eceipts from the performance of services must be attributed to the state in which the benefits of the services are consumed." Minn. Stat. §á290.191, subd. 5(j) (1988). Respondent Commissioner of Revenue (Commissioner) denied the refunds, concluding that LBR/LBS's services were consumed by the trustee of the mutual funds, not by the ultimate investors, and that the trustee was located in Minnesota. The tax court granted summary judgment for the Commissioner, finding that all of the fees collected by LBR/LBS were properly apportioned to Minnesota. Lutheran Brotherhood Research Corp. v. Comm'r of Revenue, No. 7285, 2002 WL 1150102, at *5 (Minn. T. C. May 8, 2002) (LBR). By certiorari on the relation of LBR, we review the decision of the tax court and affirm.
Lutheran Brotherhood, the ultimate parent of all of the Lutheran Brotherhood entities involved in this case, is a fraternal benefit society organized and existing under Minnesota law. During 1992, 1993 and 1994, Lutheran Brotherhood operated a group of six mutual funds referred to as the Lutheran Brotherhood Family of Funds (LB Family).
Prior to July 15, 1993, each of the six funds in LB Family was separately incorporated under the laws of either Maryland or Minnesota. Each fund elected to be treated as a regulated investment company for federal and state income tax purposes. For 1992 and until November 1993, each of the six funds contracted directly with LBR and LBS for management services. Several of the service contracts for that period recited that the principal place of business of LBR, LBS and each of the six funds was in Minnesota.
On July 15, 1993, LB Family was reorganized as a Delaware business trust and, on October 28, 1993, the investors approved a further reorganization whereby the six funds became sub-trusts of the LB Family trust. LB Family was registered as an open-end management company under the federal Investment Company Act, 15 U.S.C. §§á80b-1 to 80b-21 (1992) (the 1940 Act).
As a trust, LB Family had no employees but had a president and a board of seven trustees, the majority of whom were residents of Minnesota. LB Family's assets were held by a custodian, the State Street Bank, in Massachusetts. Under the Master Trust Agreement, the principal office of the trust was in Minnesota; the purpose of the trust was to operate as an investment company, offering investment shares in the trust and each sub-trust; the trustees were given the power to manage the business of the trust, acting "as principals * * * free from the control of the shareholders"; and the trustees were authorized to enter into contracts for the "performance and assumption of some or all of the following services, duties and responsibilities to, for or on behalf of the trust," including advisory, administration, distribution, custodial and transfer services. Effective November 1, 1993, LB Family entered into four contracts with LBR/LBS.
First, LB Family entered into an Investment Advisory Contract with LBR pursuant to which LBR provided investment research, evaluation and supervision of each fund's investments. LB Family paid LBR a fee for those services. LB Family did not pass that fee directly to investors, but instead deducted it from the net asset value of each fund. The contract recited that LB Family and LBR each had its principal place of business in Minnesota.
Second, LB Family entered into three contracts with LBS: (1) a Distribution Contract for the sale of shares of the funds, (2) a Transfer Agent and Service Contract for transferring shares to and from the funds and disbursing dividends, and (3) an Administration Contract for the administration of the operations of LB Family. Each contract recited that LB Family and LBS each had its principal place of business in Minnesota. Fees for these services were paid to LBS in one of two ways: (1) some were paid directly by investors (e.g., commissions paid under the Distribution Contract were "front-end loaded" and were deducted from the investor's initial investment; some transfer fees and some miscellaneous fees charged under the Administration Contract were charged directly to the investors who used specific services), and (2) some were paid monthly by LB Family to LBS and were then passed on to investors indirectly by a deduction from the net asset value of each fund. By a Stipulation of Settled Issues, the parties agreed that the revenue received by LBS from fees paid directly by investors should be sourced to the states where the investors were located, and these fees are not at issue here.
LBS filed timely combined Minnesota franchise tax returns for 1992, 1993 and 1994. The original returns attributed 100 percent of the disputed fees to Minnesota. LBR subsequently filed timely amended Minnesota franchise tax returns which attributed the disputed fees "based on the location or residency of the investors" in each fund, which ranged from 12 to 30 percent. LBR claimed refunds totaling $604,911.
The Commissioner denied LBR's refund claims. On LBR's appeal, the tax court granted summary judgment for the Commissioner, finding that LBR/LBS's services were "consumed" by LB Family, not by its investors, and that LB Family was located in Minnesota. LBR, 2002 WL 1150102, at *5. The court also denied LBR's request for an alternative method of apportionment under Minn. Stat. §á290.20 (1992). LBR, 2002 WL 1150102, at *6. The court then examined and rejected all three of LBR's constitutional arguments. Id. at *6-9. The court's holdings on each of ...